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Week in perspective: UK defies Brexit blues

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Key indicators of the UK economy remained surprisingly upbeat this week, despite Brexit worries and a trend of falling business investment. On Tuesday, the Office for National Statistics (ONS) said that UK employment reached a new record in the three months to January. The number of people in employment rose by 220,000 in the quarter, way above analysts’ expectations of a 120,000 increase. As a result, the unemployment rate fell to 3.9 per cent, the lowest since 1975. The employment rate rose to 76.1%, up from 75.3% 12 months earlier. This figure is the highest on record. Wage growth also exceeded expectations, running at a rate of 3.4% during the quarter, down from 3.5% in the previous three months. Economists had expected wage growth to fall to 3.2%. After accounting for inflation, wages were 1.5% higher year-on-year by the end of 2018. Analysts are struggling to reconcile the positive jobs and wages data with consistent reports of falling business investment. Some have suggested that it is easier to hire more people to meet demand (and then let them go in the event of a downturn), than it is to spend large sums on expensive machinery or manufacturing facilities, which would be difficult to sell if they became surplus to requirements.

The UK inflation rate increased in February, pushed up by rising food prices. The ONS said that the annual rise in the consumer price index for February was 1.9%, up from 1.8% in January. The ONS commented: “The rate of inflation is stable, with a modest rise in food, alcohol and tobacco offset by clothing and footwear prices rising by less than they did a year ago.”

The increase in prices is the first rise in inflation since last August, when the Bank of England raised interest rates to 0.75% - the highest level since the financial crisis. Inflation is expected to rise in the coming months as the energy regulator increases its price cap by 10%, which will see prices rise in a major component of the consumer prices index. 

Ordinarily, data that showed strong wage growth and record employment would be putting upwards pressure on interest rates and inflation, but Brexit uncertainties make the link more tenuous. Indeed, the Bank of England’s Monetary Policy Committee unanimously voted to leave rates unchanged on Thursday as Brexit uncertainty acts as a brake on the economy. But rates could move in either direction in the coming months depending on the outcome of the Brexit saga. If the UK manages a smooth withdrawal, the pressure on wages and inflation could force the Bank to raise rates. And even crashing out without a deal could force a rate rise to counter the expected spike in inflation that would likely accompany a falling pound. Conversely, the Bank could choose to cut rates to cushion the economic shock.

The US Federal Reserve also left its interest rates on hold this week, and took the prospect of further rate rises off the table for 2019 amid data suggesting that the economy was slowing more than expected, and inflation was falling. Meanwhile, in the UK, retail sales volumes increased by 0.4% in February compared to January, although much of the rise was attributable to a rise in fuel sales and online shopping. The annual rate of growth was 4%, down from the 4.1% rate reported in January, but well above the consensus forecast of 3.3%. News from the housing market continued in its negative vein, with the ONS saying that prices are rising at their slowest pace since 2013. It said prices increased by 1.7% in the year to January, down from the 2.2% reported in December. Prices actually fell by 1.6% in London.

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