Home news Lift in UK growth bolsters rate rise prospects

Lift in UK growth bolsters rate rise prospects


One of these days we might stop caring about Gross Domestic Product (GDP).

After all, it is difficult to know where to begin with the statistic’s flaws.
While it is the broadest measure of economic performance (at least, the broadest measure available within a few months) it is still disappointingly narrow.
It is blind to social performance, it notches up natural disasters as economic boosts and takes little account of innovation, new products, inequality, the sharing economy and other social yardsticks.
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And who knows: perhaps in future we will be focusing on a totally different measure of growth, such as the ones proposed by Diane Coyle, Benjamin Mitra-Kahn and Jonathan Haskel for the Indigo Prize on finding a replacement for GDP.
In the meantime, though, GDP is what matters. It is GDP which hogs the headlines.

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It is GDP which many people view as the ultimate yardstick of whether Britain is in recession (two successive quarters of shrinking GDP equals a recession – at least according to the conventional wisdom).
It is GDP which most politicians fixate on when they’re looking for a measure of how well the economy is doing.
So what’s the answer: how well is it doing?
The answer is: well, it depends.
On the one hand, the figures are stronger than had been expected by economists, who had been anticipating growth of just 0.3%. Moreover, save for the construction sector, which had a dismal quarter (but is quite volatile at the best of times), this was pretty broad based growth.

The manufacturing and services sectors are both growing – though the latter, which contributes about 80% of total GDP, is still growing at well below its historical rate – 0.4%, compared with 0.8% in the years before the financial crisis.
And that brings us to the broader concern. While these figures are stronger than the City had expected, they are nonetheless, considerably weaker than the UK’s normal, trend rate of expansion.

Image: The sun rises over the City of London seen from Waterloo Bridge. Boats moored in the river Thames. The skyline includes St Paul’s Cathedral, skyscrapers of The City including The Gherkin, the Cheesegrater, 20 Fenchurch Street ‘Walki-Talkie’
Normally you’d hope for the economy to grow by about 0.7% a quarter. It hasn’t achieved anything like that since late 2015.
Indeed, these figures mean Britain has had the worst three quarters since 2013, and the worst first three quarters of a calendar year since 2009.
One question economists will be asking themselves is whether this is the new normal: is Britain transitioning to a lower normal rate of growth?
If so, that would have enormous consequences for all of us.
Weak growth means less income shared among us, which means less prosperity and (a worry for the Chancellor) less tax revenue. And less tax revenue in turn means the potential for more austerity.
A final consequence of the stronger-than-expected numbers is the implications for monetary policy.
At present the majority of economists and investors expect the Bank of England to raise interest rates to 0.5% at their meeting next week – the first increase since the financial crisis.
The fact that GDP is going up faster than anticipated will only increase the likelihood – after all, a stronger economy implies more inflation which puts pressure on the Monetary Policy Committee – to lift interest rates.

Source: SKY