What’s Going On In The UK Economy Right Now

How would you describe the state of the UK economy right now?

“Britain’s recession is over, inflation and interest rates are heading down. That, in a nutshell, was the message from last week’s UK Budget. First the good news. The independent Office for Budget Responsibility (OBR) thinks the UK’s recession is over and that by the end of this year, the UK economy will be growing at an above-trend rate. Inflation, the UK’s central problem for the last two years, is also in retreat. So, interest rates and mortgage rates should decline this year. Faster growth and lower inflation will also help consumer firepower – but there are caveats. These are forecasts, fallible as always, and projecting faster growth and lower inflation than most economists. 

“Countering the effect of the pandemic on jobs and incomes also obliged the government to spend on a vast scale, driving an expansion in the size of the state and pushing borrowing to 60-year highs. The pandemic passed, but was followed by the energy price shock of 2022, to which the government responded with energy subsidies and help for lower-income consumers. As a result, the government has not embraced the sort of public sector austerity that George Osborne adopted to repair the public finances in the wake of the financial crisis. Public sector debt now stands at the highest levels in 60 years and returning debt to pre-pandemic levels will be a Herculean task. Doing so depends on making large cuts to public spending in local government, transport, justice and higher education, all of which have already seen their spending squeezed. Cuts of the necessary magnitude may not be politically viable given the demands on public services – but these are challenges for the Budgets that will come after the general election.” – The Deloitte team

So, can you run us through the headlines and reaction to last week's spring Budget?

“After reducing employee National Insurance by 2% at the beginning of the year, last week’s Budget saw chancellor Jeremy Hunt cut employee and self-employed National Insurance by a further 2% from April 2024. Together these cuts could see the average employee save an extra £900 per year and the average self-employed person save £650 per year in total. Hunt also announced plans to introduce a new British ISA, which would provide savers with an additional £5,000 tax-free allowance to exclusively invest in UK-listed companies. However, given the government will need to consult with the industry on implementation, this new ISA is not expected to come into effect until at least the 2025/2026 tax year. We also saw the threshold at which parents and guardians start repaying child benefit increase to £60,000. Previously, parents who earned more than £50,000 had to repay some or all of the child benefit they received via the Child Benefit Higher Income Charge. The government estimates this change will benefit around 170,000 families with an extra £1,200 next year.” – Brian Byrnes, head of personal finance at Moneybox 

“The Budget itself did little to move the needle in terms of the overall economy. It’s not really going to push the economy any further upwards or harm it in any way. It was pretty neutral. Maybe for people who pay national insurance contributions – that might help a little bit in terms of disposable income. But the main point is that wages are growing faster than prices, which means people's real income is increasing anyway. You've got inflation at around 3%, you've got interest rates around 5%, and you've got wage growth around 5-5.5%. That should help ease the cost-of-living crisis and by helping people's disposable incomes, it should also help the economy – there’s a knock-on effect.” – Paul Sedgwick, Frank Investments

How might the changes in the Budget affect people’s incomes?

“More money in consumers’ pockets will always be welcome news and the cut to National Insurance has the potential to make a meaningful difference if the money is put to good use. To make the most of this opportunity, if they can afford to, I would strongly recommend people redistribute these funds towards a long-term financial goal, as quickly as possible. If put towards your pension contributions, for example, it would provide at least a 4% boost to your retirement savings thanks to matched contributions. Making regular contributions into a Stocks & Shares ISA will also help you grow your money over the long term.” – Brian

What role might an upcoming general election have? 

“It’s true the current government is probably thinking they’ll be out of power come the next general election, but I don't believe that means they’re doing the job any differently. Jeremy Hunt isn’t acting like he’s going to get fired. You have to do what you think is the best in the circumstances. As we saw with Liz Truss, you can’t ignore the OBR economic forecast. Whether that's right or wrong is a different matter but I think this Budget reflected the fact that Hunt acted according to what the OBR gave him.” – Paul

How are certain geopolitical factors affecting the economy right now?

“Most of the supply chain-related issues from the pandemic have largely worked themselves out. There are still bottlenecks in certain industries, but generally where geopolitical risk comes really to the fore is when it curtails supplies of either food or energy. Commodity prices have actually been pretty much on a downward trend for the last 18 months and the oil price is at the bottom end of its trading range – so the reason you see a spike in the oil price is really the market starting to price in that geopolitical risk. That translates into things like higher petrol prices – and it can have a real impact on retail spending. However, right now, I don’t think the situation in the Middle East or Ukraine/Russia is having that much of a contagion effect – and that’s what markets worry about. For now, there doesn’t seem to be a noticeable impact on the global economy. Is it changing interest rate policies around the world? No. Is it cutting supplies to raw materials? No.” – Paul 

What’s happening in the property market and why?

“Compared to a couple of years ago, it’s a slightly more optimistic picture for borrowers and for anyone looking to re-mortgage and things like that. At least, that's the theory. With lower interest rates come lower mortgage rates and that should help support the housing market. It’s as simple as that, really.” – Paul 

What’s your view on the rise of AI and its effect on markets?

“Going back through time, it’s often the case that people fear new technologies – and then it creates a growth opportunity. Go right back to the industrial revolution, when electricity was being introduced – people didn't want it, they were fearful of it, and they didn't like the idea of having it. But it also creates new opportunities, new areas of growth and arguably, AI is part of what's driven the US stock market over the last year. It’s entirely possible that AI will produce a new leg of economic growth – especially because people are already using it for healthcare, in the media etc. There are a lot of opportunities that will come because of AI that probably we haven't even been thought of yet. People are always nervous of new technologies, worried that it will take away their jobs, but revolutions or evolutions usually generate a positive economic result.” – Paul

Finally, how should people be managing or looking at their money right now?

“The situation for savers and borrowers has really changed over the last two years. For most of the last decade, savers were getting very little return on their money, and it was easy to borrow money relatively cheaply. As interest rates have risen quickly to try and combat rising inflation, savers are now getting a much better return on their money and borrowers are having to pay a much higher rate on loans and mortgages. In both instances it is imperative that people shop around. Savings rates change very quickly, and you should always be trying to get the best return on your savings pots.” – Brian

“Back when interest rates were pretty close to zero, there were very few alternatives to the equity market for people who wanted some income and capital growth. That’s why a lot of people's money was disproportionately invested in equities. On top of that, local economies were doing alright, so it seemed a sensible place to have it. Now, we have interest rates at around 5%, and you can get over 4% on savings accounts, which means it’s a harder choice now and depends very much on what you're looking for, your age etc. If you're younger, it always makes more sense to have capital in the equity market because you can ride out the cyclicality. If you're older and you're looking for some income, you can get 4-5% elsewhere. I'm an equity guy, so I always favour the equity market. But at the moment, it's a far harder choice than it was. Or maybe in some ways, it’s an easier choice because you have more options. There's a more diverse way to look after your money these days. And that's a good thing.” – Paul 

For more information visit Deloitte.com, MoneyboxApp.com & FrankInvestments.co.uk.