Economic Indicators, January 2018

Inflation reached a five and a half year high in November while a dip in employment meant an uptick in productivity.

UK economy growing more slowly than rest of G7…

The Office for National Statistics confirmed the UK economy grew by 0.4% over the quarter to Q3 2017 and revised up its estimates for growth over the past year to 1.7%.

The UK had the joint lowest annual growth rate out of the G7 economies in the year to Q3 2017, a reversal of last year’s situation when the UK had the highest annual growth rate. The International Monetary Fund suggests that the vote to withdraw from the EU and the decision to invoke Article 50 are “already having an impact in the economy”, as UK economic performance contrasts with a strong recovery in global growth in 2017.

Annual GDP growth, G7 countries

Source: OECD. Figures for the UK differ slightly to those published by the ONS

The comparative weakness in UK performance has been partly due to weak growth in household spending. Although household spending was 0.5% higher than in the previous quarter (and the largest contributor to growth for this quarter), it was only 1.0% higher than a year ago: the smallest annual increase since Q1 2012.

… but productivity figures a silver lining

While GDP increased by 0.4% over the quarter, there was a sharper increase in productivity of 0.9%. That at least is something to welcome given productivity performance has been remarkably poor since the 2008/09 recession. Even after the latest quarter, productivity is just 1.0% higher than its pre-recession peak in Q4 2007.

However, productivity is calculated as economic output divided by total hours worked in the economy, and the recent productivity rise is mainly down to a fall in hours worked rather than an increase in output. The number of people in employment in the UK fell by 56,000 in the quarter to August-October 2017, after five years of strong growth.

The employment rate remains very high by historical standards. It could be the most recent figures are something of a statistical blip, in which case productivity has not turned a corner just yet.

Inflation rises to five-year high…

Even if productivity has improved, the effect is yet to be felt in workers’ pay packets as average pay continues to grow more slowly than prices.

CPI inflation reached 3.1% in November 2017, its highest rate since March 2012. Since inflation is more than 1 percentage point above the Bank of England’s target of 2%, the Governor, Mark Carney, must write to the Chancellor explaining why inflation has increased and how the Bank proposes to bring it back to target. The Governor’s letter will be published on 8 February.

CPI inflation reached 3.1% in November

Source: ONS

After adjusting for inflation, average pay excluding bonuses fell by 0.6% in the three months to October compared with the year before.

Inflation is likely to be close to its peak and we may expect the rate of price growth to slow over the coming months. This is because the impact from the fall in sterling in 2016, the main cause behind recent rising inflation, has most likely now fully fed through to consumer prices.

…but retail sales continue to grow

Despite the increase in prices, there has been continued growth in retail sales. The quantity of goods bought was 1.0% higher in the three months to November compared with the year before. But some of this growth may be explained by more consumers bringing forward purchases to take advantage of Black Friday promotions – if that is the case, then sales may be weaker in subsequent months. We will know more when ONS publishes December data on 19 January.