It’s a question of when, not if, interest rates will rise. So, the timing of the Bank of England’s visit to Cumbria on Tuesday could not have been more opportune.
Only last week, members of the Bank’s Monetary Policy Committee voted by 7-2 to keep rates unchanged at 0.5% and the Bank published its quarterly inflation report, which predicts slower growth and falling inflation.
The Bank’s Agent for the North East, Mauricio Armellini, and his Deputy, Andrew Hebden, presented the findings at a Chamber breakfast event at the Crown & Mitre Hotel in Carlisle.
They told us that 2018 got off to a hesitant start as UK growth in the first quarter slowed to 0.1%, well below the Bank’s forecast of 0.4%.
Part of that was down to bad weather, which hit the retail and construction sectors hard. But it wasn’t the only reason. Growth also slowed in the Euro Zone, the US and China, albeit not as dramatically as in the UK.
The Bank has downgraded its growth forecast for 2018 to 1.4% but forecasts a recovery to 1.8% in 2019 and 2020. Inflation, which peaked at 3.1% last year, is falling and the Bank expects it to drop back to its target of 2% over the next two-to-three years.
It doesn’t predict its own base rate level but has factored in market expectations that it will have risen to 1.25% by 2021.
Unemployment should continue to fall.
For the last two years, consumers have dipped into their savings to sustain spending as real earnings have been squeezed by inflation.
The Bank says that consumption has started to slow but it expects it to hold up as incomes start to outstrip inflation again.
The weak pound since the EU referendum has boosted exports and narrowed the trade deficit. This, combined with a tight labour market, should encourage businesses to invest but that hasn’t happened to the degree anticipated.
Businesses are hiring extra staff – who they can shed if demand falls off – rather than invest in expensive plant, machinery or technology to become more efficient. For that reason, productivity growth remains sluggish.
Rob Johnston, Chief Executive of Cumbria Chamber of Commerce, said: “It’s important that senior Bank of England representatives visit us.
“On the one hand, it gives Cumbrian businesses an insight into their thinking. On the other, they can hear from us about the issues businesses are facing and feed that back to the Monetary Policy Committee.
“We’ve been hosting these visits for many years. What came across this time is that there is more uncertainty than usual about the Bank’s forecasts.
“The reason for that is Brexit. Nobody knows what the final Brexit settlement will look like and that makes it much harder to make assumptions about growth, inflation, unemployment and other indicators.
The Monetary Policy Committee was right to leave interest rates unchanged. The economy remains fragile.
“Given that uncertainty, the Monetary Policy Committee was right to leave interest rates unchanged. The economy remains fragile.”
He added: “This uncertainty goes a long way to explain why businesses are reluctant to invest, and that is hampering productivity growth.
“This is a national problem but it is especially worrying for us in Cumbria where the working-age population is shrinking.
Businesses will have to find ways of doing more with fewer people in the years ahead and that means boosting productivity.”
There was good news for Cumbria’s economy this week as the Government confirmed a £2.5bn investment at BAE Systems in Barrow, and Cumbria Tourism revealed that the sector grew in 2017 for the fourth year in a row.
The number of staying visitors rose by 6.2% and day tripper numbers by 5% as Cumbria welcomed 47m visitors.
Tourism is now worth £2.9bn to the county’s economy, supporting 65,000 jobs.
Rob said: “The long-term prospects for tourism look strong, boosted by the Lake District’s inscription as a World Heritage Site. The start of scheduled flights from Carlisle Airport next month will also help.
“But the short-to-medium term doesn’t look quite so rosy.
“Tourism benefited from the weak pound after the EU referendum, which attracted overseas visitors and encouraged Brits to take ‘staycations’ in the UK. That effect is starting to dissipate.
“Then there is Brexit. Research we carried out last year found that some Lake District hotels depend on EU migrants for up to half their workforce. If migrant numbers decline, it will create a real challenge for some operators.”
Tourism isn’t the only sector grappling with a labour shortage.
South Lakeland and Eden have some of the lowest unemployment rates in the UK and employers there have long struggled to recruit.
The number of people in work in Cumbria climbed from 232,900 to 240,100 last year, while the total out of work fell from 9,800 to 8,000.
The county’s unemployment rate is 3.2%, well below the UK average of 4.5%.
Rob said: “We expect the fall in unemployment to continue because of demographic factors.
“Cumbria has a high proportion of workers nearing retirement.
“We will have 113,500 job vacancies to fill over the next 10 years – a combination of new jobs and replacements for those who retire or leave.
“Even if more young people move here to work, employers will have to boost productivity to maintain output with fewer staff.
“This is arguably the most important issue facing the county’s economy, and the biggest potential drag on growth.”