High Inflation Threatens UK Economic Growth, Income, Spending

The UK economy grew by 0.3 percent in the second quarter (April to June) of 2017, the same rate as in the first quarter (January to March) of 2017. The expenditure measure of gross domestic product (GDP) also increased by 0.3 percent in in the second quarter of 2017, with private consumption, government consumption, and net trade contributing positively to the nation’s growth.

Looking at the wider measurements of economic well-being, median real disposable income for retired households increased by an average 1.4 percent per year, between the financial year ending 2008 and the financial year ending 2017. However, the sharp fall in the value of sterling since the vote to leave the European Union means that imports have become more expensive and inflation has risen well above the Bank of England’s two percent target. The trouble is that the UK has been importing more than it exports for a long time. While financial markets have to date been relaxed about the current account deficit, some economists are beginning to worry. Many believe it could make the UK vulnerable to external shocks.

Gross fixed capital formation (GFCF) also contributed positively to quarterly GDP growth in the second quarter of 2017, increasing by 0.6 percent, with business investment – the largest component of GFCF – growing modestly. The latest figures show a stronger growth profile for business investment across 2016 and 2017. Banks’ lending to businesses started to grow in 2016, having declined since 2011. Since the financial crisis the government has introduced many programs and used much political pressure to encourage banks to improve access to finance for businesses.

Forecasters predict that the rising inflation, driven by the depreciation of sterling, will squeeze household incomes and depress consumer spending; both of which have been the main driver of economic growth in recent years. As such, analysts believe that UK economic growth will continue to weaken in 2018 and 2019.

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