5 July 2018

Update

Q1 GDP growth revised up a touch

Last week, the ONS revised up UK Q1 GDP growth slightly, and business surveys continue to point to a pick-up in Q2, although official data on momentum so far has been mixed. Nonetheless, there has been little change in the MPC’s view of the outlook and we continue to expect another rate rise in August – particularly with Andrew Haldane, Chief Economist at the Bank of England, joining the ranks of those voting for a rise in June.

Q1 GDP growth revised up a touch

The ONS revised up Q1 GDP growth (which had been hit badly by the Beast from the East) to 0.2%, from earlier estimates of 0.1%. The upward revision was mainly due to changes in the way construction is measured, leading to construction output contracting less than previously thought. Nevertheless, the story overall was unchanged: Q1 saw the weakest growth in consumer spending for four years, with a slightly more positive contribution from net trade than seen in previous estimates. Fixed investment however was revised downward in the latest estimate ( -1.3% from 0.9%) in part reflecting methodological changes to the ONS’ measurement of investment.

Furthermore, official data for Q2 so far suggests that momentum across sectors remains mixed. Consumer-facing firms remain under pressure, notwithstanding a temporary boost to retail sales in May from the warmer weather and royal wedding celebrations. But official data indicates a weaker performance for manufacturing and construction. Manufacturing production declined in April, registering the largest monthly fall since October 2012, while the construction sector showed no sign of improvement with the industry remaining in recession. Business surveys (both the CBI’s growth indicator and IHS Markit/CIPS PMI) continue to indicate that Q2 growth has rebounded to some degree from Q1, but this would still leave growth over H1 2018 on a par with the weak outturns seen over 2017.

The CBI’s latest Financial Services Survey showed that optimism about the overall business situation in the financial services sector showed no improvement, having now fallen in all but one quarter since the beginning of 2016. Overall business volumes were flat with building societies reporting that volumes rebounded, after falling in the previous quarter. However, volumes were unchanged in banking, and grew at a fairly tepid pace in general insurance and investment management. Nevertheless, business volumes are expected to pick-up over the coming three months. Employment grew for the second consecutive quarter, at the fastest pace in a year, while investment intentions for the year ahead improved, most notably for IT where intentions were the strongest in three years.

In June, the Bank of England’s Monetary Policy Committee (MPC) voted 6-3 to keep interest rates on hold. The surprise was that Andy Haldane, the Bank of England’s Chief Economist, joined the ranks for those voting to raise rates. His change of heart boosts the chances of the MPC voting for an interest rate rise in August, in line with the CBI’s latest economic forecast.

Additionally, the MPC also gave some updated guidance on the future unwinding of QE. They now expect to start reducing the stock of purchased assets when interest rates reach 1.5%, compared to the 2% threshold in previous guidance. This is because the effective lower bound for Bank rate has fallen; and relatedly, the Bank’s Term Funding Scheme had helped to reinforce reduction in Bank rate and ensure its effective pass-through.

Indeed, there didn’t seem to be any material change in the MPC’s thinking about the economy, and their judgement on the pace of future rate rises ahead. The MPC seemed optimistic about a bounce-back in Q2 growth, particularly given a pick up in a number of household spending indicators. The MPC also seemed unconcerned by some of the weaker official data for Q2 so far, noting that much of weakness in manufacturing output in April may have reflected the lagged impact of bad weather, and a reversal of involuntary stock building in Q1. The MPC also noted the recent rise in the sterling oil futures curve in the minutes, which implied a slightly higher profile for inflation in the next six months.

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