This month Tony Hazell focuses on the bright side of the economy
The eurozone crisis hangs over the UK like a great thunder cloud on a summer’s day, threatening to drown any economic green shoots that are struggling to emerge. But let’s put our umbrellas aside for a moment and consider the good economic news that has appeared recently. Believe it or not there has been some.
First there’s inflation. In May the annual rate fell to 2.8 per cent from three per cent in March. This is its lowest level for two and a half years. The biggest contributors to this fall were things many of us regard as the basic essentials such as food, fresh fruit including grapes, bananas and peaches, non-alcoholic drinks and motor fuel.
Even more interesting is that many of these things actually fell in price between April and May. Often, the annual inflation rate goes down simply because prices are rising more slowly. This is the first time prices overall have fallen between April and May since the consumer prices index (CPI) was launched in 1996.
The Bank of England’s (BoE) most recent forecast is that CPI will remain above two per cent until the second half of next year, so this fall came as a bit of a surprise. Factory gate inflation also slowed to its lowest rate for two and a half years. This is the inflation on goods that leave factories. It is inevitably passed on to consumers as retailers are forced to put up the price of goods we buy in the shops.
The eurozone crisis has brought good news for summer holidaymakers as the pound now buys more euros than it did at this time last year. For every £100, tourists who shop around have been able to get more than €120. Last summer you were lucky to get €110 per £100. So those going on holiday in the coming weeks will have around 10 per cent more spending money than they did last year.
Unfortunately, we can’t ignore the eurozone, where the news seems to fluctuate on a daily basis. The Greeks held an election in June. The new majority party, New Democracy, came to power with just 29.66 per cent of the vote as opposed to 26.89 per cent for the main opposition.
New Democracy says it is in favour of austerity measures which will allow Greece to stay in the single currency. But with less than a third of the vote, it hardly has a ringing endorsement from the Greek electorate. The only certainty from the eurozone is that there will continue to be uncertainty.
Our economy is tied closely with other European countries (as I explained last month). So bad news from Europe is generally bad news for UK investors and businesses. This effect showed up when output from UK factories fell by 0.7 per cent in April. Analysts had expected there to be no change.
The figures were all the more disappointing because there had been a 0.9 per cent rise in March. Ernst & Young’s ITEM Club, which makes economic forecasts, described them as ‘a serious cause for concern’.
With continuing uncertainty one thing remains unchanged: the Bank of England’s (BoE) base interest rate. This has now been at its record low of 0.5 per cent since March 2009.
Small business and potential house buyers are continuing to struggle to get their hands on funding. This has led the BoE and Chancellor of the Exchequer to hatch a new ‘funding for lending scheme’. This will see the BoE make money available to lenders at low interest rates on the condition it is lent to homebuyers and small businesses. Up to £100 billion could be made available to support the UK economy and British business.
The housing market also took a dip in the late spring, but this had been expected. Incentives which had allowed first time buyers to avoid paying stamp duty at one per cent on a home bought for less than £250,000 were removed in April. Now only those costing less than £125,000 are exempt.
This led to a 70 per cent fall in the number of homes worth between £125,000 and £250,000 being bought by first time buyers, according to the Council of Mortgages Lenders. In total there were 36,000 loans made to homebuyers in April worth £5.3 billion. This compares with 51,600 loans worth £7.4 billion in March.
Finally, despite the economic woes we British have been digging more deeply than ever before to help charities. Government figures suggest tax-efficient donations have increased by 95 per cent over the past decade. The average donor gives £223 a year to charity. Overall, donations increased from £2 billion in the 2000-2001 tax year to £3.8 billion in the 2010-2011 tax year.
This just takes in the donations which benefit from the Gift Aid scheme that allows charities to claim tax relief on donations. So while we may be feeling the squeeze, this hasn’t affected our basic generosity.
Every month in My Virgin Money Magazine, Tony Hazell explains what’s currently happening in the economy and how it affects you. To make sure you don’t miss an update, sign up to receive our monthly emails telling you about new magazine content. For more articles on how to make the most of your money, see our Money homepage.
Tony Hazell is a freelance financial journalist. He edited the Daily Mail’s Money Mail section for over 12 years and now writes a weekly column for the newspaper solving readers’ financial dilemmas. He is married with two grown-up stepsons.
These are his personal views and not necessarily those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
Links to external websites are for information only. Virgin Money receives no income from them and accepts no responsibility for the website content. The information in this article is correct as at 24 July 2012.