Trends seen throughout 2017 have continued in the economic data published early in 2018: moderate GDP growth, high employment, low unemployment, and the rate of inflation exceeding earnings growth. As expected, at the beginning of February the Bank of England kept interest rates unchanged, although they warned that monetary policy may need to be tightened ‘somewhat earlier’ than they had previously thought.
GDP growth rises but remains moderate
GDP data published during 2017 showed moderate rates of growth, with growth of 0.3% in each of the first two quarters of 2017, and growth of 0.4% in the third quarter. In January 2018, GDP data was published for the final quarter of 2017. This showed that GDP growth had increased to 0.5%.
Growth over the entire year was 1.8%, slightly down on growth of 1.9% in 2016, and the lowest annual since 2012.
Growth in the services sector had been the main driver of GDP growth in previous years. In 2017, services grew by 1.6%, the lowest annual growth since 2011. This would have had more of a negative impact on GDP growth if it wasn’t for an upturn in growth in the production sector. This sector saw growth of 2.0% in 2017, the highest level of growth seen in this sector since 2010.
The growth in the production sector was predominantly driven by growth in manufacturing. In 2017 manufacturing grew by 2.7%, up from 0.9% in 2016, with particularly high levels of growth in the latter half of the year. This growth has been attributed to the sector benefiting from a rise in economic growth in the Eurozone and the wider world economy, as well as the weak pound increasing the cost of exports.
Inflation fell…but remained high
Rising inflation was one of 2017’s most discussed economic developments. The rate of inflation increased from below 2% at the beginning of the year to 3.1% in November 2017. The latter was the highest rate of inflation since March 2012.
In January 2018, data on inflation was published for the final month of 2017. Although inflation fell by 0.1% points to 3.0%, the rate remains well above the Bank of England’s 2% inflation target.
Across the whole of 2017, the inflation rate averaged 2.7%, up from 0.7% in 2016. This was the highest annual inflation rate since 2012.
Employment levels rise once again
Labour market data published during 2017 showed rising employment and falling unemployment.
These trends continued in January 2018’s labour market publications. In the three months to November 2017, there was a noticeable increase in the number and proportion of people in employment from the previous quarter, with a rise of over 100,000 people.
Towards the end of 2017, it had seemed that the trend of increasing levels of employment may be coming towards an end as both employment numbers and employment rates began to fall. However, the latest data continued the earlier trend.
In the three months to November 2017 the unemployment rate was at its joint lowest level since 1975.
While earnings growth remains behind the rate of inflation
Data published during 2017 showed average earnings generally rising by 2-2.5% on the previous year, and at a level below the rate of inflation for the majority of the year. Early in the year, the rate of inflation rose to a higher level than average earnings growth.
This was also the case in the three months to November 2017, where average earnings increased by 2.5% from the previous year, but the inflation rate for the same period was 3.0%. This meant that after adjusting for inflation average earnings decreased by 0.5%, the tenth consecutive month where real earnings have not increased.
However, the Bank of England has forecast that average earnings will rise faster than inflation this year, with the inflation rate falling back down towards 2% and earnings growth increasing towards 3%.
No change in interest rates…for now
In November 2017 the Bank of England’s Monetary Policy Committee (MPC) raised interest rates for the first time in more than a decade. Many experts forecast further rate increases during this year.
The first opportunity for such a rise occurred at the MPC meeting on 8 February 2018. As expected, the committee voted unanimously to keep rates at the same level, of 0.5%, and that “any future increases … are expected to be at a gradual pace and to a limited extent”. However, the MPC also warned that monetary policy “needs to be tightened somewhat earlier and by a somewhat greater extent than anticipated [in] November”, primarily to bring the inflation rate down to the 2% target. Therefore it seems plausible that 2018 will see a rise in interest rates.
This article was originally published in the February edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.