20 Mar, 2017
Report: Stock market boom pushing economy forward
Swelling share prices are making households more affluent, boosting confidence and mitigating the squeeze from rising inflation and sluggish wage growth.
Britons’ net financial wealth has jumped by 12.5% in the past year according to economists at the EY Item Club - rising four times more quickly than wages.
This “should provide some prop to spending this year” and so keep the economy growing, they hope. However, this only benefits the relatively well-off who own shares and other financial assets. As a result, rising inflation will hit lower-paid households the hardest.
Low earners also spend more of their income than high earners, meaning they receive a second bigger blow from rising prices. Prices are predicted to increase by 2.8% this year, almost outgrowing wage increases and leaving household incomes rising by only 0.1% in real terms over 2017, the Item Club believes, down from 1.8% in 2016.
According to Telegraph analyst Tim Wallace, this inflation is driven in mostly due to the drop in the pound which is pushing up the cost of imported goods.
Senior economic advisor to the EY Item Club, Martin Beck said: “Higher inflation will be the key culprit in the sharp slowdown in consumer spending growth this year, cutting off what has been an all-too-brief revival in real pay growth and continuing the dismal picture for real earnings seen since the financial crisis.”
He added: “There should be some improvement in 2018, as inflation begins to cool, but even then, we anticipate real wage growth of just 0.7%. It is likely to be 2019 before workers begin to enjoy more ‘normal’ rates of real wage growth again.”
Inflation rose even faster back in 2011 with price rises peaking at more than 5%, as high oil charges and VAT hikes pushed up living costs. Economists do not forecast a period of severe inflation, and say consumer spending is “not heading for bust this year, [but] certainly faces the ingredients for a sharp slowdown”.
Other sectors of the economy are more upbeat.
According to a Lloyds Bank survey, executives at the world’s largest financial services firms believe “the UK economy is on course for a resilient 2017, and could outperform other developed nations”.
Three-quarters of those surveyed said the UK’s economic growth will match or surpass the average in the G7 this year.
Lloyds commercial banking arm representative, Edward Thurman said: “Financial services firms are an important barometer of the UK economy - and despite uncertainties such as the future of our relationship with the EU and new regulatory pressures, they are confident that the outlook for the UK over the coming year is better than had been expected.”
Despite their confidence over the economic prospects, those investors still have some worries over the UK’s future relationship with the EU, however.
Nearly two-thirds said they are concerned about the possible loss of the passporting system that allows finance firms to do business across EU borders - while 50% are concerned about barriers to trade, and 35% about the future of regulatory equivalence between the UK and the EU.
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