Demand and output

Section 2 of the Inflation Report - November 2018

GDP growth picked up following a temporary slowing at the beginning of the year. Growth is projected to be modest, with the outlook remaining sensitive to the effects of Brexit. Brexit uncertainty continues to weigh on business investment. Real income growth is recovering following the dampening effects of sterling’s depreciation, which should support modest consumption growth. Net trade should also continue to support GDP growth, in part reflecting relatively robust global growth.

Quarterly GDP growth is expected to have picked up to 0.6% in 2018 Q3 (Chart 2.1). Although that is higher than expected in August, activity appears to have been boosted by factors that are likely to be temporary. Construction output picked up sharply (Chart 2.2), with the Agents’ contacts reporting some catch-up in activity following weather-induced falls earlier in the year. Strong growth in the retail sector may also have been partly weather-related. In addition, manufacturing output has rebounded after previous erratic weakness.

As those temporary factors unwind, GDP growth is projected to fall back to 0.3% in Q4 (Chart 2.1) and to settle at 0.4% in subsequent quarters. Most survey indicators of output remain consistent with modest growth in the near term.

The key risk to near-term growth is the extent to which uncertainty about Brexit affects spending as negotiations with the EU continue. The MPC’s projections assume a smooth adjustment to new trading arrangements with the EU.

Reports from the Bank’s Agents suggest that some companies are becoming more uncertain about the outlook. Only a few of those companies appear to have started to implement contingency plans, however (Box 3). Such plans could entail building up stocks in the near term, which would temporarily boost spending, to ensure future demand is met. To the extent that those stocks were of imported goods, they would have little direct impact on UK output. A broader reassessment of transport and logistics arrangements could also require additional spending, but that may displace other spending such as investment. Investment appears to have been dampened by Brexit uncertainty more generally.

There is less evidence that concerns about Brexit have affected households’ confidence, though their expectations for the general economy are relatively subdued (Section 2.1). Other indicators of consumer spending have been mixed. Although retail sales growth has probably been supported by favourable weather, the recent underlying trend still appears to be a little firmer than that seen on average since the EU referendum. In contrast, private car registrations fell sharply in September, although that, at least in part, appears to have reflected supply disruption following the introduction of new emissions standards.

The outlook for growth further ahead will depend on how households and companies, both here and abroad, respond to any new trading arrangements and the transition towards them. Households’ and companies’ responses will in turn be influenced by their financial positions. The estimated household financial balance has deteriorated since 2016 (Chart 2.3) as households have saved less to support spending growth in the face of a squeeze in their real incomes. Although it is currently estimated to have moved into deficit, the household balance has typically been revised up significantly in recent years. The corporate financial balance has risen, with Brexit-related uncertainty lowering investment spending relative to incomes. The public sector deficit has continued to narrow. The counterpart to those developments has been a narrowing in the current account deficit, although at 3.9% of GDP in 2018 Q2 it remains elevated.

Chart 2.1

GDP growth is expected to have been 0.6% in Q3
GDP growth and Bank staff’s near-term projectiona

Chart 2.1

  • Sources: ONS and Bank calculations.

    a Chained-volume measure. GDP is at market prices. The blue diamonds show Bank staff’s projection for the first estimate of GDP growth in 2018 Q3 and Q4. 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 Q3 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 Q3 rises to 0.2 percentage points. For 2018 Q4, the RMSE of 0.3 percentage points is based on the full evaluation window.

Chart 2.2

Growth picked up following weather-related disruption earlier in 2018
Contributions to three-month on three-month output growth by sectora

Chart 2.2

  • a Chained-volume measures at basic prices. Figures in parentheses are weights in nominal GVA in 2016. Contributions and weights may not sum to the total due to rounding.
    b Other production includes utilities, extraction and agriculture.

Chart 2.3

The household financial balance has deteriorated since 2016, in contrast to the corporate financial balance
Financial balances by sector

Chart 2.3

  • a Includes non-profit institutions serving households (NPISH).
    b Excludes public corporations.

2.1 Domestic demand

Household spending

Consumer spending is financed largely by households’ current incomes, and changes in the pattern of saving will also affect its path. Household real income growth has been weak since 2016 due to both rises in import prices following the referendum-related depreciation of sterling and subdued nominal pay growth. But consumption growth has slowed to a lesser degree, supported by a decline in households’ rate of saving (Chart 2.4).

The extent to which households continue to spend a greater proportion of their current income, relative to the recent past, or choose to increase their savings, will depend partly on their confidence around future incomes and economic prospects. Real incomes picked up somewhat during 2018 H1 and are expected to rise further as the effect of the depreciation of sterling on inflation continues to fade and nominal pay growth rises as unemployment remains low (Section 4). Consistent with that, consumer confidence surveys, such as the GfK survey (Chart 2.5), suggest that households’ expectations of their personal financial situation have improved somewhat since 2017.

Household spending and saving will also be influenced by interest rates. First, interest rates affect payments on existing debt and deposits. As borrowers’ spending tends to be more sensitive to such changes, a rise in interest rates will weigh on consumption growth through this ‘cash-flow’ channel. Second, they affect the incentive to save rather than borrow for all households.

As explained in Section 1, credit conditions remain accommodative, although the recent rise in Bank Rate is feeding through to retail interest rates facing many households. There is also some evidence of a modest tightening in consumer credit conditions. Respondents to the Q3 Credit Conditions Survey, for example, reported a further reduction in consumer credit availability. The average quoted rate on credit cards has risen in recent months, and non-price terms, such as the average interest-free period on credit card balance transfers, continue to tighten. Annual consumer credit growth has slowed (Chart 2.6), largely accounted for by slower growth in car financing, although growth in credit card and other non-credit card lending also slowed in Q3. The slowdown in car finance appears to partly reflect the completion of a structural change in the way car purchases are financed,1 as well as the fall in car registrations in September.

Consumption is expected to grow modestly in coming quarters (Table 2.A). Such growth is expected to be underpinned by, and be in line with, real income growth. The rate of saving is projected to be broadly flat, although there is uncertainty around that judgement.

The housing market

Developments in the housing market can provide a signal about household spending because decisions about whether to buy a house and whether to spend share common drivers, such as income expectations and confidence. Overall, housing market indicators continue to be somewhat subdued.

Mortgage approvals have been broadly unchanged since mid-2016, and related indicators such as property transactions and growth in secured lending (Chart 2.6) have also been steady at levels well below pre-crisis averages. Relatively subdued housing market activity is likely, in part, to have reflected the squeeze in real incomes over that period.

Annualised house price inflation was 4.2% in the three months to August according to the UK house price index (HPI) (Chart 2.7). The UK HPI, which was designated a National Statistic in September, covers all housing transactions and is therefore more comprehensive than other measures such as those released by some mortgage lenders. Those other measures are published on a timelier basis but have often been more volatile, particularly over the recent past. Nonetheless, the broad picture of slowing house price inflation since early 2016 has been consistent across a range of indicators.

As discussed in previous Reports, much of the slowdown in UK house price inflation has been concentrated within London and the South East. London house price inflation was particularly strong between 2014 and early 2016, and materially above income growth, reducing affordability (Chart 2.8). Since then, the London market has probably been disproportionately affected by regulatory and tax changes, and also by lower net migration from the EU (Section 3). The recent slowing has brought London house prices relative to income somewhat closer to other areas. House price inflation has also slowed a little across other regions, although it has generally remained a little above income growth. The latest RICS survey continued to report a divergence between price expectations in London and the South East — where surveyors expected prices to fall — and most other regions, where prices were expected to rise. Overall, UK house price inflation is projected to be modest in the near term (Table 2.A).

Developments in the housing market will also contribute to GDP directly through housing investment. Around one fifth of housing investment is accounted for by spending associated with property transactions, such as estate agent and legal fees, which has been dampened by subdued activity in the housing market. The remainder consists of new house building and improvements to existing buildings. Spending on new dwellings has risen further in recent quarters (Chart 2.9). Housing starts have been broadly flat since mid-2016, however, and some contacts of the Bank’s Agents report skills shortages in the construction sector. As a result, growth in housing investment is expected to be modest in the near term.

Corporate spending

In contrast to household spending, spending by businesses has grown at a slower rate than their incomes since mid-2016, resulting in an increase in their financial balance (Chart 2.3).

Business investment is expected to have fallen by 0.5% in the year to 2018 Q3 (Chart 2.10). Investment growth has continued to be lower than would have been expected given accommodative financial conditions, relatively robust global growth and declining slack. Although most surveys of investment intentions are consistent with positive growth, they have fallen somewhat in recent months. In particular, the CBI measure for investment in plant and machinery in the manufacturing sector fell in Q3 to its lowest level since 2009. Planned expenditure on product innovation and training has also fallen in recent quarters.

Weak investment is, at least in part, likely to have reflected Brexit and associated uncertainty. That uncertainty appears to have risen recently, and may have weighed on investment by more than had been expected in August. Results from the Bank’s Decision Maker Panel Survey suggest that Brexit’s importance as a source of uncertainty has risen further in recent months (Chart 2.11), and the Agents’ latest survey of investment intentions reported Brexit uncertainty as the largest headwind to investment spending at the moment (Box 3). Respondents to the 2018 Q3 Deloitte CFO Survey also viewed Brexit as the biggest risk facing their business, on average, with sentiment towards its long-term impact turning increasingly negative. Of those respondents, 79% expected the UK business environment to be somewhat worse as a result of Brexit, and only 6% anticipated a better long-term outcome.

Weak demand for investment appears to have been reflected in slowing growth of bank lending to both large companies and small and medium-sized enterprises since late 2016 (Chart 2.6). Results from the Q3 Credit Conditions Survey suggest that lenders anticipate a further reduction in large companies’ demand for credit in Q4. While a broader measure of companies’ external financing suggests larger companies have continued to raise finance at a reasonably steady pace since 2015, some of that financing has been raised through leveraged loans for mergers and acquisitions or balance sheet restructuring, and so is unlikely to have provided direct support to business investment growth.2

In the MPC’s central projection, conditioned on the expectation of a smooth adjustment to the UK’s eventual trading relationship with the EU, business investment growth is expected to be subdued in the near term. Further out, Brexit-related uncertainty should wane, boosting investment. Given that the current drag from uncertainty appears to be larger than expected, investment growth is projected to pick up by more after March 2019 than anticipated in August as greater clarity emerges (Section 5).


The MPC’s projections are conditioned on the Government’s tax and spending plans. As the Autumn Budget was announced following the finalisation of the MPC’s latest projections, they are conditioned on plans detailed in the March Spring Statement. The estimated impact of the Autumn Budget stimulus will be incorporated into the MPC’s February 2019 forecast.

Chart 2.4

Consumption growth has been supported by lower saving and, more recently, higher income growth
Contributions to four-quarter consumption growtha

Chart 2.4

  • a Chained-volume measure, including NPISH.
    b Measured using the consumption deflator (including NPISH).

Chart 2.5

Households’ confidence in their own finances has improved over the past year
Indicators of consumer confidence

Chart 2.5

  • Sources: GfK (research carried out on behalf of the European Commission) and Bank calculations.

    a Average of the net balances of respondents reporting that: their financial situation has got better over the past 12 months; their financial situation is expected to get better over the next 12 months; the general economic situation has got better over the past 12 months; the general economic situation is expected to get better over the next 12 months; and now is the right time to make major purchases, such as furniture or electrical goods.

Chart 2.6

Growth in consumer credit and lending to businesses has slowed
Lending to households and businesses

Chart 2.6

  • a Sterling lending by UK monetary financial institutions (MFIs) and other lenders.
    b Excludes student loans.
    c Lending by UK MFIs, excluding overdrafts, and reverse repos in all currencies, expressed in sterling. Not seasonally adjusted. Data by firm size available from April 2012.
    d Small and medium-sized enterprises are businesses with annual debit account turnover on the main business account less than or equal to £25 million.
    e Large businesses are those with annual debit account turnover on the main business account over £25 million.

Table 2.A

Monitoring the MPC’s key judgements

Table 2.A

Chart 2.7

House price inflation has slowed since early 2016
House prices

Chart 2.7

  • Sources: Halifax house price index by IHS Markit, HM Land Registry, Land and Property Services Northern Ireland, Nationwide, ONS, Registers of Scotland and Bank calculations.

    a Data only available to August 2018.

Chart 2.8

London house prices have fallen relative to incomes, but the ratio remains higher than elsewhere
Regional house price to income ratiosa

Chart 2.8

  • Sources: HM Land Registry, Land and Property Services Northern Ireland, ONS, Registers of Scotland and Bank calculations.

    a House prices divided by four-quarter post-tax income per household within that region. House price data for Northern Ireland, Scotland and the UK are seasonally adjusted by Bank staff. Estimates of regional post-tax income per household are interpolations of annual data.

Chart 2.9

Spending on new dwellings has risen further but housing starts have been broadly flat
House building and investment in new dwellings

Chart 2.9

  • Sources: Department for Communities and Local Government, ONS and Bank calculations.

    a Chained-volume measure. Excludes major repairs and improvements to existing dwellings.
    b Number of permanent dwellings started/completed by private enterprises up to 2018 Q2 for England and Northern Ireland. Data from 2011 Q2 for housing starts in Wales and 2018 Q1 for housing starts and completions in Scotland have been grown in line with permanent dwelling starts/completions by private enterprises in England. Data are seasonally adjusted by Bank staff.

Chart 2.10

Business investment has been weak, and is expected to have fallen by 0.5% in the year to 2018 Q3
Business investment and survey indicators of investment intentionsa

Chart 2.10

  • Sources: Bank of England, BCC, CBI, CBI/PwC, ONS and Bank calculations.

    a Survey measures are scaled to match the mean and variance of four‑quarter business investment growth since 2000. Business investment data are adjusted for the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2. Measures for the Bank’s Agents (split by manufacturing and services), BCC (non-services and services) and CBI (manufacturing, distribution, financial services and business/consumer/professional services) are weighted together using shares in real business investment. Agents’ measure shows companies’ intended changes in investment over the next 12 months; last available observation for each quarter. BCC measure is the net percentage balance of respondents reporting that they have increased planned investment in plant and machinery; data are not seasonally adjusted. CBI measure is the net percentage balance of respondents reporting that they have increased planned investment in plant and machinery for the next 12 months.
    b Chained‑volume measure. The diamond shows Bank staff’s projection for 2018 Q3.

Chart 2.11

Brexit-related uncertainty among companies has risen
Decision Maker Panel: Brexit as a source of uncertaintya

Chart 2.11

  • a Responses to the question ‘How much has the result of the EU referendum affected the level of uncertainty affecting your business?’.

2.2 Net trade

An increase in net trade has contributed to an improvement in the current account since mid-2016 (Chart 2.3). Net trade is expected to have contributed 0.9 percentage points to GDP growth in 2018 Q3, although that follows a 0.6 percentage point drag in Q2 (Table 2.B). Those contributions in part reflect continued volatility in net exports of non-monetary gold, which do not affect aggregate GDP as they are offset by changes in the contribution of private sector investment in valuables. More generally, the trade data are volatile and subject to revision.

The past depreciation of sterling and relatively robust global growth have been supporting the demand for exports. Survey indicators of export growth continue to be relatively strong but have fallen in recent months (Chart 2.12).

Import growth has slowed since mid-2016 (Table 2.B). That may in part reflect the decline in the exchange rate, which has raised the cost of imports. Consistent with that, import penetration — the proportion of exports and domestic demand satisfied using imported goods and services — has been broadly flat in recent quarters (Chart 2.13) compared with a steady upward trend in previous years and in other advanced economies.

The outlook for net trade will depend in part on how supply chains, both here and abroad, evolve in response to Brexit and any associated movements in sterling. Goods trade is concentrated within a subset of companies, with 70% of goods traded in 2016 by value accounted for by the top 1% of trading firms. Services trade is also concentrated, with companies that both export and import services representing 2% of all firms but accounting for over 80% of all services trade.3 As a result, the outlook for trade in aggregate will be sensitive to developments in these particular firms.

Overall, net trade is projected to make a positive contribution to GDP growth in the near term, given the prospects for demand in the UK relative to abroad, and some further boost from the past depreciation of sterling.

  • 1 For further detail, see the box on pages 16–17 of the November 2017 Inflation Report.

    2 For further discussion of trends in leveraged loans, see the ‘Record of the Financial Policy Committee meeting on 3 October 2018’.

    3 Estimates for goods and services trade shares are based on statistical data from Her Majesty’s Revenue and Customs (HMRC) and ONS respectively, which are Crown Copyright. They do not imply the endorsement of HMRC nor ONS in relation to the interpretation or analysis of the information. The research data sets used may not exactly reproduce HMRC or ONS aggregates.

Table 2.B

Expenditure components of demanda

Table 2.B

  • a Chained-volume measures unless otherwise stated.
    b Includes 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.

Chart 2.12

Survey indicators are consistent with positive export growth but have fallen
UK exports and survey indicators of export growtha

Chart 2.12

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

    a Survey measures are scaled to match the mean and variance of four-quarter export growth since 2000. Agents’ measure shows manufacturing companies’ reported annual growth in production for sales to overseas customers over the past three months; last available observation for each quarter. BCC measure is the net percentage balance of companies reporting that export orders and deliveries increased on the quarter; data are not seasonally adjusted. CBI measure is the average of the net percentage balances of manufacturing companies reporting that export orders and deliveries increased on the quarter, and that their present export order books are above normal volumes; the latter series is a quarterly average of monthly data. EEF measure is the average of the net percentage balances of manufacturing companies reporting that export orders increased over the past three months and were expected to increase over the next three months; data available since 2000 Q3. The IHS Markit/CIPS measure is the net percentage balance of manufacturing companies reporting that export orders increased this month compared with the previous month; quarterly average of monthly data.
    b Chained-volume measure, excluding the impact of MTIC fraud. The diamond shows Bank staff’s projection for 2018 Q3.

Chart 2.13

Import penetration has flattened since 2016
Imports relative to import-weighted demanda

Chart 2.13

  • Sources: ONS and Bank calculations.

    a UK imports as a proportion of import-weighted total final expenditure, chained-volume measures. Import-weighted total final expenditure is calculated by weighting together household consumption (including NPISH), whole-economy investment (excluding valuables), government spending, changes in inventories (excluding the alignment adjustment) and exports by their respective import intensities, estimated using the United Kingdom Input-Output Analytical Tables 2014. Import and export data have been adjusted to exclude the estimated impact of MTIC fraud. The diamond shows Bank staff’s projection for 2018 Q3.

Box 3: Agents' update on business conditions

The Bank of England’s Agents have a long-standing role in providing economic intelligence to the Bank’s policymaking committees from their regular meetings with businesses. Some of the key information from Agents’ contacts considered by the MPC at its November meeting is highlighted in this box.1

Over the past three months,2 annual consumer spending growth remained modest. New car sales remained weak, dampened further by the impact of some supply disruption following the introduction of new emissions standards.

Growth in business services activity was also modest as companies in sectors reliant on discretionary business spending, such as marketing and hospitality, reported weaker demand. However, IT firms reported strong demand, and professional services firms expected to benefit from a further pickup in Brexit-related activity.

Growth in domestic manufacturing output in the past three months was slightly weaker, reflecting softer sales growth among companies supplying the retail, construction and automotive sectors. Growth in manufacturing export volumes also eased, with strong demand for capital goods from the US and Asia partially offset by slower growth in automotive exports, and a small impact on a few producers in the metals sector from US tariffs.

Annual construction output growth steadied at a sluggish pace, following weak growth earlier in the year. Growth in house building and student accommodation remained stronger than other parts of the construction sector. Planning delays and skills shortages continued to be cited by some contacts as a constraint on activity.

Capacity constraints were above normal in most sectors, due to the tight labour market. This was particularly the case in logistics, where contacts reported a shortage of haulage drivers, as well as limited spare capacity in warehousing. However, constraints in manufacturing eased slightly due to weaker activity.

Employment intentions softened in manufacturing, and continued to contract among consumer services firms. Overall, employment was expected to continue to rise, however, and recruitment difficulties to worsen. Difficulties were particularly marked in IT and construction. Pay settlements remained in the range of 2½% to 3½% — slightly higher than last year.

There was uncertainty about Brexit outcomes, but only a few companies had started to implement contingency plans. This was partly due to caution among contacts about tying up cash flow to build inventory.

Consistent with that, there has been only a small amount of stockbuilding activity reported to date, although some companies were considering increasing stocks towards the end of 2018 Q4 and in 2019 Q1. However, the potential timing varied across sectors, as did the scale of planned stockbuilding.

Of those few contacts that had already begun to implement plans, actions taken included: building cash reserves; reviewing supply chains; acquiring more warehousing capacity; applying for Authorised Economic Operator status; and opening EU subsidiaries.

Agents’ survey on investment intentions

The Agents surveyed business contacts about their investment intentions for the next 12 months.3 Contacts were also asked how a variety of factors, including Brexit, was affecting investment levels.

Around a fifth of respondents — weighted by employment — said that they expected their investment spending in the UK to be higher over the next 12 months than in the previous 12 months, while a slightly smaller proportion said that they expected it to be lower (Chart A). Some two thirds of respondents expected investment to remain about the same.

While the resulting net balance for investment intentions was positive, it was below that from the equivalent 2017 survey and was weak relative to most previous years, except 2016 (Chart B). In the 2016 survey, companies had expected investment to decline over the next 12 months, though the 2017 survey suggested that actual capital expenditure had increased.

This year’s survey showed that companies were most likely to invest to maintain or replace equipment, and to achieve future efficiency or productivity gains (Chart C). This may reflect strategies that prioritise investment in essential, or ‘no regrets’, projects given the uncertain environment.

Companies cited Brexit uncertainty as the biggest headwind to investment intentions, with a net balance for this factor of around -10% (Chart C). Domestic and export demand were considered less likely to drive investment over the coming year than in the 2017 survey.

  • 1 A comprehensive quarterly report from the Agents on business conditions is published alongside the MPC decision in non-Inflation Report months.

    2 This section covers intelligence gathered between late August and mid-October 2018. References to activity and prices generally relate to the past three months compared with a year earlier.

    3 The survey was conducted between 15 August and 5 October 2018. Responses were received from 352 companies, employing over 500,000 people, and accounting for around £11 billion in capital expenditure. Responses were weighted by employment.

Chart A

The net balance of investment intentions is slightly positive

Change in capital expenditurea

Chart A

  • a Companies were asked ‘How has your UK capital expenditure changed over the past 12 months, and what are your future expectations for capital expenditure?’.
    b Net percentage balance of companies reporting increases in investment. Half weight was given to those that responded ‘less’ or ‘more’, and full weight was given to those that responded ‘far less’ or ‘far more’.

Chart B

Investment intentions are weak compared with previous surveys
Investment intentionsa

Chart B

  • a Net percentage balance of companies reporting increases in investment.

Chart C

Brexit uncertainty was the largest reported headwind to investment
Factors affecting the level of UK capital expenditurea

Chart C

  • a Companies were asked ‘How are the following factors affecting your levels of UK capital expenditure plans over the next 12 months compared with the past 12 months?’.
    b The 2018 data relate to factors affecting investment intentions for the next 12 months. The 2017 data relate to intentions over the next 12 months from the 2017 survey.
    c Companies were not asked about these factors in the 2017 survey.
    d In 2017, companies were asked about uncertainty about the economic environment and expected future UK trading arrangements. In 2018, companies were asked about Brexit uncertainty (economic or political), and expected future trading arrangements emerging from Brexit.
    e Net percentage balance of companies reporting increases in investment as a result of these factors.
This page was last updated 27 September 2023