Following the latest Bank of England report to the Treasury Select Committee, it is clear recent positive upturns cannot mask the divergence from predictions made before the EU referendum, or the fact inflation continues to outstrip growth
The prospect of rate rises and the broader economic outlook, were the subject of a Treasury Select Committee hearing yesterday. The Governor of the Bank of England (BoE), Mark Carney, told MPs inflation remained a key concern as the pound had lost roughly 16% of its value since the Brexit referendum, an event that has impacted other UK asset prices, seeing them underperform international equities by 35%, as well as accruing a significant amount of risk labelling.
Writing to the Committee earlier in the month Carney mentioned the ongoing movement of imported inflation through the economy due to a low pound. CPI (Consumer Price Index) inflation is currently 3%, while the RPI (Retail Price Index) puts inflation at 4.1%. This remains above wage growth which the Bank estimates to be 3.5% lower than projections made before the EU referendum. Consumption is also 2% weaker in this context.
While the Bank made clear they saw this recovery as the “shallowest” for more than half a century in investment terms there was some good news in how the UK had benefitted from the broader growth of the global economy which is growing at its fastest pace for seven years, with 90% of economies above trend. However, UK growth remained 1% lower than predicted in 2016. “The biggest influence on, and source of uncertainty about, the economic outlook remains Brexit,” said the Governor’s report.
However, recent Office for National Statistics (ONS) data detailing the health of the British economy have revealed some key areas of growth. Wage growth, long seen as lagging in the UK, moved from 2.3% to 2.5% closing the gap on inflation to around 1%. Additionally, the government’s deficit has shrunk by an estimated £7 billion, to around £45 billion – down from £49.9 billion estimated last year.
The ONS also highlighted a second quarter of growth for productivity. Long seen as the bugbear of the UK economy when compared to Germany or France, low levels of productivity have received scrutiny over the last year in line with sluggish growth overall as UK growth, estimated at 1.5% for 2017, continues to trail behind that of the Eurozone at 2.5% and global growth, forecast to be around 3.9% in 2018.
The rise in productivity of 0.8%, following a rise of 0.9% in the previous quarter, shows a modest increase but was described as “very encouraging”, by one KPMG economist talking to the BBC. “If stronger productivity continues in 2018, the Bank of England may decide to hold at least once in raising rates,” said Yael Selfin.
Notably though, some analysts have tied the productivity rise to an increase in unemployment, as less workers produce similar outputs. Having enjoyed a prolonged period of low unemployment, the amount of people without a job has now seen an increase to 1.37 million – marking an unemployment rate of 4.4% and the first rise for almost five years.
With inflation above growth the Bank signalled a continuation, potentially accelerated, of the incremental interest rate rise guidance. “I think there is the potential for greater than expected momentum in both global and UK growth and inflation,” wrote the Bank’s chief economist Andy Haldane to the Committee. Interest rates are currently at 0.5%, having risen for the first time in ten years last November when they moved from 0.25%.
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