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Shadow MPC

It seems a rise in the interest rate is likely to be years away, meanwhile the UK economy is stagnating and is likely to stay that way while troubles in the eurozone are unresolved, or a plan B is put into action to avoid an economic storm

Decision – no change – 0.5%

UK economy shows few signs of growth but also some equal signs of optimism and the net result has been stagnation.

The ONS data for Q2 UK GDP was revised upwards to a 0.5 per cent reduction from the previously reported 0.7 per cent reduction. Unemployment is falling, and

retail sales in July up 2.8 per cent on 2011.

Most economists eThexpect a further rebound in Q3 as post Olympic sales feed through.

But the downside shows a June trade deficit jumping a massive 43 per cent against 2011, increasing by £1.6bn to £4.3bn. Exports fell by £2.2bn with a 7.1 per cent reduction to the Eurozone and 9.6 per cent.

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Far Eastern economies are slowing down and still importing Western goods. China’s imports are up 4.7 per cent in June – they are just not buying British.

The Bank of England continues to flag that we are on a really long road to recovery. I believe we will end up overall in 2012 at zero growth.

Inflation is falling, now at 2.6 per cent and way below the peak 5.2 per cent in September last year. But wages are not rising and real disposable incomes are being eroded.

Energy firm SSE’s recent 9 per cent energy price rise was a surprising and unwelcome reminder which highlighted the precarious nature of many UK households finances.

On the housing front, major lenders report that they are currently undergoing due diligence with the government on the Funding for Lending Scheme.

I believe that this will be one of the few bright lights on the horizon for 2013 mortgage lending. Some lenders will no doubt find that mortgage profits will increase as a result, but so will volumes and I hope this really does provide the intended boost we need.

Interest rate rises still look a very long way off, with some now talking of earliest rises in 2017. Mervyn King has recently headed off calls for Base Rate reductions to 0.25 per cent or lower. These will have little effect and could be counterproductive as lenders’ profits reduce and they lend less.

Regular readers of my column will note that I remain of the view that our future economic affairs will be determined by events across the Channel.

There are major headwinds as the Germans face up to the crisis in Greece, and risks to contagion spreading to other southern European countries. There are elections in the Netherlands in September and even Finland is planning for a euro break up.

I believe nothing will happen before the US elections in November as Obama seeks a second term and will not want an economic storm in Europe. The continual rounds of negotiations, extensions, and bailouts leaves the Euro heavily exposed to a major external shock or market event with no plan B. This would have a major impact on the UK economy. We must hope that contingency plans are in place and decisive actions are taken next year.

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