Economic Indicators, May 2019

Economic update: stability and vulnerability

Economic growth in the UK has continued steadily during May, with little change in GDP figures from previous months. The labour market appears to be doing well, with record high employment and low unemployment, and above-inflation increases in wages. However, economic growth remains unspectacular, and weakness in productivity, trade and business confidence indicates that the economy remains vulnerable.

GDP growth remains steady as public finances improve

GDP grew by 0.5% in the first quarter of this year. While this was something of a recovery from 0.2% in the previous quarter, there is no sign as yet of a sustained acceleration in growth. All major sectors of the economy grew: services (the largest part of the economy) grew by 0.3%, with greater growth in manufacturing (2.2%) and construction (1.0%).

Inflation is also mostly steady – the Consumer Price Index inflation rate rose to 2.1% in April, up from 1.9% in March, but this remains very close to the Bank of England’s specific 2% target. In its May Inflation Report, the Bank said that it was expecting inflation to drop back below its target in 2020 and then begin rising as economic growth picks up.

The Government’s budget deficit continues to decrease; the latest figures indicate that, at 1.1% of GDP, borrowing in 2018/19 was at its lowest level since 2001/02. After the sharp drop in borrowing in 2018/19, the Office of Budget Responsibility expect a small rise this year due to changes in tax and spending.

The labour market continues to impress

The employment figures continue to give good news. 354,000 more people were in employment in the first quarter of the year than in the same period in 2018, and the employment rate increased from 75.6% to 76.1%, the joint-highest since comparable records began in 1971. Similarly, the number of people unemployed fell by 119,000 from the previous year, with the unemployment rate reaching 3.8%, its lowest level since 1975.

Earnings continue to outstrip inflation in both the public and private sector, although average real wages are yet to return to their pre-2008 financial crisis level.

But the economy remains vulnerable

Despite this steadiness, there is some cause for concern about the economy’s vulnerability to another shock. Productivity continues to be stagnant, and stockpiling to protect against Brexit disruption has led to the value of imports growing faster than exports. As a result the trade deficit widened by a record £8.9 billion to £18.3 billion (also a record) in this quarter.

Business confidence is also decreasing, with more manufacturers in April expecting output to fall than to rise. The EU’s Economic Sentiment Indicator index for the UK has been falling towards levels last seen in 2013. This suggests that uncertainty in the current political climate is affecting confidence, and that risks to the economy remain.