Economic Indicators, February 2019

The UK economy

The economic data for the final quarter of 2018 provided mixed news. While employment levels continue to rise, economic growth weakened in the final quarter of 2018.

Annual GDP growth lowest since 2012

Quarterly GDP growth in Q4 2018 was just 0.2%, with particular weaknesses in car and steel production, and construction.

Growth across the whole year was 1.4%, which is the lowest it has been for six years. Growth was subdued in all sectors in 2018:

• The services sector grew by 1.7%, the lowest growth since 2011.
• The production sector, which includes manufacturing, grew by 0.7%, the lowest growth since 2013.
• The construction sector grew by 0.6%, the lowest growth since 2012.

Prior to the publication of this latest data, the Bank of England’s Monetary Policy Committee (MPC) published its February Inflation Report. Within this report, the MPC indicated that it expected the subdued growth to continue into 2019, cutting its GDP forecast for 2019 from 1.7% to 1.2%.

It should be noted that the economic growth seen in the UK in 2018 was higher than growth seen in various other countries. In the year to Q4 2018, the UK grew by 1.3%. This was slightly higher than growth in the Eurozone (1.2%), and was higher than growth in Germany (0.6%) and France (0.9%).

But employment levels keep rising

The final quarter of 2018 saw another large increase in employment. 167,000 more people were in employment in Q4 2018 than in the previous quarter, meaning that there were almost 450,000 more people in employment at the end of 2018 than there were at the end of 2017. The employment rate of 75.8% in Q4 2018 was the joint highest level ever recorded.

As shown in the chart above, the increase in employment levels over the past year have been driven by an increase in people working full-time.

Unemployment also remains at a very low historical level, and the unemployment rate of 4.0% at the end of 2018 was the joint lowest level since 1975.

Inflation falls below 2%

The CPI inflation rate in January 2019 was 1.8%, the first time that inflation has been below the Bank of England’s inflation target of 2% since January 2017.

The inflation rate gradually slowed throughout 2018, down from 3.0% in January 2018. The MPC forecasts that inflation will remain around 2% in 2019.

In contrast, average pay growth continued to accelerate, with a 3.4% increase in average earnings in the final quarter of 2018. Real (inflation-adjusted) average earnings growth rose to 1.1% in this quarter. The last time growth was above 1% was back in 2016.

Interest Rates remain at 0.75%

In February, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep interest rates at 0.75%. The MPC also indicated that they expect there to be little movement in interest rates over the next couple of years.

Spring Statement two weeks away…

The Spring Statement is scheduled to take place in two weeks time, on Wednesday 13 March. The library will publish a background briefing prior to the Statement, and shortly afterwards will publish a summary of it and the OBR’s new set of forecasts.