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Households bank higher wages - but growth slows

Ed Monk

Ed Monk - Fidelity Personal Investing

There were reasons to explain why the UK recorded its steepest monthly fall in growth for three years this week, but the figure was startling nonetheless.

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Gross Domestic Product (GDP) fell by 0.4% in April, according to the office for National Statistics, following a 0.1% fall in March. Monthly growth figures are volatile and can swing from negative to positive quickly. More stable is the three-month figure, which shows growth of 0.3% in the three months to April, down from 0.5% in the period to March.

In other words, growth in the UK is slowing and slowing by more than was predicted. The National Institute of Economic and Social Research now forecasts that the economy will contract by 0.2% in the second quarter when official data arrives, ending more than six years of unbroken quarterly growth. Remember, two quarters of lower GDP in a row is recession.

The April figure was made worse by a sharp pull-back in manufacturing, and car-making in particular. Some carmakers stopped production completely in April as a measure to better cope with disruption around the UK’s planned departure from the EU, which of course never arrived.

BMW shut its UK Mini and Rolls-Royce plants for all of April. Peugeot’s Vauxhall car factory and Jaguar Land Rover also brought forward planned summer shutdowns to April.

That at least suggests that the figures will improve when this activity starts up again in later months, but clearly not all is right with the UK economy.

Except, perhaps, in the area that most affects our personal finances - wages. For a very long period after the financial crisis, pay flat-lined and inflation made the average household poorer. That is now reversing thanks to wages that are now growing by 3.4% a year excluding bonuses, and by 1.5% after inflation.

In that sense, workers are getting richer in real terms, which perhaps explains the strange feeling around the economy at the moment. There’s no shortage of negative news, if you look for it, but many feel disconnected from that because wages are rising, prices are under control and borrowing is still relatively cheap.

The stock market, too, is holding up with both the FTSE 100 and the more domestic FTSE 250 higher year-to-date.

This all poses a conundrum for the Bank of England. Governor Mark Carney has warned that rates will have to rise, and perhaps sooner than the market expects, but he must also contend with weaker growth and inflation that remains on target. Under normal circumstances, prolonged periods of rising real wages would lead to inflation but it has failed to come through as strongly as expected.

With interest rates unlikely to rise much for the foreseeable future, savers and investors will need to continue seeking decent returns in the stock market. Fortunately, the UK market offers an attractive alternative, with historically low valuations and an income yield well in excess of that on offer traditionally safer investments like bonds and cash.

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