Economic Indicators, February 2018

Economic data published in early 2018 marked a continuation of the trends seen throughout 2017: moderate GDP growth, high employment, low unemployment, and the rate of inflation exceeding earnings growth. As expected, at the beginning of February, the Bank of England kept interest rates unchanged, although with an expectation that they will increase at least once during the rest of 2018.

GDP growth rises but remains moderate

GDP data published throughout 2017 showed moderate rates of growth, with growth of 0.3% in each of the first two quarters of this year, and growth of 0.4% in the third quarter. In January, GDP data was published for the final quarter of 2017. This showed that GDP growth had increased to 0.5%.

Growth over the entire year was 1.8%, slightly down on growth of 1.9% in 2016, and the lowest annual since 2012.

The services sector growth had been the main driver of GDP growth in previous years. In 2017, services grew by 1.6%, the lowest annual growth since 2011. This would have had more of a negative impact on GDP growth if it wasn’t for an upturn in growth in the production sector. This sector saw growth of 2.0% in 2017, the highest level of growth seen in this sector since 2010.

The growth in the production sector was predominantly driven by growth in manufacturing. In 2017 this sector grew by 2.7%, up from 0.9% in 2016, with particularly high levels of growth in the latter half of the year. This growth has been attributed to the sector benefiting from a rise in economic growth in the Eurozone and the wider world economy.

Inflation fell...but remained high

One of the most discussed economic developments of 2017 was the increase in the rate of inflation, from below 2% at the beginning of the year to 3.1% in November 2017. The latter was the highest rate of inflation since March 2012.

In January, data was published for the final month of the year. Although this did show a fall in the rate of inflation, by 0.1% points to 3.0%, the rate remains well above the Bank of England’s 2% inflation target.

Across the whole of 2017, the inflation rate averaged 2.7%, up from 0.7% in 2016. This was the highest annual inflation rate since 2012.

Employment levels rise once again

Labour market data published throughout 2017 showed rising employment and falling unemployment.

These trends continued in the labour market data published in January 2018. In the three months to November 2017, there was a noticeable increase in the number and proportion of people in employment from the previous quarter, with a rise of over 100,000 people.

Towards the end of 2017, it has seemed that the trend of increasing levels of employment may be coming towards an end as both employment numbers and employment rates began to fall. The latest data marked a reversal of this trend.

Although there was little change in the numbers and proportion of people who were unemployed from the preceding quarter, in the three months to November 2017 the unemployment rate was at its joint lowest level since 1975.

While earnings growth remains behind the rate of inflation

The earnings data published throughout 2017 showed average earnings generally rising by 2-2.5% on the previous year, and at a level below the rate of inflation for the majority of the year. Early in the year, the rate of inflation rose to a higher level than average earnings growth.

This was also the case in the three months to November 2017, where average earnings increased by 2.5% from the previous year, but the inflation rate for the same period was 3.0%. This meant that after adjusting for inflation average earnings decreased by 0.5%, the tenth consecutive month where real earnings have not increased.

No change in interest rates…for now

One of the talking points from the 2017 economic year occurred in November when the Bank of England’s Monetary Policy Committee raised interest rates for the first time in more than a decade. At the start of 2018, many experts forecast further rate increases during this year.

The first opportunity for such a rise occurred at the MPC meeting on the 8 February 2018. As expected, the committee voted unanimously to keep rates at the same level of 0.5%, and that “any future increases … are expected to be at a gradual pace and to a limited extent”. However, the MPC also warned that monetary policy “needs to be tightened somewhat earlier and by a somewhat greater extent than anticipated [in] November”, primarily to bring the inflation rate down to the 2% target. Therefore it seems likely that interest rates will rise during 2018.