Professor of economics at Dartmouth College, New Hampshire, and member of the Bank of England’s monetary policy committee from June 2006 to May 2009
The UK was the slowest growing economy in the EU28 in the first quarter of 2017 and joint last in the second quarter. Pathetic growth of 0.5% for the first half of the year wins the UK the wooden spoon. The euro area grew 1.1% and the EU28 by 1.2% over the same period. Germany grew 1.3%; France 1%; Spain 1.7%; Sweden 2.3% and the Netherlands by 2.1%. Even Greece grew by 1%. Among the major EU countries, the UK’s inflation rate of 2.9% compares with 1.5% in the euro area and is only lower than Estonia, Latvia and Lithuania.
Average weekly earnings did not rise at all between June and July. The annual growth of wages fell from 2.8% in June to 1.4% in July. Real wages continue to fall, for the fourth month in a row they were negative, squeezing purchasing power. Debt-fuelled spending can only go on for so long. The unemployment rate ticked down to 4.3%, its lowest level for 42 years. But underemployment, measured by the number of part-timers who want full-time jobs, rose by 23,000. Currently there are just over a million workers in this category compared with around 670,000 at the start of the “Great Recession” in 2008. Underemployment has replaced unemployment.
The Markit/CIPS purchasing managers’ index (PMI) for services came in at 53.2 in August, down from 53.8 in July, signalling the slowest pace of business expansion in 11 months. The construction PMI was also weak although August’s manufacturing PMI was strong. The Bank of England agents’ report on business conditions for August was weak. In particular they noted that consumer spending had slowed further, while employment and investment intentions were both modest. Growth looks unlikely to pick up any time soon.
On top of all this there was lots of silly talk from several MPC members – including the Bank’s governor, Mark Carney – about the possibility of a rate rise later this year. He has done this before and there has never been a rate rise and only a rate cut and more quantitative easing. There is absolutely no basis for a rate rise in the data. The enhanced uncertainty over the form Brexit will take will constrain growth even further. Cut the stupid stuff. Britain is the sick man of Europe.
Senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011
The economic data over the past month has had a more positive flavour. The unemployment rate has continued to fall, reaching a new post-1970s low of 4.3%. Employment growth has remained resilient despite a slowdown in the rate of increase in spending and economic activity.
Retail spending was relatively strong in August, perhaps reflecting the impact of more “staycations” as the weak pound has pushed up the cost of foreign holidays.
Retail sales growth seems to be fluctuating around an annual growth rate of 2% in volume terms. This is much weaker than the growth of around 4.5% seen in the three years of 2014 to 2016. But it is consistent with an economic growth slowdown, rather than something worse.
The trade figures show that export volumes were up 9% on a year ago, excluding oil and erratics. This reflects the strength of the world economy and the rebound we are seeing in continental European economies. The trade deficit is not shrinking because import growth has also been strong – but this too suggests that domestic spending has been increasing, adding to the demand for goods produced overseas.
The official figures for manufacturing output have been rather subdued. But business surveys – from organisations like the CBI and the EEF – point to healthy growth in industrial production. That is consistent with a picture of rising demand from overseas driving the growth of manufacturing and other export-oriented industries.
The public borrowing numbers also provide encouragement for the chancellor and give him some room for manoeuvre in the forthcoming autumn budget. Tax receipts are holding up well, consistent with continuing growth in the UK economy.
This more positive flavour to the economic data should encourage the Bank of England to raise interest rates in November – for the first time in more than a decade. This should be seen as a positive development, reflecting the resilience of the economy. A quarter point rise in the Bank Rate would only take it back to the 0.5% level which was set from 2009 to 2016 – and is most unlikely to derail the economic recovery.