An Uncertain Recovery
Recent Data showed a marked rise in inflation and a unexpected rise in unemployment.
CPI inflation is now 3.5%. Unemployment also rose. Those claiming job seekers allowance rose 23,500 to 1.64m in January. A broader measure of inflation – ILO method showed a small fall in unemployment to 2.46 million.
This rise in unemployment and inflation is an unwelcome combination suggesting a period of stagflation. However, the rise in inflation is mainly due to factors such as a rise in VAT rates and higher oil prices. There is no sign of underlying inflationary pressures. Spare capacity in the economy should keep inflation low.
With the economy still very weak, and some economists fearing a double dip recession, there is no likelyhood of any increase in interest rates in the near future. After the general election, the UK is likely to see some form of fiscal tightening (higher taxes, lower spending) to help reduce the budget deficit. This will keep the pressure on interest rates to remain low.
The economy could face a further slowdown this year because of:
- Recession in southern Europe – UK exports twice as much to Spain as China.
- Fall in Confidence following problems in Eurozone
- Rising unemployment in the public sector
- Expiration of stimulus packages.
