The latest – the PMIs for Britain by the Office for National Statistics have showed that inflation is rising and unemployment is rising. Unemployment is increasing, but the jobless figures do not show the number of people who have quit their jobs. As a result, it is difficult to gauge the impact of the slowdown on the UK economy.
We also do not know what the trade deficit will be in the second quarter of this year. The weakness of exports and imports in Q2 and the weaker outlook for exports due to the drop in the value of the pound has made many companies rethink on expansion plans and take further outlay cuts before they make a further blowout in the second quarter.
If the new trade deficit is any indication, then the UK economy will be suffering in the near future. There are two key concerns when it comes to the economy and they are the price of basic commodities like oil and gas, and inflation. As we move through the third quarter of the year, the Bank of England’s Monetary Policy Committee will meet and there will be a meeting of all of the major financial institutions.
At this point, some of the measures that the BoE may decide to take include interest rate cuts. The BoE does not want to cause a situation where the UK economy starts to contract as it will be too aggressive and could lead to a depression. However, if there is a sustained drop in the pound, the UK could become less competitive.
It is quite possible that the UK economy could be forced into recession and this would affect the ability of the British pound to retain its value and its ability to hold its value. This could also have knock-on effects for the euro and other currencies in the UK.
As the UK government prepares its next Spending Review, which is likely to come out in the autumn, we will get a better idea of the direction in which it wants to take the economy. If the next Spending Review does not set out a clear agenda to reduce the cost of living, then the chances are that the Chancellor is going to use the autumn Statement to try to sell off some of his own policies so that he can then come back with a budget later on. After all, he did spend much of his time trying to convince the House of Commons that he was on a course for fiscal stability.
The Chancellor must also consider whether or not the UK needs to go in for a second mortgage and get a second mortgage in the future to take the pressure of the current one off the price of sterling. if the current situation is not tackled, the UK is bound to suffer and the pound will probably fall again. However, if the next Spending Review is strong in its economic message, it will strengthen the pound and put downward pressure on the cost of living.
Finally, we need to understand the impact of the slowdown in the manufacturing sector. The PMIs have shown that the manufacturing output figures have been very poor in the third quarter of this year, which means that we are experiencing a recession in the manufacturing sector.
In this situation, a lower pound will help to make up for the lack of manufacturing output, so this factor has got to be looked at before a further cut is made in the pound is announced by the BoE. However, it is not clear what the effect of the slowdown in the manufacturing sector is going to have on the UK’s export performance.
Therefore, it looks as if the Chancellor will not make another cut to the interest rate until after the Autumn Statement. However, the fact that the UK has one of the most pro-active central banks in the world and a large number of its members of the Bank of England’s committee, may mean that it will be able to do this without the BoE having to come under much pressure.
It is likely to get the Chancellor talking about the future of monetary policy and it is important to watch how he reacts to this. in order to see whether he uses this chance to bring down the pound further or whether he stays quiet and lets the pound drop.