Analysis of the latest UK and international economic indicatorsJump to full report >>
Slow GDP growth and relatively high inflation provide the backdrop to this month’s economic update. Perhaps the biggest headline came from the Governor of the Bank of England who signalled interest rates are likely to rise soon, for the first time in more than a decade.
UK quarterly GDP growth in Q2 2017 was confirmed as 0.3%, unchanged from Q1. This is the lowest rate of quarterly growth of any G7 economy or the Eurozone, which grew by 0.6% over the same period.
Revisions show that the UK economy grew by 1.5% over the year to Q2 2017, more slowly than previously estimated.
The production and construction sectors saw output fall in Q2, whilst output from the services sector (which constitutes over 80% of the UK economy) rose by 0.4%.
The volume of retail sales grew by 1.2% over the quarter to August, the biggest increase in retail sales volume since the three months to November 2016 and an improvement on recent weakness.
However, the services Purchasing Managers Index (a measure of how businesses in the services sector think they will perform in the coming months) slowed in August: five of the eight months in 2017 have registered diminished growth in services confidence.
Interest rates are likely to rise in the “relatively near term” according to Mark Carney, the Governor of the Bank of England. Mr Carney’s comments on 29 September suggest that rates might rise at the next meeting of the Bank’s Monetary Policy Committee (MPC) in early November.
Interest rates have not risen in the UK since July 2007. Between March 2009 and August 2016, rates were 0.50%. In August 2016, following the Brexit referendum, rates were cut to 0.25%, the lowest they have ever been in the UK.
The minutes from the MPC’s September meeting state that the continued prospect of rising “inflationary pressure” precipitate the need for a rate rise, but that this would only be “at a gradual pace and to a limited extent.”
Mark Carney also cited “a pocket of risk – a risk in consumer debt, credit card debt, debt for cars, personal loans” as motivation for the possible rate rise.
CPI inflation, which the MPC tries to keep at 2%, rose to 2.9% in August, the highest level since June 2013 (apart from May this year when it was also 2.9%). Average wages continued to grow at a slower pace than inflation.
One contributing factor is the price of oil which rose to $59 a barrel in September, higher than at any time since July 2015.
The MPC predict that inflation will rise to “above 3% in October” and is “likely to overshoot the 2% target over the next three years.”
This is despite the easing of pressure from last year’s "exceptional" depreciation of sterling, in the words of the MPC. In fact, the gradual rise in the $/£ exchange rate since May 2017 accelerated slightly in September, probably due to Mark Carney’s indication of a likely rate rise.
Commons Briefing papers CBP-8098
Authors: Chris Rhodes; Andy Powell