The UK economy got some good news a few days ago when the Bank of England announced that the country was set to see economic growth of 7.25% this year. To put that into perspective, that would be the biggest yearly growth in the economy since the Second World War.
That is certainly some good news and very welcome as we look to return the economy back to the size of GDP it was pre-pandemic. Whilst this is positive news, there is some context to understand, and a potential new threat looming in the distance.
UK economy set to bounce
There is a difference between a boom and a bounce back. That is at least what the Bank of England wants to say. In its report, it estimates that the 7.25% growth this year is more of a bounce-back than a signal of a sustained boom that will stretch beyond the end of this year. In 2022 they expect growth of 5.8% (which is still very good) and roughly 2% in 2023.
Even with 7.25% growth in 2021, the economy will still only be the same size as it was in 2019. It would mean two full years without real economic growth. It is expected that the UK economy would return to pre-pandemic levels in 2022. At that point, we will know whether this was a bounce-back or whether a more sustained boom has set in.
This is the natural response to an economy that has been suppressed for a long period of time. Sectors that have been dormant for so long finally being allowed to operated is going to spur almost immediate and very strong business activity. UK fenestration knows this acutely. Although for our sector specifically, I think we have moved past the bounce-back phase and into a more sustained boom phase. The bounce-back happened after the ending of the first lockdown back in May 2020. We’re a year on from then and demand has only grown further, to the point where the supply chain is being crippled.
The question is whether other sectors will do the same. For 2021, it does look like foreign travel is going to be off the cards. The colour-coded travel lists that were announced by Government make it very restrictive on the number of places you can go without having to quarantine. Places like the Faroe Islands, the Falkands and some very remote islands are on the Green list, along with Portugal. It has effectively cancelled summer holidays for Brits, with many choosing to stay here. It does also mean a further boost to home improvement spending as more homeowners will likely spend that money on renovations to their homes.
I also believe that there is enough money in people’s pockets right now to spend quite widely and in a varied manner. People have been worried that should foreign travel come back, more likely now in Q2 of 2022, then people might stop spending on replacement windows and doors. I don’t think that will be the case, at least not in a big way. There is a lot of money out there sloshing about. Plenty of people are better off now than they were before, thanks in large part to Government support packages and the fact most normal spending routes were closed. It’s going to take time to spend the thousands, sometimes tens of thousands that have built up in bank accounts. A foreign holiday perhaps won’t stop the ability to spend on a new front door.
Maybe demand levels off in 2022 and stops rising, but even so, the supply chain needs to be able to expand capacity soon as there is very real and genuine pressure on it anywhere you look.
There is however a threat to the UK economy now coming over the horizon and it is something we have to be mindful of: inflation.
Inflation isn’t the most exciting subject, but it is something that affects the UK economy and us all personally. Inflation is the rate at which prices rise. The BoE has a target of 2% inflation as they see that as a sustainable level. For months it’s been very low, due to the circumstances of the past year or so. Now though, there are signs it’s rising, and it won’t be a gradual one.
Right now, inflation as of March was 0.7%. In February it was 0.4%. It is expected to rise quickly to reach 2% later this year. For me, we are widely underestimating how far inflation is going to rise. Over in the US, where their economy is very similar in terms of structure and is also going through a huge construction boom and supply chain strain, inflation today jumped 0.8% in one month. The UK needs to be looking at the US for signs of what is to come.
The prices of almost everything have been going up for months, and quickly. Food, fuel, construction materials, tech. You name it, prices have risen rapidly as heavy demand forces prices higher. But they have been like this for months now, and it’s only just starting to show in Government figures. I’m almost certain we’re going to fly way past the 2% mark into much higher territory.
Why does this matter? The higher the inflation, the bigger and faster prices of everyday goods and services rise. Wage inflation rarely keeps up, which means the cost of living becomes more expensive, and if it happens quickly, it becomes a problem quickly too. So to control inflation, banks and governments use interest rates to cool inflation rates down. They are the brakes as they slow consumer spending. At least that’s the idea. The very specific problem here is if interest rates do rise in the months to come to combat inflation.
Interest rate rises are good for savers, but that’s about it. If you have a tracker mortgage and it rises just 1%, which historically would still be very low but not by recent standards, your monthly mortgage costs are going to shoot up. If you have loans or debts then the cost of that loan or debt is also going to rise. And then there is the UK national debt. If interest rates rise 1%, due to the immense levels of public borrowing undertaken in the last year to prop up the economy, the additional interest alone on that would equate to £25bn.
Interest rate rises when debts are low are manageable. Rate rises when debt is high makes that debt even harder to work down and puts further pressure on an economy that can ill afford any new problems.
Before long the monthly Government figures will start to show rising inflation. We have been seeing it specifically in our sector for months now. And it’s going to continue for some months yet. We do need to keep an eye on this and be mindful of the issues it could create.
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