Buoyed by better than expected economic data and a functional government committed to creative initiatives and responsible policy, the United Kingdom has said goodbye to years of recession and has emerged with a strong and growing economy. The United States could learn from the economic programs and positive government initiatives deployed by the UK to lower unemployment and strengthen the housing market.
British sterling is outperforming many other major currencies and has been for several months. The USD fell further against the GBP on Wednesday to 0.6240 USD. Against the euro, the GBP settled at 1.1904 after falling off the day’s high of 1.984. Sterling settled at 159.70 yen.
Earlier in the week, the Office for National Statistics (ONS) released solid inflation numbers for the UK. Inflation hit a 13-month low, easing pressure on the Bank of England (BoE). In October, inflation fell to 2.2 percent after settling at 2.7 percent in September. In August, the BoE predicted inflation would be at 2.8 percent by the end of the year.
British bond yields turned positive as markets breathe easier seeing that the central bank would not be increasing lending rates.
In contrast, inflation in the euro zone slipped to 0.7 percent in October, too far below projections and causing the euro zone to revise policy. The stable rate in England leaves room for more growth and ensures that the current low interest rate of 0.5 percent will be in play for a long time to come.
The inflation data allows the BoE to accelerate growth without the fear of inflation. Inflation might tick upwards in November but the rate would still be comfortable enough for the government to continue helpful and aggressive easing though 2015.
Growth, Unemployment and Transport
Bank of England Governor Mark Carney took the reins in July and set his policy in August. His agenda called for interest rates to remain at 0.5 percent until UK unemployment reached the 7 percent plateau. At the time, he indicated this would not take place for at least three years.
On Wednesday, Carney projected that unemployment could reach the target by late next year. Immediately, investors began to question if the rate achieved in late 2014 would cause the bank to raise rates prematurely. Carney’s upbeat analysis of the overall economy gave no indication that he would not continue the favorable lending rates beyond the 70 percent mark.
Unemployment in the UK was a healthy 5.0 percent prior to the 2008 recession. Carney did not reject the possibility that the good inflation news would allow him to rethink the target number. Carney was candid that the 7 percent target was not an automatic trigger to raise rates.
Economic growth in the UK has turned nicely but has lost ground to make up. Helped by low transportation costs that have fueled consumer confidence and ignited strong consumer spending, growth has expanded since reaching 0.8 percent in the third quarter has shown strong improvement. Carney indicated growth projections for 2014 were now improved to 2.8 percent from his August 2013 projection of 2.5 percent.
The UK housing market has surged in 2013. Prices have climbed highest in London where housing is up 9.4 percent in year over year comparisons. Several creative programs have stabilized the new home and existing home market and brought thousands of first time homebuyers to the marketplace. Employed in the construction industry has also stabilized due to the new home incentive program.
The Royal Institution of Chartered Surveyors reported that housing prices reached an 11-year high in October as government was praised for their support of the industry. Outside London, the recovery has been less sensational with prices rising about 2.1 percent.
As further encouragement, the BoE projected that current trends should keep inflation below 2 percent through 2015. What a difference it makes when government is functional and chooses to serve the entire population rather than special interest groups.
