Slow UK economic growth is not just a cold weather trend

The UK economy had a poor start to 2018. Manufacturing output was flat in January and fell slightly in February. Construction remains firmly in recession. Export volumes are rising but less quickly than imports.

By the end of this month, the Office for National Statistics will publish its flash estimate of growth in the first quarter. Most City economists think it will be 0.3%, down from 0.4% in the final three months of 2017. At one of Britain’s long-established thinktanks, the National Institute for Economic and Social Research, they think it could be as low as 0.2%.

There are reasons to think the position is not quite that gloomy. The unexpectedly cold weather, especially the snow at the end of February and the beginning of March, stopped work on building sites and prevented consumers from getting to the shops. On past form, there will be a bounceback in activity in the second quarter. The first quarter number may also be revised upwards.

Even so, it is still obvious that the economy has lost momentum in recent months. Last year’s story was of weaker but better-balanced growth, with consumer spending muted by industry doing well. This year’s story, so far, has been weaker growth, pure and simple.

There are reasons factory output has stalled. Sterling has been rising on the foreign exchanges as the markets have started to bet against a cliff-edge Brexit. That makes exports more expensive at a time when demand from the rest of Europe has faltered. After years of underinvestment, it is also the case that manufacturing has lacked the capacity to meet rising demand.

The pound rose against the dollar after the news in anticipation of a quarter-point hike in borrowing costs from the Bank of England next month. This looks a bit curious. Threadneedle Street is clearly worried about wage inflation picking up, but in the past the Bank’s response to such data would have been to cut borrowing costs, not raise them.

Why the pay gap extends to pensions

Three years have passed since new rules came into force allowing people over 55 to draw money out of their accumulated pension pots to live on when they stop working. The new arrangements are designed to provide more choice, but as new research from the financial firm Zurich UK has shown, they have also highlighted how the gender pay gap extends beyond retirement.

Over the course of their working lives, women tend to earn less than men. Inevitably, therefore, they also tend to stick less into defined contribution pension schemes. That, in turn means, the average woman starting to draw down her pension has a pot of £132,000 compared with £212,000 for the average man.

Assuming a 3% annual yield, that would provide a man with an annual income of £6,360 according to Zurich’s calculations, while a woman would get £3,990.

Clearly, women will have smaller pension pots than men until such time as they have equality in lifetime earnings. In the meantime, they would need to get a yield of 5% on their investments in order to achieve the same annual income as men. That’s achievable, but only by taking more of a risk with the money carefully accumulated over the decades.

Tesco bucks the trend

The past year has been tough for the retail sector. A big structural shift – the relentless growth of online shopping – has coincided with a cyclical downturn caused by the impact of higher inflation on family budgets. Almost 6,000 shops across the UK closed last year – the biggest casualty list since the economy was clawing its way out of recession in 2010.

All of which makes the performance of Britain’s biggest retailer – Tesco – impressive. In the year to February, the company saw operating profits rise by 28% and gained market share in food despite the strong competition from Aldi and Lidl.

The City liked what it saw in the Tesco numbers on Wednesday. For a start, Tesco seems to have recovered from the time three years ago when it announced a £6.4bn loss – the biggest in British high-street history. Secondly, while it is still early days, investors think the takeover of the food wholesaler Booker will pay off.

Finally, cost-cutting and greater efficiency meant profit margins rose to 3% in the second half of the year, making a 2019-20 target of 3.5%-4% look achievable, especially if, as looks likely, falling inflation and rising wages gradually boost consumer spending power.