Negatives and positives for the UK economy

TWO interesting pieces of economic news today. In a way, you can argue that they point to a race to recovery.
The first cropped up late last night when one of the international credit ratings agencies, Moodys, decided to put the UK on what’s known as a negative outlook.
In simple terms, it emans it believes there’s a 30% chance the UK’s triple A credit rating will have to be downgraded because of the scale of the economic problems we face.
Moodys says those problems are our exposure to the Eurozone (our biggest export market) and our own slow recovery.
Interestingly, it doesn’t say the government needs to change tack. Rather, it suggests external events are placing attempts to address the deficit under threat, and may cramp manoeuvre to stimulate the economy.
Which brings us neatly on to today’s other economic news, that inflation has dropped significantly again. Consumer Price Inflation (which measures the prices of a supposedly typical shopping basket of goods) is down from 4.2 to 3.6%, while Retail Price Inflation (which includes housing costs and mortgage payments) is down from 4.8 to 3.9%.
CPI is generally the one to watch as it gives a good indication of how much spending leeway consumers have got (you can’t avoid the mortgage payments in RPI). It’s also used by government to index things like benefits, tax allowances and pensions.
One of the main reasons for January’s fall is that the impact of last January’s hike in VAT has now fallen out of the annualised calculation.
George Osborne will be hoping this kick-starts at least a bit of consumer spending. He needs some growth to overcome the drag which is partly to blame for leaving our credit rating slightly exposed.
I says slightly because a negative outlook is usually followed by a negative watch before any action on the rating is taken. At this stage, it seems unlikely the UK’s credit rating will be downgraded, and even if it did happen its impact probably wouldn’t be that significant.
For the moment, falling inflation is the one to watch as it offers the best hope of a short-term improvement in the economy, both through increased consumer spending and an opportunity for business to rebuild profit margins as inflation among raw materials softens.
Inflation is likely to continue falling steadily throughout the year, a trend which could also take the heat out of pressure for significant pay rises.