Economic commentary

• Output growth in the major overseas economies slowed somewhat in the second quarter, although a number of special factors may have been at work.
  
  
• The authorities in the major economies tightened policy slightly in response to worries about potential inflation. Inflationary pressures arising from commodity prices have, however, eased and, while domestic pressures have become more of a preoccupation recently, inflation itself has remained subdued in the major overseas countries.
  
  
• There has been evidence of slower progress in reducing the external imbalances of the three major economies in recent months; Germany's merchandise trade surplus widened to a record level in the second quarter.
  
  
• Growth in the United Kingdom is recorded as having slowed in the second quarter, but problems with the measurement of GDP cast some doubt on this. Demand seems to have grown strongly in the first half of the year and concern about the potential inflationary consequences of this led the authorities to increase interest rates by a total of 4,½ percentage points between May and September.
  
  
• According to the preliminary estimate, consumer spending rose by over 2% in the third quarter. This may, however, conceal some slowing in recent months; retail sales rose sharply in July but were unchanged in August and fell in September. This may owe something to the tightening of policy, as may the fall in turnover in the housing market in some areas.
  
  
• Inflationary pressures in the United Kingdom have intensified, even allowing for the effects on the RPI of recent mortgage rate rises. There are signs that profit margins have widened, and the labour market continues to tighten although the growth in labour costs has been subdued.
  
  
• The effects of rapid demand growth can be seen clearly in the deteriorating balance of trade in manufacturing. This was the main factor in the very sharp increase in the current account deficit in the third quarter. The current account deficit is forecast to reach £13 billion for the year as a whole.

Economic commentary