The weakest household spending for three years and falling levels of business investment dragged the economy to its worst quarterly performance for five years according to official statistics, with revised estimates showing GDP rose by just 0.1% in Q1.
Nevertheless, there have been signs that the economy may have recovered somewhat in the second quarter. Growth in UK services hit a three-month high in May, although this was against the backdrop of strong cost pressures. The IHS Markit/CIPS UK Services Purchasing Managers’ Index climbed to 54 in May, up on 52.8 in April. Competitive pricing, greater business investment and new product launches led to improved sales volumes, but the increase in new work was one of the weakest seen since summer 2016.
Meanwhile, Brexit rumbles on with multiple outcome scenarios still a possibility. Theresa May has welcomed the passing of the Brexit bill through Parliament as "a crucial step" in delivering a "smooth and orderly Brexit". Peers accepted the amendment to the EU (Withdrawal) Bill sent to them from the House of Commons, meaning the bill now goes for Royal Assent to become law.
In spite of the less bullish atmosphere, the Treasury’s forecasting panel has maintained this month’s GDP growth forecasts for 2018 and 2019 at, respectively, 1.4% and 1.5%.
Inflation & interest rates
Annual consumer price inflation was unchanged at 2.4% in May, although RPI inflation nudged downwards, from 3.4% to 3.3%. The Treasury forecasting panel’s 2018 inflation (CPI) forecast was held at 2.3% for the second month in succession, and the RPI forecast was held at 3.2%. Further reductions in both inflation measures are forecast for 2019.
The Bank of England’s Monetary Policy Committee held Bank Rate at 0.5% at its May meeting. It is still widely expected that there will be at least one further increase this year, especially if inflation remains above target and real wages’ growth stays in positive territory. UK 3 month Libor rates have nudged upwardsthis month and as at 15 th June stood at 0.631%, while 5 year swap rates have dropped slightly to 1.323%.
Employment and earnings growth
The latest employment rate is 75.6%, higher than for a year earlier (74.8%) and the joint highest since comparable records began in 1971. The latest unemployment rate stands at 4.2%, down from 4.6% for a year earlier and the joint lowest since 1975. Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms increased by 2.8% excluding bonuses, and by 2.5% including bonuses, compared with a year earlier. Inflation continues to take its toll, however, and average weekly earnings for employees in Great Britain in real terms increased by just 0.4% excluding bonuses, and by 0.1% including bonuses, compared with a year earlier.