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Last month’s developments

Over the course of July we observed the first estimate of GDP for the second quarter of 2017, and the picture was much the same as for the first quarter. Economic growth accelerated, but remained modest, inflation continued to grow at a higher rate than wages, and employment levels continued to rise.

A “noticeable slowdown” in economic performance…

Let’s start with the positive news. The publication of the preliminary estimates of UK economic growth in the second quarter of 2017 showed that growth had increased from the first quarter and that GDP had now grown for 18 consecutive quarters.

Less positive was the size of the increase. The economy grew by 0.3% in the latest quarter, following growth of 0.2% in the previous quarter, with the Office for National Statistics (ONS) stating that “the economy has experienced a noticeable slowdown in the first half of 2017”.

This represents an increase of 0.7% from the last six months of 2016 to the first six months of 2017, the smallest increase since the middle of 2012.

Despite growth in the services sector…

The last Economic Indicators summary reported that the slowdown in the first quarter of 2017 was mostly down to weak growth in the services sector, despite stronger growth in both the construction and manufacturing sectors.

This was reversed in the second quarter, leading to the small increase in GDP.

The services sector grew by 0.5%, up from 0.1% in the previous quarter, while there were falls in the output of both the construction and manufacturing sectors. Manufacturing decreased by 0.5%, primarily due to a fall in the manufacture of motor vehicles, and construction decreased by 0.9%.

Real wages continued to drop…

Recent summaries have reported that real wages have been falling and the latest labour market statistics showed a continuation of this trend.

In the three months to May, average weekly earnings for the whole economy, including bonuses, were 1.8% higher compared with the year before. In itself this was the lowest increase since the three months to November 2014.

As wage growth has slowed, the inflation rate has risen. In May it rose to 2.9%, the highest rate since June 2013, leading to a continued fall in real wages.

After adjusting for inflation, in the three months to May, average weekly earnings including bonuses decreased by 0.8% compared to last year.

Despite a fall in inflation, the decrease in real wages is likely to continue…

In June 2017 the inflation rate fell for the first time since October 2016, down to 2.6% from 2.9% in May.

However, compared to inflation rates over the last few years, the inflation rate remains high. The rate over the second quarter of 2017 was 2.7%, which is the highest it has been since the third quarter of 2013.

On 12 August the ONS will publish average wage growth data for the three months to June 2017. As wage growth has been slowing, it would be surprising if this does not show a further fall in average real wages.

All eyes will be on the next monetary policy meeting…

The Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged in its June meeting, but the vote was closer than most observers expected. The MPC voted by 5-3 to keep the rates at the same value, with the three members voting to raise rates citing concerns over rising inflation.

The results of the next vote will be published on the 3 August, and the Interest Rates and Monetary Policy indicator page will be updated shortly after the decision is made.

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