Chamber Chat with Helen McClure

July 28, 2021 - 12:00am

Chamber Chat with Helen McClure

As always, the economy gives us plenty to think about. Handelsbanken’s UK Chief Economist, James Sproule, considers three key questions going forward:

What is driving the recovery? We are confident that the biggest driving force of the expansion is the redirecting of existing income from forced savings to consumption. We are making no heroic forecasts that people will take on more debt; we are merely assuming that people are going to return to something like normal. Alongside the big boost to consumer expenditure, we are also looking for a reasonable rise in business investment. We believe Brexit uncertainties may have been allayed and with consumer habits looking like they may be changing as a result of the pandemic, businesses may have an incentive to productively invest.

When and how will the economy slow? The UK’s long run annual trend rate of growth is around 2 percent (Office for Budget Responsibility). This year economic growth could be over 7 percent; clearly unsustainable in our opinion. We believe slowing to a sustainable pace is happening with much of the slack in the economy already gone, resulting in the level of GDP seen at the end of 2019 likely to be regained by the end of this year. Key to our forecast is that interest rates remain low.

Is inflation a threat? We believe inflation is set to surge as we are measuring today’s prices against the depressed prices of the first lock down (what is known as the base effect); and pent-up demand is hitting businesses, so they are putting up prices (what is known as friction). Our view is that both these impacts will lessen over the coming year, resulting in inflation falling to its target rate of two percent. How global economies cope with the vast expansion of the money supply is a concern for another day.

James shares more economic insights in our weekly podcast which you can find here:

Helen is the Branch Manager of Handelsbanken Lancaster. Handelsbanken are also Chamber Ambassador members.