24 May 2018

Update

MPC holds fast in light of soft economic data

Despite the continued strong performance of the UK’s labour market, the latest economic data releases point to certain areas of concern for the UK.

MPC holds fast in light of soft economic data

Despite previous expectations for a rate rise in May, “Super Thursday” saw no change in monetary policy from the Bank of England. The Monetary Policy Committee (MPC) voted 7-2 to leave the Bank Rate at 0.5%.

This decision followed a series of economic indicators that had been softer than expected, such as the preliminary estimate for Q1 GDP growth (0.1% q/q). As a result, the majority of the MPC agreed to keep rates on hold this month to see whether the weakness in Q1 proved to be temporary, as they expect, or more persistent. However, the Committee’s guidance on the future path of rate rises remained unchanged: an ongoing tightening in monetary policy would be necessary to return inflation to target, assuming that the economy evolved in line with the MPC’s forecast.

Labour market data continued to show a solid rise in employment in Q1, with the unemployment rate staying at its lowest (4.2%) since the mid-1970s. This positive news came alongside a further slight rise in real pay, with nominal pay growth (excl. bonuses) edging higher and inflation having fallen back over the same period. That said, pay growth remains well below its historical norms.

The ONS’ “flash” estimate for labour productivity pointed to a fall in output per hour of 0.5% q/q in Q1 2018. This decrease reflected an increase in total hours worked in Q1 (0.6%) alongside the weak growth in gross value added during the quarter (0.1%). The drop in productivity for Q1 follows a 0.7% increase in the previous quarter.

Meanwhile, the CBI’s May ITS showed a notable slowdown in manufacturing growth, with output largely unchanged after two years of solid expansion. The survey also reported a softening in total order books, which hit their lowest in a year, though export orders held up better. However, in a mixed survey some respondents reported that tight capacity is the main factor holding back output growth and expansion. Firms also appear to expect the slowdown to be temporary, with output expected to rise firmly in the next three months.

Our May DTS showed a modest rise in retail sales on a year ago. However, growth was largely concentrated in grocers, and overall the survey paints a picture of a sector that is struggling. Retail employment declined for the sixth quarter in a row, while average selling prices continued to see stubbornly high growth (having picked up slightly from February). Retail firms had a negative outlook for their business situation in the next quarter, and investment intentions for the coming year turned negative for the first time since last May. 

Consumer price index (CPI) inflation fell to 2.4% in April, its lowest in 13 months. The drop in the CPI rate over April was largely driven by the earlier timing of Easter this year, which pushed air fares lower. Falling inflation is unlikely to deter the MPC from raising interest rates in the near term, given that the Committee expects the economy to continue growing above its potential (i.e. the rate at which the economy can grow without stoking inflation). Indeed, the slight decrease in CPI inflation over April was in line with the Bank of England’s forecast.

For more information contact Charlotte.Dendy@cbi.org.uk