The ONS said the services sector was “the largest contributor to GDP growth, with a strong performance in computer programming, motor trades and retail trade.” British manufacturing also returned to growth, with output rising by 1% during the quarter.
The Bank of England’s Monetary Policy Committee will be looking very carefully at today’s figures, as they meet next week to announce whether interest rates will be raised by a quarter point to 0.5%. If they do rise it would be the first rate hike in more than a decade.
Recent statements from committee members suggest it’s a close call. Two members of the nine-strong committee have already voted for rate increases, and in September two more put themselves in a group committed to raising rates “in the coming months”.
This is also the final growth figure published before the Chancellor delivers his Budget on 22nd November. It will not be an easy Budget for Phillip Hammond as households continue to feel the squeeze as inflation is rising faster than our pay packets. At the beginning of this century wage growth was above 5%, it is now struggling at around 2%, which is way below the current 3% rate of inflation. This means in real terms households are worse off.
The good news is unemployment is at record lows, which does help offset the negativity of low wage growth. But while this means more people are benefiting from the security of regular employment, for many, discretionary items like a new car, sofa or foreign holiday will probably take a back seat for the foreseeable future. This will have an inevitable knock-on effect on the UK economy so heavily dependent on consumption, especially at this time of year when retailers gear up for Christmas.
While there is a case to raise interest rates to control inflation, with today’s growth figure still looking relatively lacklustre and the ongoing Brexit negotiations casting a long shadow over the economy, there is also a strong case for maintaining the status quo. Writing in the Guardian this week, David Blanchflower, Professor of economics at Dartmouth College, New Hampshire and member of the MPC from June 2006 to May 2009, warns, “this is no time for a rate rise as the economy slows”. In his opinion inflation will likely fall back in 2018.
Meanwhile Andrew Sentence, senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011, believes the Bank would be right to raise rates despite subdued growth. It is his belief that a rate rise and the promise of more to come would help raise the value of sterling which would bring down the price of imports, taking some of the inflationary pressures off consumers.
As the current benign interest rate period starts to come to an end, consumer debt is already under the spotlight from the government and regulators alike. It was revealed in the summer that unsecured credit - which is borrowing through credit cards, overdrafts and car loans - had topped £200bn for the first time since the financial crisis. In response to this the government is exploring an idea that borrowers would be given - as a last resort - a six week grace period from higher interest charges to give them time to prepare a repayment plan.
The Financial Conduct Authority is also focusing on rising debt levels. This week it said BrightHouse, a company that supplies household goods on high-cost credit has not been a ‘responsible lender’. As a result they have been ordered to pay £14.8m in compensation to 249,000 customers.
The Bank of England and the Chancellor have much to consider as we slowly make the transition back to a ‘normalisation’ of interest rates. The first to respond formally will be the Bank on 2nd November followed by the Chancellor on the 22nd. Investors will be watching both with increasing interest.
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