Economic update: forecasts largely unchanged but interest rates likely to rise

March 2018 saw the Chancellor deliver his spring statement on the same day that the Office for Budget Responsibility (OBR) published updated forecasts for the economy and public finances. The Bank of England’s Monetary Policy Committee signalled that an interest rate rise is likely in coming months.

Economic situation – lowest annual GDP growth rate in five years

The Quarterly National Accounts for Q4 2017 were published by the ONS in March. GDP grew by 0.4% compared to Q3 2017 and by 1.4% in the whole of 2017. This is the lowest annual GDP growth rate for over five years, and below GDP growth in other major economies, including the US (2.5%), Germany (2.9%) and France (2.5%).

Forecasts published by the OECD in March suggest that UK GDP will grow by 1.3% in 2018, below forecast growth in other major economies.

The current account balance (which includes trade, investment and financial transfers) was 4.1% of GDP in 2017, down from 5.8% of GDP in 2016.

The labour market continued to perform well, with new figures showing that there were 402,000 more people in employment in the three months to January 2018, compared with the same period last year. Unemployment fell by 127,000 over the same period.

Average earnings grew in the quarter to January 2018, but by less than inflation, meaning that in real terms, earnings fell slightly.

Annual CPI inflation was 2.7% in February 2018, slightly down compared with January, and the first fall in inflation in nine months.

Rate rise on the horizon?

The Bank of England’s Monetary Policy Committee voted to maintain the Bank Rate at 0.5% in March. However, this was a split decision, with two Committee members voting for an increase. The Committee commented that continued falls in unemployment imply that “pay growth will rise” in the coming months, suggesting a rate rise is likely.

Updated forecasts for the public finances

The Chancellor presented the Spring Statement to Parliament on 13 March. This included the announcement of a number of consultations on topics such as tax options for tackling the plastic waste problem, the future of cash and digital payments and the VAT registration threshold. The Chancellor also announced that there will be a Spending Review in 2019 setting departmental spending limits until 2022.

Alongside the Spring Statement, the OBR published updated forecasts for the economy and the public finances.

Although the OBR did not significantly alter the economic forecasts it had made in November 2017, it did slightly lower forecasts of public sector borrowing for this year and the coming five years. The improvements are a result of better than expected tax revenues this year, and the OBR increasing its forecast for future tax revenues.

For more information on the Spring Statement and the OBR forecasts, please see the Library briefing, Spring Statement 2018: a summary.

This article was originally published in the April 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.

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