Economic Indicators, September 2018

Last month’s developments

Economic growth over the summer was lifted by higher retail sales and a strong performance in the construction sector. GDP rose by 0.6% in the three months to July, the fastest growth in nearly in a year, as economic activity recovered from a brief downturn earlier in 2018. Latest data show average wage growth accelerating, although this was tempered by a surprise increase in inflation, meaning that in real terms average wage growth is barely rising.

Pickup in retail sector boosts GDP growth

Economic growth accelerated in the three months to July underpinned by higher retail spending and strong gains in construction output. The Office for National Statistics (ONS) cited: “warm weather and the World Cup” as factors in the improved performance of the retail sector.

GDP growth of 0.6% compared with the previous three months was up from 0.4% in the previous period. This was the highest three-month growth rate since August 2017 when it was also 0.6%. The latest figure was somewhat flattered by the period of comparison: the three months of February, March and April, when growth was depressed by unusually severe weather.

Retail sales data for August remained relatively strong, driven by household goods stores. Online sales continued to post very high growth rates, up by 14% in August compared with a year earlier. Online sales now account for 18% of all retail sales.

Earnings growth accelerates…

Not adjusting for inflation, average earnings excluding bonuses rose by 2.9% in the three months to July compared with a year earlier, up from 2.7% in the previous three-month period ending in April.

Whether this is the start of a more pronounced upward trend remains to be seen, as earnings growth has struggled to rise above 3% since the 2008/09 recession. It most recently hit 2.9% on this measure in the three months to March 2018 before easing back slightly in the following months.

Some observers, including the Bank of England, are of the view that the low unemployment rate – at 4.0%; it’s not been lower since 1975 – should eventually lead to faster growth in earnings, as employers find it harder to fill vacancies and employees are in a stronger position to negotiate pay increases. Others disagree, pointing to weak productivity growth (which is usually linked to wage growth) and the changing nature of employment, with workers less able to command higher wages.

…but so does inflation

Consumer price inflation unexpectedly rose in August to 2.7%, up from 2.5% in July. The increase was mainly due to higher passenger transport fares and the ‘recreation and culture’ category within which upward price pressure came from theatre tickets and computer games.

Bank of England Governor’s term extended

Mark Carney has agreed to extend his term as Governor of the Bank of England by seven months. He was due to leave the Bank in June 2019, but will now remain until end January 2020. The Chancellor, Philip Hammond, stated that the move was in order to, “support a smooth exit of the UK from the EU.” The Chancellor also announced that this year’s Budget will take place on Monday 29 October.