It's been a big year. Whether that be politically in elections and referendums or economically with big decisions being made. I look back over five aspects of 2016, where the United Kingdom's economy was impacted.
1) FTSE 100 Rollercoaster
Volatility. This year has seen a lot of economic uncertainty and this has led to the markets becoming unpredictable. The second half of the year has been rather interesting in terms of fluctuations in the stock market. It all began in the run up to the Brexit vote, where uncertainty had caused many worried shareholders to start to short sell. The FTSE 100 fell from 6,338.10 on the day of the referendum to 5,982.20 by 27th June. However, on 1st July the FTSE 100 index had risen to 6,577.83 indicating a swift recovery.
The fluctuations continued however the FTSE 100 graph was overall heading in a positive direction. A surge at the beginning of October saw it reach a record high of 7,129.83 on the 11th October, which was due to the weak value of the pound. This is because the weak value of the pound meant that overseas earning would worth more when they would be converted back to pound sterling. Fast forward a month to the result of the US election, the FTSE had fallen again by 83 points after Donald Trump won the election to 6827.98.
2) Bank of England cuts Interest Rates for the first time in seven years.
On 4th August, the Bank of England cut interest rates from 0.5% to 0.25%. The cut in interest rates came after all nine of the members of the Bank of England's Monetary Policy Committee agreed to do so and it was the first time interest rates had been cut in seven years (March 2009). It was also announced that up to £100 billion would be given to banks to help them implement the cut in interest rates, £60 billion would be given for 'bond buying', which would as a result help to increase quantitative easing.
3) Autumn Statement
In some ways, the Autumn statement has been more significant than the Spring budget because after Brexit, we have now got a new chancellor of the exchequer (Phillip Hammond) compared to the one who delivered the Spring Budget (George Osborne). It was announced in the Autumn Statement that there would be a Spring statement from 2018 onwards and an Autumn budget in 2017. Some of the key announcements were:
• Fuel duty would be frozen in 2017 for the seventh consecutive year.
• By 2017-18, personal allowance (the amount you have to earn before paying income tax) will increase from £11,000 to £11,500 and higher rate income tax will increase from £43,000 to £45,000.
• The National Living Wage will rise from £7.20 to £7.50 for those aged 25 or over.
• Those aged 21-24, the minimum wage will rise from £6.95 to £7.05 and those aged 18-20, it will increase from £5.55 to £5.60.
• There will be a £2.3 billion fund which will be used towards improving housing- building 100,000 new ones and infrastructure with an extra £1.4 billion to build 40,000 affordable homes.
• Corporation tax will be cut from 20% to 17% by 2020 and £400 million to invest in the growth of small and innovative businesses, helping them to expand.
4) UK GDP increases beyond expectation
GDP is a way of calculating the combined value of goods and services that is produced in a country and the value that they were purchased at. In the first quarter of 2016, GDP increased by 0.4%, the second quarter saw an increase of 0.7%. In the third quarter, the GDP increased by 0.5% and this increase had been seen as being surprising because this was the period after the Brexit vote and it had been feared that GDP may not have grown as much. This was partly due to the Bank of England's forecast of 0.2%. Even though construction, agriculture and production shrunk, the services sector grew by 0.64%, which ultimately averaged out GDP to be 0.5%.
5) Inflation reaches two-year high
The rate of inflation (Consumer Prices Index) increased by 1.2 percent in the year to November 2016. The Office for National Statistics found that this was due to the rising prices of fuel (oil), recreational products and clothes. Brexit has been a cause of inflation increasing due to the fact that businesses are increasing prices of their goods. It is expected that inflation will continue to increase in the upcoming months as uncertainty over Brexit and outcomes of negotiations are still unknown. The falling value of the pound has made importation more expensive and this could be another factor why inflation is increasing.
The events which occurred this year will shape things to come in 2017 when it comes to monetary policy with the Bank of England's interest rates decisions, inflation and GDP growth. In the times we are living in, anything can happen.