Oecd interim economic ocde outlook march 2017 embargo (3)
Economic Outlook Report
1. Economic Outlook Report
After the devastating effects the Global Financial Crisis of 2007-2008 had on the UK it finally
seems that there is light at the end of the tunnel. Britain is now on the slow and steady road
to recovery. Figures show economic growth of 0.7% in the second quarter of this year, and a
revised growth forecast of 1.5% this year. This growth is expected to continue throughout
next year so things are definitely on the up. As confidence grows more people will be in
employment, meaning more people with incomes, meaning more people making money
decisions. The MAS will have to make sure that it’s content and service delivery is up to date
and is appropriate for the changing economic climate in the UK.
Housing
The housing market is returning back to life after the recession that hit the UK in 2008. The
number of first-time buyers is rising, with an increase of 45% in July compared to a year
earlier. This is due to an increase in loans to home buyers, and more affordable mortgage
rates due to government schemes such as NewBuy, Help to Buy etc. With this increase in
home-buyers, especially first time home-buyers, the MAS can expect an increase in people
asking for advice on how to fund the purchase of a home, how these government schemes
work etc. However due to this increase in home buyers house prices are soaring, demand
for houses is outstripping supply causing this rise in prices, which is the fastest since 2006.
According to the Halifax House Price Index the average house price is now £170,231 which is
5.4% higher than a year earlier and 2.1% higher than the previous quarter, house prices are
also expected to rise by up to 7% in 2014. However this may be a worry for potential home-
buyers, as prices continue to rise buying a house may become increasingly difficult
especially for first time home-buyers. The average deposit paid by a first-time buyer in
London is around £64,000, and as house price rise this figure will continue to increase. The
MAS may expect an increase in people coming to them for advice as they are struggling to
get on the property ladder.
There is speculation that this may ‘burst the housing bubble’ The ‘housing bubble’ occurs
when instead of rising gradually with inflation, housing prices rise rapidly to unsustainable
levels. When the bubble ‘bursts’ housing prices tumble causing the housing market to
collapse. The consequences of this are that the falling house prices may mean that some
people will owe more than their house is worth. Putting them in a position where they are
forced to sell at a loss, and must somehow find the money to pay off the outstanding
amount on the mortgage. An increase in the interest base rate could possibly slow the
growth of house prices as it becomes harder to get on the property ladder as borrowing is
more expensive. For example, a person with £100,000 outstanding on their mortgage, with
10 years left till the mortgage is repaid after a 1% increase in the Interest base rate.
Mortgage Rate (%) 3.43 4.43
Monthly Repayment (£) 986 1,034
2. Interest Rates
Interest rates have been at a record low of 0.5% since March 2009 compared to the pre-
recession rate in 2008 of 5.25%. The Bank of England plans to keep the interest rates this
low until unemployment falls to 7%. The unemployment rate is currently 7.7% and in March
2008 before the global financial crisis it was at 5.1% The BOE’s reason for doing this is to try
and create more certainty for businesses and individuals about interest rates, and by doing
this they will encourage borrowing and investing which will lead to more economic growth.
The BOE doesn’t expect base rate to rise to 0.75% until 2016. Low interest rates puts
borrowers in an advantageous position, as low interest rates makes borrowing very cheap.
With interest rates at 0.5% until 2016 people may rush to borrow now for mortgages etc.
before the interest rate begins to increase. Low interest rates are not great news for people
who are saving, as they are seeing very little returns on savings. The MAS can expect a lot of
people contacting them for advice about buying a home as people look to take advantage of
the low interest rate. MAS should also be ready for people who will come to them for advice
asking them for possible alternatives to putting money in a savings account, or the best
savings accounts to use at a time of such low interest rates.
Inflation
Inflation is the rate of increase in prices for goods and services. Inflation is an important
indicator of economic health as it tells us at what rate the cost of living is increasing. This is
important as how high or low the cost of living is will determine our purchasing power as
consumers. Inflation also plays a role in setting economic policy; interest rates are set
depending on what the inflation rate is. If inflation rates are through the roof, interest rates
will be increased to try and suppress inflation. Although inflation is not at the BOE’s 2%
target yet, inflation seems to be heading in that direction as the general rate of increase in
prices continues to slow. Latest figures show that inflation eased to 2.8% in July from 2.9%
in June. This was mainly caused by lower air fares, and continued discounts on the high
street. The decrease in inflation was partially offset by rising petrol and diesel prices.
Although inflation is falling consumers are still under pressure and may be for some time to
come. The fall in inflation has masked food and energy price rises that increased at almost
double the rate. Food price inflation rose by 4.4% year-on-year in July from 3.9% in June,
and these prices are expected to rise over the coming months. Rail fares are also set to rise
by more than 4% in 2014 due to RPI staying above 3%. This will add more than £200 to the
annual price of commuters’ tickets in SE England. All of this along with declining real wages
and tax credit cuts, means Britons will have to ride through the continued squeeze on their
purchasing power. The MAS can expect many more people coming to them to ask for advice
on how to make their money stretch, budgeting etc.
Unemployment
3. UK unemployment has dropped to 7.7% between May and July, the number of people
unemployed fell 24,000 to 2.487 million. The number of people claiming JSA fell by 32600 in
August, which is its lowest level since February 2009. This figure has been seasonally
adjusted, therefore taking into account increases in employment due to seasonal summer
jobs etc. However the number of people working part time because they cannot find a full
time job rose to 1.45 million which is the highest since 1992. Although employment has
risen strongly, evidence suggests that firms are responding to higher demand more by
boosting productivity rather than taking on new workers, meaning it could take a long time
for unemployment to fall to 7%. Unemployment is expected to drop over the coming
months, but the drop will be limited as companies make more use of the workers they have
rather than employing more.
Summary
In general things are on the up in the UK, with more people in employment, increased levels
of output, and house prices soon expected to be back above its 2007 peak in cash terms, the
economy is slowly beginning to gain some momentum. However there are still the problems
of declining real wages and inflation being above target which need to be resolved. The MAS
can expect a huge demand for housing advice, which I feel will be an area of interest for
many as the housing market continues to pick up speed. The MAS will need to make sure
the content it puts out is relevant to the ever changing concerns of consumers in the UK.