The UK economy looks as if it is slowing so when will Base Rate cuts come on the agenda?

Today is central bank day with both the Bank of England and the European Central Bank (ECB) declaring the results of their policy meetings. Having reviewed the build up of dissent at the ECB yesterday there is an increasing possibility that there will be less dissent at the Bank of England if the UK economy continues on its current economic trajectory. However before I look at the economic prospects let us in the UK take stock for a moment and consider how strong our record of official economic growth has been recently.

GDP was 3.0% higher in Q3 2014 compared with the same quarter a year ago.

This means that we have finally pushed ahead of the pre credit crunch peaks.

In Q3 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008.

Also if we continue in glass half-full terms we have managed this with an inflation rate which has fallen back considerably from the peaks of autumn 2011 when it pushed over 5%.

The Consumer Prices Index (CPI) grew by 1.2% in the year to September 2014, down from 1.5% in August.

This would have been seen as something of an economic nirvana back in the pre credit crunch days. How times change!

If we are looking for a third optimistic leg then the demand for cars in the UK can provide that.

New car registrations jumped 14.2% in October to 179,714 units, marking the 32nd consecutive month of growth.

2,137,910 cars registered in the year-to-date –first time the market has passed two million in October since 2007.

Accordingly at this point we can sing along with Ian Dury and the Blockheads.

Reasons to be cheerful, part 3
Reasons to be cheerful, 1, 2, 3

Not quite so cheerful

The counterpoint to the data above is that the growth numbers are aggregate ones and if we start to allow for the increase in the population over the same period we in fact still have not regained our past peak.

Looking Forwards

The official UK GDP numbers have shown a slight slowing to a quarterly rate of 0.7%. This rate of growth was repeated by the NIESR (National Institute for Economic and Social Research) in its numbers which also covered October. Since then we have seen the business surveys hint that there is a further slowing going on.

After GDP growth slowed to 0.7% in the third
quarter, a 0.5% expansion is currently being
signalled by the surveys for the fourth quarter.
However, with inflows of work rising across all three
sectors at the slowest rate for 16 months, there is a
risk that economic growth could weaken further.

As you can see this was a little downbeat but if we look at the international environment and Europe in particular it should be no great surprise. Also there was a suggestion of further disinflationary pressure.

The surveys also point to lower inflation in coming
months: average prices charged for goods and
services fell, albeit only slightly, for the first time
since July 2012.

As we review an oil price that continues to be weak (under US $83 per barrel for Brent Crude) then there is a clear disinflationary push from it. This is now so clear even the government has cottoned on.

The chief secretary to the Treasury is to urge petrol and diesel distributors to cut prices further after recent declines in the cost of oil.

Although the danger for Danny Alexander is that distributors reply by pointing out that fuel duty is 57.95 pence per litre and that VAT at 20% is levied on the total. Yes that does mean that a tax is levied on the tax!

Retailers are also reporting disinflationary pressure according to the British Retail Consortium.

Overall shop prices reported deflation for the eighteenth consecutive month, accelerating to 1.9% in October from 1.8% in September.

Another downwards push

Whilst September’s industrial production figures were some 0.6% better than those for August there was a kicker in the tail for the past quarter.

The preliminary estimate of GDP, published on the 24 October 2014, contained a forecasted increase of 0.5% for production in Q3 2014. This release of data estimates that production increased by 0.2% between Q2 2014 and Q3 2014 and the impact on the previously published GDP estimate for Q3 2014 is minimal.

So production increases look like they are fading somewhat although they did not fall enough to reduce economic growth by 0.1%. In a way that shows the relative unimportance of production in our economy these days (14.6%). Also we return to a theme of this blog which is the potential unreliability of many economic statistics and the cause this time was this.

This was due to late revisions to electricity, gas, steam & air conditioning sector data, caused by the receipt of late data to replace estimates.

I had been wondering how it was rising at a time of mild weather! Now we know it wasn’t.

Ironically in some ways we did get a hint of the famed rebalancing from the numbers.

Of the four main sectors, manufacturing output was the only one to rise, (over the year to September) increasing by 2.9%.

What about house prices?

I have been recording a fading of the boom over the past couple of months and it would appear from the Halifax data released today that this is continuing.

House prices fell by 0.4% between September and October. This is the fifth monthly decline in the past year.

House prices in the latest three months (August-October 2014) were 0.8% higher than in the previous three months (May-July 2014)

So there has been a fading although it is still true that house prices as calculated by the Halifax were 7.6% higher in October than a year before. Even so the house price to average earnings number is five and just as a reminder the Halifax uses a particularly favourable measure of earnings here.

Savers continue to be punished 

The November Economic Review tells us this.

In recent quarters, however, net interest payments have partially reversed this decline: rising by around 0.3 percentage points since late 2012 to 3.8% in Q2 2014. On closer examination, this recent rise is mainly caused by a fall in the value of interest receipts on households’ deposits, while household payments of interest have remained broadly stable.

These numbers subtract savers income from what borrowers pay to give a net figure for the economy. Up to now the reductions in base and then mortgage rates have seen the number fall from a net peak of 6% in 2008. But now further cuts in deposit rates are seeing it edge back higher and operate as a contractionary influence on the UK economy.


The position for the UK economy is that it has had its best run of the credit crunch era with declining inflation and a solid economic growth performance. But some of the factors which pushed the growth performance seem to be fading such as house prices and production. I note that even the Office for National Statistics is beginning to analyse the continuing fall in savers income. To this we need to add the increasingly difficult international environment especially in much of mainland Europe.

As to the Bank of England it would appear that as ever events are looking likely to wrong-foot it!

Bank staff continued to expect GDP growth in the final vintage of data for Q3 to be 0.9%……Bank staff’s expectation that GDP growth in the final vintage of data for Q4 would slow to 0.8%.

And this on inflation.

This was 0.3 percentage points lower than Bank staff’s
expectations at the time of the meeting and 0.5 percentage points lower than incorporated into the August Inflation Report and would require further analysis.

Lower economic growth and inflation seem to be on the cards. We know how Sweden responded to such trends don’t we? If you do not my analysis of the 28th of October will tell you. Maybe if current trends continue we could see a three-way split at the Bank of England.

Just to be clear I would not vote for a Base Rate cut as I believe that any gains from interest-rate cuts near 0% are very small and may even turn out to be losses. Also as I have been writing today’s blog both Asda and Sainburys have announced fuel price reductions of 1 pence. Is that price -fixing? Perhaps we are less bothered when it is downwards…..


9 thoughts on “The UK economy looks as if it is slowing so when will Base Rate cuts come on the agenda?

  1. Great article as always Shaun.

    As you point out in your article the kicker is HPI. I think the tories started their house price stimulus too early and it was always going to run out before the election. It will be difficult for the tories to head into the election with falling houseprices.

    So I expect another attempt to waste tax payers money supporting the housing market.

    The problems will start after the election. As pointed on on the HPC site, the halifax figures for may were +4% this year, and this will drop out of the YoY figures just as the next party begins their parliament. I nice surprise for whoever that will be…..

    • Hi Anteos and thank you

      The subject of the timing of the house price boom has been discussed in the comments section before. In terms of the athletics commentaries of the great David Coleman they have invariably repeated his famous “has he/she gone too soon?” for the electoral cycle. It is starting to look ever more like that unless yet another rabbit can be pulled from the taxpayers hat.

      The May figures are intriguing! So they will drop out just as the new government begins. Perhaps they will keep the coalition negotiations going a really long time and mimic the Belgians if nobody gets a majority.

  2. Hi Shaun
    Hah yes ‘savers income’. NIRP has made it into the retail market in Germany with at least one bank imposing negative rates for large deposits.

  3. Hi Shaun and thanks for the blog.
    To answer your question I believe a rate rise is still in the distant future despite the Shadow MPC still advocating a rise now. I read the NIESR are forecasting no rise before May’s general election and a possible rise in June but may be later.
    For all of the reasons you have outlined I think the BOE will not make a move for sometime although the economy is surely strong enough to accommodate a small upwardly move.
    When it comes it will be small and very gradual. I doubt whether by the end of 2015 the rate will more than 1%.As we pay income tax surely filling up the car with fuel is a tax upon at tax upon tax.

    • Hi Midge

      Next week we will get the Bank of England quarterly inflation report and as I described in today’s post it will show lower growth and inflation than before. So the more dovish members such as David Miles may return to their default posture of recommending more monetary easing.

      The chance to nudge rates higher was missed in 2010 and I wonder when we will see it again. The joker in the pack is wage growth where there are surveys mentioning a pick-up which is missing from the official average earnings figures.

      Filling ourselves with beer and wine is the same……

  4. Hi Shaun,
    I’ve always felt uneasy with the notion, as expressed by Mr. Bean, that savers would be encouraged to spend by lowering savings rates. I suspect that savers faced with declining income are more likely to save harder. And banks faced with negative central bank rates may try to recoup their increased costs by increasing their loan rates – just the opposite of what was intended by the policy. I also doubt that very low inflation, or even falling prices, encourage consumers to delay purchases – how has anyone been able to sell flat screen TVs or computers over the last 10 years?

    • Hi Eric

      I agree completely that there are more than a few holes in the conventional agenda. Mr Bean forgot that there is a difference between a temporary move and one which has begun to look ever more permanent.

      I do know however that the world of ZIRP and indeed NIRP is a trap which those who have taken us into it have shown no ability to get us out of.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s