The UK economy: growth slowdown and well-contained inflationary pressures

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK economic data:

  • GDP slipped by 0.4% (MOM) in April, mainly reflecting the fall in production output.
  • This disappointing GDP number has led to a downgrade of expectations for GDP for 2019Q2. For example, the Bank of England now expects GDP to be flat (QOQ) in 2019Q2, compared with +0.2% previously.
  • Employment growth may be slowing, but, having said that, the labour market remains robust. The unemployment rate was 3.8% in the three months to April, and has not been lower since 1974Q4. Job vacancies remain very high.
  • Earnings growth is firmer. In the three months to April, annual earnings growth (in real terms) was 1.2% (including bonuses) and by 1.5% (excluding bonuses).
  • CPIH inflation slipped to 1.9% in May, whilst CPI inflation slipped to 2.0%.
  • Producer prices (PPI) inflation weakened in May. Output PPI inflation eased to 1.8% (YOY), reflecting lower petroleum prices. Input PPI inflation eased to 1.3% (YOY), reflecting an annual fall in crude oil prices.

Concerning other data:

  • The trade deficit (goods and services) widened in the three months to April, but the ONS cautioned that that the data had been distorted by large imports of “unspecified goods”, including non-monetary gold.
  • According to the ONS, UK house prices increased by just 1.4% (YOY) in April, down from March’s 1.6%, remaining very subdued. London prices fell 1.2% (YOY), whilst prices in the South East fell 0.8% (YOY).
  • Public sector net borrowing was a greater-than-expected £5.1bn in May 2019, compared with £4.2bn in May 2018, as expenditure growth outstripped the growth of receipts.
  • The Bank of England’s latest “Agents’ summary of business conditions” pointed to moderating activity. On preparations for Brexit, the Agents said that “companies tended to report that they would be ready for Brexit “in whatever form that takes” by the 31 October deadline.”
  • A recent report by UNCTAD on global foreign direct investment (FDI) showed that the UK attracted higher FDI inflows in 2018 than France and Germany combined.

Concerning Central Bank Watch:

  • The Bank of England left monetary policy unchanged at its June meeting. Moreover, the financial markets are seeing little prospect of a UK rate increase over the 5-year time horizon. If anything, they are anticipating a cut.
  • The US Fed also left rates unchanged but struck a dovish tone at its June meeting, making little attempt to “push back” on market expectations of a cut in rates in July.
  • ECB President Draghi said in a recent forum that “additional stimulus will be required” if the economic outlook of the Eurozone did not improve

Concerning political developments:

  • After a series of ballots, the two Conservative party leadership candidates chosen by Conservative MPs to go forward to Conservative party members for the final vote were Boris Johnson and Jeremy Hunt. The new leader of the Conservative Party, and Prime Minister, is expected to be announced during the week beginning 22 July.
  • Concerning Brexit, European Council President Donald Tusk stated, at the end of the recent EU Summit (20-21 June), that the EU was “open for talks on the Declaration on the future UK-EU relations…but the Withdrawal Agreement was not open for renegotiation”.

Ruth Lea said, “Against a background of weakening global growth, the UK has lost growth momentum in 2019Q2. It is now expected that growth will be flat in 2019Q2, following a 0.5% rise in 2019Q1 when activity was boosted by preparations ahead of the original Brexit day (29 March). Some firms had increased inventories and some firms had brought forward the completion of orders. Inflationary pressures appear well contained, providing there are no significant increases in oil prices.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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