Economic Indicators, May 2018

Last month’s developments

Economic summaries for April 2018 will inevitably focus on the GDP figures that were published at the end of the month, and which showed that economic growth was at its lowest level for five years.

There were more positive economic developments throughout the month that have been rather overshadowed by the GDP data. Inflation continues to fall, and is now at a similar level to earnings growth, the employment rate is currently at its highest level since comparable records began and unemployment levels fell again.

Slowest economic growth since 2012

The economy grew by just 0.1% in the first quarter of 2018 compared to the previous quarter. This was the slowest quarterly growth since the final quarter of 2012. Over the year, the economy grew by 1.2%, which was the slowest annual rate of growth since the second quarter of 2012.

A slowdown from the 0.4% quarterly growth seen in the preceding quarter had been expected in the first quarter following the heavy snow that fell during the first few months of the year. However, experts had predicted a smaller slowdown than proved to be the case, at least in this initial estimate (figures may get revised).

The weak growth resulted from a sharp fall in construction output, which declined by 3.3%, along with a slowdown in manufacturing output growth (which rose by 0.2%, down from 0.9% in the last quarter of 2017) and a continuation of the limited growth in services (0.3%).

But was this due to the snow?

The Chancellor stated that part of the slowdown reflected “some impact from the exceptional weather”, although the Office for National Statistics reported that the snow had a limited impact:

1. While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales.

The effect that the snow had on construction is evident from the decline in this sector, and overall retail sales volumes also fell in this quarter as people stayed indoors. Petrol sales, in particular, fell as a result of the weather.

However, other areas of the economy seemed to benefit from the weather. Internet sales, in particular, appeared to be boosted by the snow, with department stores reporting growth in their online sales.

Inflation fell to a similar level to earnings growth

One of the most discussed economic trends throughout 2017 was the inflation rate rising to a level above the growth in earnings. This meant that, after adjusting for inflation, average earnings were decreasing.

In the three months to February 2018, average earnings were 2.8% higher than in the same three months in 2017. This is slightly below the CPI inflation rate of 2.9% over the same period.

Inflation has been on a downward trend in recent months, easing from 3.0% in January 2018 to 2.7% in February 2018 and 2.5% in March. If average earnings growth continues at similar levels to that seen in the three months to February, then average earnings will be at a higher level than inflation in months to come.

Will interest rates change?

Next week the Bank of England’s Monetary Policy Committee (MPC) will meet to decide whether to change interest rates. Following the previous meeting in March, where two of its nine members voted to raise interest rates from the current rate of 0.5%, the expectation was that the MPC would raise rates in May. The MPC had implied that an interest rate increase would be appropriate over the coming months.

However, the MPC also stated that a rate rise would be dependent on the economic data published between March and May, with the GDP data seen as being an especially important indicator. Even before this data was published, the Governor of the Bank of England had suggested that a rate rise may not be imminent, and the recent weak economic data may provide a further reason to keep them unchanged.