Economics

UK GDP growth remains sluggish but rates are poised to rise

The Bank of England is unlikely to back away from raising interest rates in November despite ongoing weakness in growth and productivity.

25 October 2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The preliminary estimate for UK third quarter GDP growth shows a small pick-up in activity, but a weak environment still persists.

Small improvement in production sectors

Quarterly real GDP accelerated from 0.3% in the second quarter to 0.4% in the third, mostly thanks to a small improvement from production sectors.

Growth in the third quarter was dominated by services output as usual as three-quarters of growth came from such sectors.

Production sectors including manufacturing made up the remaining growth, but the construction sector was flat overall.

Overall, the latest GDP figures are broadly in line with our forecast, although slightly higher than consensus estimates.

November rate hike expected

With regards to monetary policy, despite the obvious ongoing weakness in growth, it is hard to see why the Bank of England would suddenly change its policy bias now and not raise interest rates in November.

The Bank argues that inflationary pressures could rise sharply if not checked by higher interest rates, and that the current low unemployment rate could lead to much faster wage growth.

That has yet to be seen, and the latest weak growth data suggests that productivity growth will also remain poor, making it unlikely that pay growth will rise much above inflation anytime soon.

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