UK Economy expands by 0.4% as expectations for rate rise mount
The UK economy is estimated to have grown 0.10% more than expected during July 2017 to September 2017 reaching 0.40% in latest figures from the Office for National Statistics (ONS). The main driver of growth was attributed to the Services sector, which increased by 0.40%, while Manufacturing/Production and Agriculture all increased by 1.0% following a weak Quarter 2 2017. The Construction sector contracted for the second quarter in a row at 0.75% although the sector remains well above the pre-downturn peak.
Better-than-expected growth is now being hailed as the last metric required by the Bank of England to press for an interest rate hike at the next Monetary Policy Committee (MPC) meeting in November 2017 to help constrain rising inflation, which reached 3.0% in September 2017.
GDP in the UK is largely driven by the Services sector, which accounts for 80% of the overall economy. Around half of the growth reported in Services emanates from Business and Financial services while a quarter of the reported growth emanates from the distribution, hotels and restaurants category, which also includes retailers.
While the economy continues to grow, the impact of high inflation persists. In a report released by UK Finance (a new entity formed by the combination of the British Bankers' Association [BBA] and the UK Cards Association [UKCA] amongst others), deposits at the largest UK banks have grown at their slowest annual rate since the middle of the financial crisis while British customers have also drained ISA savings and increased credit card borrowing - a concern when viewed against the backdrop of the Financial Conduct Authority's Financial Lives study, which indicated that over half of UK adults are financially vulnerable.
The Bank of England has consistently repeated the challenge that it faces in walking a tightrope between raising interest rates to constrain inflation and the contractionary impact that this may have on households and consumer spending in the UK economy, particularly amidst the ongoing political negotiations as the UK prepares to leave the European Union. The data released this week only adds further to that challenge.
Inflation reached 3.0% in September 2017, with figures largely attributed to the prolonged fall in the value of sterling following the June 2016 referendum. This has fed its way into consumer pricing as business protections have been slowly used up. The Bank of England has indicated inflation could go higher and that the true impact will be gradually felt over the coming years.
While the UK economy has indeed shown growth to the extent that the market is now widely expecting a rate hike next month to reverse the August 2016 emergency rate cut, raising interest rates back to 0.50%, the Financial Lives and UK Finance findings will undoubtedly require strong consideration by the MPC. These findings indicate that many UK adults do not hold adequate liquidity buffers. 47% of those who rent have indicated that they would "struggle to pay their rent if payments went up by less than £100 per month". Total Cash ISA savings fell by £0.9bn in September, the fifth successive month of decline. Credit card borrowing increased by 5.5% year on year while borrowing in the wider market rose by 7.8%, its fastest rate since April 2016.
Together, these findings raise significant concerns about the health of the UK economy. For those who wish to grow their cash buffers in these times, do give us a call on 0191 481 3777 and we'll be delighted to assist.