Joint managing director of My Business FD, Trevor Overall, says that while Bank of England governor Mark Carney’s threshold may be reached in 2014 this will not necessarily herald a rise in interest rates: “at that point the Bank of England will look at spare capacity in the economy and a number of other factors before moving the rate. Falling unemployment is not an automatic trigger.”
New jobs may be good news, but Overall sounds a note of caution: “These jobs may not be high quality jobs. There has been a huge rise in part-time jobs and there are a high number of people who are under-employed, for example working in two part-time jobs that amount to 25 hours a week, when they would really like full-time jobs for 37.5-40 hours a week”.
This is backed up by figures released in October by the Office of National Statistics, which reveal that 1.45 million people were working part-time, because they couldn’t find full-time jobs, the highest number since records began in 1992. While four out of five new jobs created since 2008 have gone to part-time female workers.
The OECD figures also revealed that Britain’s GDP has risen slightly and growth is firming in the UK. This growth is fuelled for the most part by a rise in the level of private consumption, which is no doubt due in part to the continuing low rates of inflation.
“It is not surprising that the GDP rise and shape of growth is consumer driven. I suggest there is quite a lot of stored up demand from consumers who are now feeling more confident. But this is not the government wants, wanted or promised”, says Overall.
Chancellor George Osbourne wants to wean the UK off this dependence on consumer spending and with good reason. The National Institute of Economic and Social Research (NIESR) says that the increase in consumer spending is fuelled by people eating into their savings at a time when real wages continue to fall. This is illustrated by the fall in household savings from 7.3 percent in 2010 to 6.2 percent in 2013.
Part of the problem is that companies are still wary of investing. “The government is looking for an investment-led recovery, but as yet companies are still sitting on piles of cash, rather than investing it. What we need to see is more of this cash being invested”, says Overall.
Business investment fell by 25 percent during the slump of 2008-9 and has failed to recover since then. Rather than investing in new plant and machinery, businesses have relied on cheap labour on zero-hour contracts to meet demand. The problem is until cash rich corporates feel confident about investing the upturn in the economy is based on fragile consumer demand, which could easily fall away if interest rates were to rise and property prices fall.
A big boost from world trade would be just the shot in the arm the economy needs, but it seems unlikely for the time being. The US political system is in disarray and the growth in China and other developing countries is beginning to slow. “The looming debt crisis in the US has to be settled as this is a major export market for us and I am sure uncertainty in the US is not helping businesses to decide to invest”, says Overall.
But it’s not all doom and gloom and figures suggest that the UK GDP will continue to grow. The latest Market survey shows that the UK economy grew 1.3 percent, in the three months to November. This is faster than Germany or the US. “It would be a surprise if growth does not continue through the last quarter and into 2014. Hopefully this will lead to confidence building and companies beginning to invest by mid-2014”, explains Overall.
If companies do begin to invest it could see the UK on a much safer route to recovery, rather than the current upturn based on consumer confidence that could be wiped out should the Bank of England decide to raise interest rates to cool the over heating housing market.
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