November is proving to have been a lucky month in Britain. Inflation slowed significantly: from 4.6 per cent on the year in October down to 3.9 per cent on the year in November (a bigger fall than anyone predicted). Not only that: this morning we learned from the Office for National Statistics that the economy grew by 0.3 per cent, rebounding from an (unrevised) 0.3 per cent contraction in October.
Unfortunately that headline growth rate was largely thanks to a handful of temporary factors. Growth in overall services, up 0.4 per cent, is mainly attributed to a reduction in strikes that month, particularly within the health and transport sectors. Furthermore, feedback from businesses to the ONS suggest Black Friday sales ‘had a positive impact on monthly turnover’.
None of this is the stuff of long-term, sustainable growth. But the bounce-back from the previous month may just be enough to keep the UK out of a recession for now. Capital Economics estimates that so long as the economy didn’t shrink in December by 0.2 per cent or more, Britain should stay on the right side of the line in Q4, avoiding the technical definition of recession.
But is Britain’s luck about to run out? Last night the US and the UK carried out airstrikes against Houthi facilities in Yemen, which have been used by the rebel group for weeks now to cause disruption to shipping in the Red Sea. While the attacks on commercial ships combined with rerouted (and delayed) trade have not yet sent prices in the UK spiralling, there is growing concern that the disruption may soon be felt by businesses and consumers – especially if energy prices start to rise again.
The assumptions behind better-than-expected inflation data is that energy prices continue to fall, with predicted Ofgem would reduce the energy price cap once again in April by around 14 per cent. But according to the BBC this morning, the Treasury is modelling scenarios where Red Sea disruptions send oil prices back up again: these scenarios are thought to include ‘crude oil prices rising by more than $10 (£7.84) a barrel and a 25 per cent increase in natural gas’.
It was just earlier in the week that the Bank of England’s governor Andrew Bailey was issuing some reassuring words about the disruption. While uncontrollable, external factors continued to be one of the biggest risks to the health of the UK economy, he noted, the disruption in the Red Sea had not yet led to the ‘prolonged spike in oil prices’ as many had predicted before Christmas. Instead, he said, ‘the oil (price) is actually coming down a bit’. Unfortunately this now looks more like a jinx than a reassuring piece of news, as both Brent crude and US West Texas Intermediate crude are up by 2 per cent a barrel since last night’s strikes.
Only a few weeks into the new year, it seems the UK’s economic narrative is once again going to be heavily influenced by geopolitical factors, whose consequences are eventually reflected in the domestic figures. If disruption continues, or worsens, in the Red Sea – which accounts for 15 per cent of global seaborne trade – it’s inevitable that it will dent economic growth to some extent. The question remains how much – and whether the government is prepared to ramp up growth reforms domestically to try to offset some of the damage taking place abroad.
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