UK economic growth has peaked
Article Date: Feb 13 2007
Finance professionals working for UK businesses believe that the economy may have reached its peak in the current business cycle, research by the Institute of Chartered Accountants in England and Wales (ICAEW) has found.
The survey indicates that the most recent interest rate rises are beginning to have an impact on business sectors dependent on consumer spending. Retail price inflation has risen faster than earnings in the last 12 months to December, eroding purchasing power.
Over 900 of the ICAEW’s members responded to UK Business Confidence Monitor of 2007 (BCM). The overall confidence index has fallen from +6.2 to +5.2, the second consecutive decline in business confidence, and points to a maturing economic cycle.
According to the ICAEW, the current climate of rising interest rates, high inflation and squeezed household finances means that the more moderate economic growth this year is no longer expected to be largely driven by consumer spending.
Confidence appears to have taken a downward turn in the consumer driven sectors such as in retail and wholesale, where the confidence of finance professionals dropped from +5.1 last quarter to -4.0 this quarter. The property sector has also seen a sharp decline in confidence, from +14.3 last quarter to -11.8 this quarter, adding to evidence – such as fewer mortgage approvals in December – that the housing market may have finally reached its peak.
Meanwhile, the technology sector is very confident. The IT sector remains the most confident about its outlook at +22.7, and the communications sector strengthened significantly, jumping to +13.2 in the first quarter of 2007 from +5.0 last quarter.
In January interest rates rose to 5.25 per cent and were on left on hold on 8 February, but with inflation far above the Bank of England’s target, the BCM suggests that rates will rise again this quarter, not least to defend the Bank’s inflation-fighting credibility. Interest rates at 5.5 per cent would be at the highest level since March 2001.
