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U.K. Economy – Where Is The Feel-Good Factor?

Inflation Plummeting, Recession Ending, Record Highs on the Stock Market, - Where Is the Feel-Good Factor?

Big Ben and the houses of parliament in London.

In recent months, the British economy has shown a series of promising signs. Official statistics are expected to confirm that the UK has emerged from a technical recession, defined as two consecutive quarters of economic decline. This development, combined with a significant reduction in inflation rates and record highs in the stock market, paints a picture of a robust recovery. Yet, the elusive feel-good factor remains conspicuously absent from public sentiment.

The broader economic indicators tell a story of recovery. Inflation, once a persistent scourge driving up the cost of living, has fallen to its lowest level in nearly three years. As of April, prices rose by only 2.3% year-on-year, a sharp decline from the previous month’s 3.2%. Lower energy prices, particularly in gas and electricity, have been the primary drivers behind this drop, with energy costs falling by an astonishing 27% compared to the previous year.

Simultaneously, the stock market has been soaring. The FTSE 100 index recently closed at a record high, breaching the 8,300 mark. This surge reflects traders’ optimism, buoyed by expectations of imminent interest rate cuts by the Bank of England. These cuts, anticipated to begin as early as August, are expected to provide further stimulus to the economy.

A Deflated Public

Despite these positive developments, the sense of economic well-being among the public is notably lacking. One reason for this disconnect is the lingering high cost of living. Although inflation has decreased, prices for many essential goods and services remain elevated. For instance, while the prices of some food items like milk and butter have fallen, others, including olive oil and cocoa, have seen significant increases due to poor harvests and high demand.

Furthermore, household finances are still under strain. High interest rates, although expected to decrease, currently sit at 5.25%, the highest level in 16 years. These rates have made borrowing more expensive, impacting mortgages and loans, and have exacerbated the financial pressure on households. The cost of living crisis, driven by past inflationary pressures, continues to erode disposable incomes.

Another factor dampening the feel-good factor is the uneven nature of the recovery. While the stock market’s record highs benefit investors and those with significant equity holdings, the broader population sees little direct benefit. The wealth generated by stock market gains often fails to trickle down to those in lower income brackets, exacerbating feelings of economic inequality and exclusion.

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General Election on the Horizon?

Political uncertainty also plays a role. With a general election on the horizon, economic stability becomes a crucial issue. The governing Conservative party faces an uphill battle as household finances remain strained, making it difficult for them to claim credit for the economic recovery. The opposition, represented by Labour’s shadow chancellor Rachel Reeves, has been quick to point out that now is not the time for the government to celebrate, highlighting ongoing challenges faced by the average citizen.

The Bank of England’s cautious approach to interest rate cuts further underscores the tentative nature of the recovery. While a reduction in rates would provide relief to borrowers, the Bank has indicated it needs more evidence of sustained low inflation before making such a move. This cautious stance reflects the delicate balance the Bank must maintain to ensure long-term economic stability without triggering another bout of inflation.

In the corporate sector, mixed results add to the complex economic landscape. While companies like Shell report positive developments, others like BP have missed earnings forecasts due to lower energy prices and operational issues. Additionally, the travel sector faces challenges, with airlines like EasyJet and Wizz Air seeing significant stock declines following warnings of lower-than-expected summer ticket prices.

Moreover, the recent history of economic shocks, from the COVID-19 pandemic to the impact of the Ukraine war on global commodity prices, has left a lasting impression on public consciousness. The rapid inflationary surge in 2022, which saw rates peak at 11%, has made consumers wary. The psychological impact of these events means that even as economic indicators improve, confidence and optimism are slow to recover.

Despite the encouraging signs, the structural issues within the UK economy persist. High levels of public and private debt, a challenging housing market, and ongoing concerns about productivity and wage growth all contribute to a sense of unease. The real wages of many workers have not kept pace with inflation, leading to a squeeze on living standards that undermines the broader narrative of recovery.

In conclusion, while the macroeconomic indicators suggest that the UK is on a path to recovery, the feel-good factor remains absent for many. This dichotomy reflects deeper, structural issues within the economy and the lingering effects of recent economic shocks. Policymakers must address these underlying challenges to restore confidence and ensure that the benefits of economic growth are more broadly felt. As we navigate this complex landscape, it is imperative that we remain vigilant and proactive in addressing both the immediate and long-term needs of our economy and society. For those seeking expert financial advice during these turbulent times, we at Jack Ross have over 75 years of experience helping SMEs across Manchester and the North West.

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