Demand and output

Section 2 of the Inflation Report - August 2018

GDP growth is expected to have recovered in 2018 Q2, having slowed temporarily in Q1. Real income growth is recovering following the effects of sterling’s depreciation, which should support modest consumption growth. Business investment and net trade should also continue to support GDP growth, though remain sensitive to the global outlook and the effects of Brexit.

2.1 Near-term outlook

Quarterly GDP growth is estimated to have slowed to 0.2% in 2018 Q1 (Chart 2.1). That was revised up from 0.1% in the preliminary estimate and, as set out in the May Report, it is expected to be revised up further to 0.3% in the mature estimate.

In May, the MPC judged that growth in Q1 was probably depressed by around 0.1 percentage points by disruption from adverse weather. Developments since then have been broadly consistent with that judgement. For example, according to Bank calculations based on responses to the ONS Labour Force Survey, total hours worked were 0.15% lower in Q1 due to the adverse weather.

GDP growth is expected to have recovered to 0.4% in Q2 (Chart 2.1), as anticipated in May. That is slightly faster than the estimated growth rate of potential supply — the pace at which output can grow consistent with balanced inflationary pressures. Newly introduced ONS estimates of monthly GDP growth (see Box 2) suggest that growth in the three months to May was 0.2%. That growth rate continued to be depressed by the impact of weak activity in March however, probably due to the adverse weather. By contrast, monthly growth in April and May averaged ¼%.

The recovery in GDP growth in Q2 is expected to have been driven by a pickup in consumption growth, to 0.5% (Section 2.2). A number of indicators of household spending, including consumer credit growth and property transactions (Section 2.3), which were weak in Q1, have bounced back since then, suggesting much of the earlier weakness was erratic. In addition, retail sales grew by 2.1% in Q2 (Chart 2.2). Although in the past year the number of retail store closures have increased and retail footfall has fallen, contacts of the Bank’s Agents suggest that mainly reflects shifts in consumer demand to online stores and from goods to services. And although growth in household money has slowed, that appears to reflect an unwind of past shifts in demand for different assets (see Box 3).

In contrast to consumption, net trade is expected to have subtracted from growth in Q2, in part due to a fall in goods exports (Section 2.4). Consistent with that, manufacturing output has weakened since the start of 2018 (Chart 2.3), although part of that recent fall could reflect a lagged impact from the weather-related disruption in Q1. Companies built up inventories in the first quarter (Table 2.A), but surveys suggest that inventories fell back in Q2 and so companies should need to raise activity to meet further demand growth. Net trade is projected to contribute positively to growth in subsequent quarters.

GDP growth is projected to remain at 0.4% in Q3 (Chart 2.1). Most survey indicators of output remain consistent with steady growth over the rest of 2018.

Chart 2.1

GDP growth is expected to have picked up in Q2 following temporary weakness in Q1
Output growth and Bank staff’s near-term projection(a)

Chart 2.1

  • Notes
    Sources: ONS and Bank calculations.

    (a) Chained-volume measure. GDP is at market prices. The diamonds show Bank staff’s projection for the first estimate of GDP growth in 2018 Q2 and Q3. The bands on either side of the diamonds show uncertainty around those projections based on the out-of-sample performance of Bank staff’s best performing model since 2004, representing ±1 root mean squared error (RMSE). The RMSE of 0.1 percentage points around the 2018 Q2 projection excludes three quarters affected by known erratic factors: the 2010 snow and the 2012 Olympics and Diamond Jubilee. Including those erratic factors, the RMSE for 2018 Q2 rises to 0.2 percentage points. For 2018 Q3, the RMSE of 0.3 percentage points is based on the full evaluation window.

Chart 2.2

Retail sales growth rose sharply in Q2
Retail sales volumes and survey indicators of retail sales

Chart 2.2

  • Notes
    Sources: Bank of England, British Retail Consortium (BRC), CBI, ONS, Visa and Bank calculations.

    (a) Chained-volume measure.
    (b) Swathe includes: BRC percentage change in total sales, not seasonally adjusted; balance of respondents to the CBI distributive trade survey question ‘How do your sales and orders this month compare with a year earlier?’; percentage change in Visa total consumer spending on a year ago, deflated by CPI inflation; Agents measure of companies’ reported annual growth in the value of retail sales over the past three months, monthly measure until August 2016 and six weekly thereafter. All series have been scaled to match the mean and variance of ONS retail sales volumes growth since 2000 except the BRC and CBI series, which are since 1995, and the Visa series, which is since 2006.

Chart 2.3

Manufacturing output has weakened since the start of 2018
Manufacturing output and survey indicators of manufacturing activity

Chart 2.3

  • Notes
    Sources: Bank of England, BCC, CBI, EEF, IHS Markit, ONS and Bank calculations.

    (a) Swathe includes: Markit/CIPS net percentage balance of manufacturing companies reporting that production/output increased this month compared with the previous month; CBI average of the net percentage balances of manufacturing companies expecting the volume of output to rise; EEF average of the net percentage balances of manufacturing companies reporting that total output was expected to increase over the next three months; BCC net balances of manufacturing companies that reported that turnover will improve over the next 12 months; Agents measure of companies’ reported annual growth in the value of manufacturing output over the past three months. Scaled to match the mean and variance of four-quarter manufacturing output growth since 2000.
    (b) Chained-volume measure at basic prices. Three-month moving average.

Table 2.A

Expenditure components of demand(a)

Table 2.A

  • Notes
    (a) Chained-volume measures unless otherwise stated.
    (b) Includes non-profit institutions serving households (NPISH).
    (c) Investment data take account of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2.
    (d) Excludes the alignment adjustment.
    (e) Percentage point contributions to quarterly growth of real GDP.
    (f) Includes acquisitions less disposals of valuables.
    (g) Excluding the impact of missing trader intra-community (MTIC) fraud.
This page was last updated 17 October 2018
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