Navigating economic growth: Insights from the Euro Championships and post-election outlook

In this article Phil Eckersley comments on recent economic news, the impact of the Euro Championships and the post–election outlook. 

Economic growth remains firm…

The most recent monthly growth release data is more encouraging.  GDP expanded 0.4% in May after zero growth in April.  While monthly data are often volatile, stronger growth has been a theme of data releases so for this year.  Encouragingly, this growth was well spread across sectors with services, manufacturing and construction all registering positively.  Construction output is relatively important for SE England (and Kent in particular) as it makes a disproportionate contribution to regional GDP. 

What about the Euros?

England’s success in reaching the final of the EURO championships should have lifted consumer spending in late June and July. So, while the rain may have kept consumers off the high street, the hospitality sector and the food and drink supermarket multiples enjoyed the benefits of England’s progress through the tournament. It’s relatively straight forward to measure the direct benefits experienced by these sectors, but there are also likely to be other less tangible positives more difficult to determine.  The feel-good factor associated with progress in the tournament is likely to have had a positive impact on other areas of the economy such as durables spending – buying a new TV to watch the matches, there is even some evidence, albeit weak, that consumers trade up into newer cars.  

But will there be a hang-over?

To some extent the jury remains out on this.  The answer, in part, lies in how the additional spending has been financed.  Covid did see a pause in spending and the accumulation of savings that have not fully reappeared; some of this residual may well have been used to finance additional spending in May, June and July.  However, and at the same time, consumer debt has been rising.  It’s therefore likely that some of the extra spending has been met by increased indebtedness, for example on credit cards.  The extent to which consumer finance has been used to fund this spending could, in turn, weigh heavily on consumption in the next few months as households struggle with higher than usual credit card bills.   

And what about the change in political hue?

In the past, post-election periods have been associated with a modest pick-up the domestic economy, with a larger majority more often being associated with a stronger surge.  However, this fillip has rarely been sustained for much longer than a few quarters.  Therefore, the new Labour administration is likely to enjoy a near-term boost to growth, but this factor in isolation could be short-lived. When it comes to active legislation, we are still at the point of wait and see. The government has made some announcements relating to growth objectives and the lifting planning restrictions, but one senses there is not enough detail in the rhetoric to decipher the underlying intents. In particular, many businesses await the details of labour market reforms, environmental policies and business tax reliefs in areas like inheritance. 

Monetary Policy

As predicted in this article last month the Bank of England’s Monetary Policy Committee held interest rates at their June meeting.  Not only were the political sensitivities highly elevated with the general election due the following week, but the economic news could not fully justify a reduction in base rates. While the headline rate of inflation has weakened, underlying measures such as core inflation, services inflation and wages have not yet come down sufficiently to justify the reduction.  My money is on September or November, with an outside possibility of August, although I would like to get a read on the latest CPI numbers before feeling sure. In contrast, recent soundings from the US suggest inflation concerns are easing and the FED will move fairly soon to ease policy rates.