Rate Rise on Cards as New Monthly Figures Show Economy Warming Up
The British economy is gathering momentum after a slow start to the year caused by bad weather, a comprehensive set of official figures has shown.
Growth in the three months to May bounced to 0.2 per cent after flatlining in the three months to April, according to the Office for National Statistics’ new monthly reading of GDP, which sets out the dramatic impact of the snow in February and March and the subsequent rebound.
With the economy on track for 0.4 per cent growth in the quarter to June, economists said the Bank of England was likely to raise interest rates next month. Jacob Nell at Morgan Stanley said the figures “look consistent with a solid second-quarter rebound — consistent with the [Bank’s] 0.4 per cent forecast — and keeps our call for an August hike on track”.
A quarter-point increase to 0.75 per cent had been expected in May before the data stayed the Bank’s hand.
The newly published GDP figures represent a shake-up of how the ONS releases data about Britain’s economic performance and is designed to ensure higher quality information is provided earlier. It makes Britain one of a handful of countries, alongside Canada, that provide comprehensive monthly GDP releases, as the ONS tries to raise its game after years of criticism.
Underlining the momentum, the month-on-month GDP figures showed growth picking up to 0.3 per cent in May from 0.2 per cent in April. In February, when the first snow fell, the economy shrank 0.2 per cent and stagnated in March as the cold snap returned. Despite the headline improvement, Victoria Clarke, UK economist at Investec, described the data as “a picture of mixed fortunes”. There was good news from the dominant services sector, which “has clearly been recovering” from its weak readings in February and March, she said.
Like Mr Nell, Ms Clarke said the UK was now “more likely than not” to see an increase in interest rates next month.
The ONS data showed that growth in the three months to May was driven by the services sector, which expanded 0.4 per cent. In a sign that households are feeling wealthier now that wages are outpacing prices, consumer-facing industries such as retail, hotels and restaurants picked up. Retailers had a particularly strong May with month-on-month growth of 1.3 per cent due to “a sustained period of good weather and royal wedding celebrations”, the ONS said.
Industrial production and construction weighed on three-monthly growth in May. Production contracted by 0.6 per cent and construction, which was hit hard by the weather, shrank by 1.7 per cent. Manufacturing, part of the production industry, had a particularly bad three months — shrinking 1.2 per cent “driven by weak exports”.
However, the more timely monthly figures again pointed to a recovery. Construction grew rapidly at 2.9 per cent in May and manufacturing was up 0.4 per cent. In the services sector, the logistics and technology sectors had a solid month, alongside the retailers.
To complete the picture for May, the ONS also published the trade data, which disappointed. The total trade deficit widened by £5 billion to £8.3 billion on a rolling three months basis as goods exports fell and goods imports rose. Weak car exports were largely responsible, the ONS said.
Manufacturers are struggling to make the most of the cheap pound. Annual growth in manufacturers’ export sales peaked at 18.2 per cent in January 2017, when the pound was at its lowest ebb. As customers substituted more costly imports with cheaper UK goods, domestic order growth peaked at 5 per cent in March 2017.
Export turnover for manufacturers stagnated in the three months to May compared with the year before. “This is the weakest growth since December 2015 when export turnover decreased by 0.4 per cent,” the ONS said.
Q&A
What has changed with Britain’s GDP data?
The Office for National Statistics is now publishing a GDP growth estimate every month. Yesterday was the first. Previously GDP was estimated for each consecutive three-monthly period and the data was not published until 25 days after the end of the quarter.
The ONS is also releasing more data on the services sector, which accounts for four fifths of national output. In the past, economists would have two months’ worth of data on the production and construction industries before the full quarterly GDP estimate was released, but only one month of services data.
As production accounts for 14 per cent of national output and construction accounts for 6 per cent, that meant there were considerable gaps.
Why has the ONS changed things around?
The new schedule gives users of the data, such as the Treasury and the Bank of England, a clearer picture of what is happening in the economy.
Economists were building their own monthly estimates already. The ONS is now formalising that with more statistical rigour. Ultimately, the intention is to publish higher quality data earlier than before and in a more organised manner.
It’s a good thing, then?
Yes, but quality does come at the expense of punctuality. The first GDP estimate for each full quarter will now be published 15 days later than before. It means the Bank will no longer have a full GDP estimate when it votes on interest rates in February, May, August and November.
The Bank is not too concerned as the first estimate has tended to be revised considerably and the Bank has been cautious about it. Moreover, the additional information on services will help fill the gap.
Monthly GDP will mean the data will be much more volatile, which could make each release more political. Both parties will have more data to lob at the other.
courtesy : thetimes.co.uk
photo : The Times
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