The Bank of England have just published their Q2 report to June 2021.
Bottom line is that the numbers are looking good. So well done to British firms.
Summary points would be
- Upward revision to GDP growth for 2021 – Forecasts improving
- Two-paced – fast then slow – Initial recover fast from a low point.
- People spending more, paying off debt, Visits to retail increasing, Dining out increasing, Vehicle traffic (included buses and trains) increasing
- Unemployment expected to rise slightly as furlough unwinds but job vacancies up with labour shortages in some areas. Labour shortages driving up wage price inflation
- Investment picking up supported by super-deduction *** See below
- Inflationary pressures on the increase *** See below
- Input costs increasing for manufacturing and services, Sales price increases in response
- Shortages of materials and labour and transport
- Energy prices, Vat relief, eat out to help out are all impacting on CPI. *** See below
- Expected to be transitory, possibly rising to 3% by end of year (NB Andy Haldane says it might well be nearer 4%)
- No radical tightening of monetary policy in the immediate future
- Quantitative easing to continue
- Extra government spending commitments made in the last budget
**The super deduction gives relief at 130% of the qualifying cost compared to the usual 18% writing down allowance for investment in main pool plant and machinery assets.
*** Inflation measured by consumer price index (CPI) is defined as the change in the prices of a basket of goods and services that are typically purchased by specific groups of households.
*** This is the one to watch. The Government are very keen to keep interest rates down and the UK Credit rating looking good. Inflation is a threat to that. All the QE we have had especially recently leads to inflation. Prior to the pandemic a lot of the QE remained in our financial institutions, the QE for Furlows etc is being spent by consumers driving inflationary pressures.
I expect that Andy Haldane is right. There is very real inflationary pressure. It will be interesting to see how they deal with it.
This is what Prime minister James Callaghan said in 1976. 15 years later interest rates on mortgages hit 18%
“We used to think you could spend your way out of recession and increase employment by boosting government spending…. I tell you that option no longer exists. And insofar as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
You can view the Bank of England report here