Economic overview
Volatile inflation and low expansion expected for the foreseeable future
The 0.5 percent monthly rise in Gross Domestic Product (GDP) in June and 0.2 percent on the quarter in Q2 2023 were better than the consensus forecast of 0.1 percent. Public sector strike action has weighed on activity, particularly in services, with output growing by just 0.1 percent in Q2 2023.
GDP growth has been weak for the past five quarters and business activity surveys suggest this will continue into the second half of the year. It usually takes two years for Bank Rate increases to take effect because households and businesses are impacted at different times. The hike in the Bank Rate from 1.0 percent in June 2022 to 5.25 percent in August this year has so far not caused an economic downturn.
In fact, the consensus forecast is for low growth rather than a recession (defined as two consecutive quarters of contracting GDP) despite the sharp rise in interest rates.
Source: Office for National Statistics, Bank of England and HM Treasury
Labour market resilience continues to support the economy. Unemployment, at 4.2 percent in June, is still close to a fifty-year low. Although the level of job vacancies fell again, it is still above one million and contributing to an annual wage growth of 7.8 percent in the three months to June, up from 7.5 percent in May. Wage growth is now at levels not seen since records began in 2001.
The fall in the annual rate of consumer price inflation (CPI) from 7.9 percent in June to 6.8 percent in July was driven by the lower energy price cap. Goods price inflation fell to 6.1 percent in July from 8.5 percent in June. However, core inflation, which excludes volatile items such as food and energy prices, remained steady at 6.9 percent. Meanwhile, the annual rate for services inflation, which is a good indicator of underlying domestic inflation, edged up to 7.4 percent.
With wage growth and services inflation both stronger than expected, markets are pricing in further rate hikes in September. The consensus of forecasts is that inflation will remain above the 2.0 percent Bank of England target into 2025, which would mean higher borrowing costs for longer.
Source: Office for National Statistics and HM Treasury
Economic data
GDP at (market price) index
Q2 2023: 101.1 Q1 2023: 99.9 Increase: 0.2%
Unemployment level (thousand)
Q2 2023: 1,439 Q1 2023: 1,329 Increase: 8.3%
Construction output index
Q2 2023: 105.0 Q1 2023: 104.7 Increase: 0.3%
Consumer price inflation
July 2023: 130.9 July 2022: 122.5 Increase: 6.9%
Bank of England base rate
August 2023: 5.25 June 2023: 5.0 Increase: 25 Basis points
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