The fragility of Britain’s economy will be underscored this week by official figures showing a further fall in consumer spending amid soaring costs of living, ahead of a possible slowdown in activity during the period of national mourning after the death of Queen Elizabeth II.
City economists predict inflation will rise further to 10.2% in August when official figures are released on Wednesday, as rising weekly shop prices and sky-high energy bills add financial pressure on households in difficulty. That would mark a slight rise from July’s reading of 10.1%, which was the first time the consumer price index had topped 10% since the early 1980s.
The figures come after the Bank of England delayed its decision on raising interest rates further from the current level of 1.75% this week, in a mark of respect for the Queen. As businesses, financial institutions and unions cancel or postpone major events during the national mourning period, the central bank’s monetary policy committee will wait until September 22 to act.
Over the weekend, it was confirmed that the Queen’s funeral on Monday September 19 would be a bank holiday. While providing an opportunity for the public to pay tribute, the event could bring mixed benefits to businesses.
Rail industry executives have said travel to and from London will be “extremely busy”, urging mourners traveling to the capital to plan their journeys in advance.
Additional holidays can boost retail sales and hospitality spending. However, additional public holidays also led to lower monthly output for the economy as a whole as businesses and factories closed earlier. Official figures showed a fall in monthly gross domestic product (GDP) for previous public holidays, including the Queen’s Golden and Diamond Jubilees in 2002 and 2012 respectively.
Simon French, chief economist at City broker Panmure Gordon, said single public holidays in 2002, 2012 and earlier this year reduced economic output by at least £2bn. “There are few parallels for this moment and that makes predictions particularly difficult,” he told The Sunday Times. “We may not just be talking about an extra holiday. There could be a long period of national mourning.
Government guidelines released last week encourage businesses to consider canceling or postponing events during the mourning period, particularly on the day of the state funeral. However, there was no obligation to suspend the activity, the decision being left to the discretion of each company.
However, on Friday, some retailers temporarily closed and many events, including conferences and sports games that were scheduled to take place this week, were postponed. Overall, this suspension of normal commercial and cultural life could weigh on an already bleak economic picture.
Households have started to rein in spending in response to soaring prices for basic necessities, with the city bracing for figures confirming a drop in retail sales in Britain in August when the Office for National Statistics releases its latest monthly data later this week. Economists polled by Reuters expect a fall of 0.4% on the month, reflecting the slowdown in broader economic activity as Britain drifts into a long recession.
Last week the government announced plans to freeze energy bills at an average of £2,500 a year for two years, under a home and business support package which marks one of the largest government interventions since the financial crisis. In her first major act as prime minister, Liz Truss said her energy price guarantee would “give people certainty on energy bills, curb inflation and spur growth”.
Economists believe that these measures could prevent inflation from rising much more than current levels while helping to cushion the impact of the recession. However, the Bank is still expected to continue raising interest rates amid the risk of high inflation taking root, and as the pound comes under pressure in global financial markets due to speculation about the cost of Truss’ tax and spending plans.
Figures released on Monday are expected to show economic activity picked up in July following a slump in June, when the long Platinum Jubilee weekend weighed on growth. After Britain’s GDP fell 0.1% in June, City economists predict a monthly rise of 0.4% in July, while warning that this will represent a temporary respite amid increased pressure on businesses and households.
“July GDP is expected to be disappointing,” said Klaus Baader, an economist at French bank Societe Generale. “Retail sales are expected to show renewed weakness. Inflation probably only increased in August, but recently all the surprises have been on the upside, so we have to be prepared for another one.