Real GDP growth in the U.K. was steady in Q3, holding firm at 1.5 percent year-over-year. Sluggish GDP growth, tepid wage growth and above-target inflation put the Bank of England in a tight quandary.
U.K. GDP Growth Remains Sluggish in Q3
Data released this morning showed GDP in the U.K. expanding 0.4 percent (not annualized) in Q3. The print was 0.1 percentage points higher than consensus expectations. On a year-over-year basis, real economic growth held steady at 1.5 percent (top chart).
Although a breakdown of GDP into its underlying demand components is not available at this time, examining growth data by sector reveals mixed results. Output in the service sector moved in-line with total output, rising 0.4 percent over the quarter and 1.5 percent over the year. The finance and distribution, hotels & restaurants sectors were the top performers in the quarter. On the production side of the economy, output rose a solid 1.0 percent, the fastest pace of 2017. Gains in manufacturing and mining & quarrying, however, were offset by the second consecutive quarterly decline in construction output, which fell 0.7 percent over the quarter.
Above-target inflation and stagnant wage growth in the U.K. likely continued to weigh on economic growth in Q3. The consumer price index rose 0.3 percent in September and 3 percent over the year, while the core index held steady at 2.7 percent, year over year (middle chart). Both of these measures are in excess of the Bank of England’s 2 percent inflation target, which has been exceeded largely due to the depreciation in the pound in the wake of last year’s Brexit vote.
Despite the faster inflation, wages have failed to accelerate in tandem. Average weekly earnings data for August showed a steady reading of 2.2 percent year-over-year growth. Real wage growth, or nominal wage growth minus the inflation rate, has turned negative amid this acceleration in prices and stagnant wage growth, and the loss of purchasing power has weighed on consumers. Real retail sales excluding auto fuel in the U.K. fell 0.7 percent in September. Some of this decline was likely payback from August’s large increase, but year-over-year real retail sales are up just 1.2 percent (bottom chart).
From a monetary policy perspective, this morning’s print likely represents a mixed bag for policymakers at the Bank of England (BoE). Financial markets appear convinced that the BoE will hike rates at the conclusion of the Monetary Policy Committee’s meeting on November 2. We are maintaining our call for the next rate hike to occur in February 2018. Even with the above-target inflation, real economic growth of 1.5 percent is sluggish, and wages have shown few signs of accelerating. That said, we recognize that the risks of a rate hike by the BoE next week have clearly moved higher. Regardless of when the first move occurs, the pace of tightening through 2018 will likely remain gradual as inflation begins to recede and economic growth remains modest.
