The UK economy is growing nicely, next week’s numbers should show
Purchasing managers are expected to say on Monday that the UK services sector grew strongly last month, albeit not quite as much so as in the autumn. And official figures on Friday should show that manufacturing output rose by over 1 per cent in the fourth quarter. Thanks to these developments, the NIESR is likely to say on Friday that real GDP grew by around 0.5 per cent in the three months to January.
One big reason for this is that the UK economy is being dragged up by strong growth overseas. We’ll see more evidence of this next week. Purchasing managers on Monday are likely to confirm that the services sector in the eurozone grew at its fastest rate for 11 years last month. And official figures from Germany should show a strong quarter-on-quarter increase in industrial production.
In this context, Thursday’s statements from the Bank of England (BoE) will be paradoxical. BoE governor Mark Carney will have to write a letter explaining why consumer prices index (CPI) inflation recently rose above 3 per cent. That’s simple: it’s because sterling fell in 2016. The more interesting question is why inflation is so low in the face of strong growth and low unemployment? The conventional view at the BoE has been that inflation rises when output is above its potential level. With domestically-generated inflation low despite unemployment being at its lowest rate since 1975 and capacity utilisation (according to the CBI) at a 29-year high, this view needs rethinking. Economists will look to the Bank’s Inflation Report for answers here.
The Bank is likely to hint that rates will rise only gradually this year because of economic uncertainties. Those uncertainties aren’t just about the path of growth, but also about the causes of inflation.
We’ll get downbeat news from the housing market next week. The Halifax is expected to say that prices have fallen in real terms in the past 12 months, and will say this is likely to recur in 2018. This message will be corroborated by the RICS. It’s likely to say that prices are rising slightly, but only because weak demand is matched by a lack of supply, and estate agents don’t expect much change in the coming months.
