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It’s A Vote of No Confidence For The UK Economy

By Sera Akinci  |  16/06/2017 09:21


British stocks had a rough Thursday following the release of some pessimistic economic data and a statement from the UK’s central bank, in which it was suggested that they might begin to withdraw their economic aid sooner than anticipated.

What does this mean?

The data shared indicates that May retail sales suffered the slowest growth rate in 4 years. The decline in UK wages after accounting for inflation likely bore some relation to the lower figures as consumers begin to cut back on spending.

With regards to UK wages, product prices are rising faster than wages which is attributable to the global issue of low wage growth. According to the data released on Wednesday, UK wages increased by 2.1% and inflation by 2.9%. This rate difference, alongside the fact that the inflation rate rose higher than the wage rate, translates into less affordable products and services. This causes the aggregate demand to fall. According to some research, low unemployment rate will push wages upwards as businesses battle for workers.

The big picture: if people won’t be receiving higher wages, they will be less likely to increase their spending. Consumer spending is an important economic factor because of its direct impact on the strength of a nation’s economy. A benefit for businesses of a high consumer spending would be determining which products have the most value in the economic marketplace in order to develop or innovate new products. On the other hand, if people spend less, retail sales will likely eventually drop and lead to a slump in company earnings. As a result, lower sales will lead to companies paying less tax to the government (lower government income) and eventually cause the unemployment rate to rise, in turn perpetuating the cycle.

Meanwhile, the Bank of England voted to preserve its target interest rate as expected. Be that as it may, a surprising number of Bank of England officials voted to increase the interest rate. This is attributable to a fundamental concern over rising inflation.
 

Why should you care?
As for the markets: mid-sized companies in the UK (most of whom are domestically focused) saw a fall in their stock prices of 2%.
 

The table above shows the FTSE100 falling 0.74% with Next and Marks & Spencer (after the officials announced the retail sales growth) falling to the slowest rate since 2013 in the month of May.
 
With this being the case, the UK economy actually held up pretty well after the Brexit vote, but it appears to be changing in a substantial way. In fact, the hung parliament is boosting political uncertainty no end and, in return, consumers and businesses are cutting back on spending. Now the UK central bank is indicating that they might cut some of its support.

 

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