Economy Round Up

The economy, including inflation and interest rates, has been at the forefront of our minds over the past 12 to 24 months.

We saw a technical recession at the end of 2023 and since then we have seen the UK economy bounce back and have some mild growth. This has left farming businesses facing higher interest rates for longer than hoped, and experiencing costs that continue to rise. Direct input costs have started to plateau but there is still a fear this could reverse very quickly.

As of June 2024, inflation is currently at 2.3% compared to a high of 11.1% in October 2022.

With inflation at 2.3% it sounds like it is now under control, however, we must remember that this is the average inflation across different areas of the UK economy. If you look at the underlying data you will see that energy inflation is dragging the average down, whilst services inflation sits at around 6%.

This gives the Bank of England (BoE) cause for concern. The BoE wants to see the underlying data showing a decrease from the above before we see base rate reductions. The only way that they can impact this is by keeping the base rate at the current level of 5.25%. The worry is that if this does not happen, then what can we do to curb inflation at all?

The truth is that wage growth has had a big impact on inflation. Wage growth year on year currently sits at 6%. This has been caused by labour tightening from a lack of immigration, EU nationals leaving the UK after Brexit, and lots of active workers moving into the non-active category. It has also been influenced by the 10% living wage increase in April 2024.

As I write this article we are in the midst of an election. Voters are concerned about public finances and government debt has risen from 66% of GDP in 2010 to 100% of GDP as things currently stand.

Our public services are very lean and incredibly strained which leaves whoever is in charge come the 4^th of July in a tough position. A new government will either need to grow the economy to start bringing this % down and enable future borrowing or increase taxes in order to fund future investment in government services.

Liz Truss has certainly shown that the markets will not just continue to lend the UK money without a long-term plan.

For farming businesses, this puts long-term capital tax planning at the front of the mind. The capital tax regime is an easy target for a new government, but the question is, would any changes actually raise much tax?

The BoE base rate currently sits at 5.25%. If you had asked economists at the start of the year to predict the position, then they would have expected a base rate cut by now. The BoE has delayed making these cuts due to the issues outlined above.

High street banks are still expecting rate cuts and they predict that by the end of next year the BoE base rate should be just below 4%. However, it is expected that the size of the initial rate cuts will be small in an attempt to continue curbing inflation.

For farming businesses with variable rate loans, this continues to put strain on cashflow with the end nowhere near in sight. For those taking on new debt, it leaves them in a predicament as to whether to fix, and know where they are, or take a risk and hope that rates come down.