The possible road to another Bank of England Bank Rate cut

This morning has brought some disappointing news about the UK economy. From the Office for National Statistics.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2016 and Quarter 1 (Jan to Mar) 2017.

As the official release goes on to tell us this is slightly worse than the preliminary estimate.

UK GDP growth in Quarter 1 2017 has been revised down by 0.1 percentage points from the preliminary estimate published on 28 April 2017; mainly due to broad-based downward revisions within the services sector.

Whilst this was disappointing it was far from a complete surprise as there have been hints that the services sector had struggled in that quarter. Of course it makes up the vast majority of the UK economy these days leaving not much scope to regain the ground elsewhere.

The detail

It turns out that all sectors of the UK economy grew it is just that they did not do so by much.

In Quarter 1 2017, all four sectors show positive growth; agriculture increased by 0.3%, total production increased by 0.1% and construction and total services both increased by 0.2%.

If we look at the services sector we see that in football terms it was in a way a story of two halves.

The growth was focused in the business services and finance, and government and other services industrial groups, but there was a slow-down in growth in consumer-focused industries, such as retail sales and accommodation. Within the services industries, two of the four main sectors decreased in Quarter 1 2017; distribution, hotels and restaurants, and transport, storage and communications.

The area responsible for today’s downwards revision has ironically been a strength for the UK economy in recent quarters.

Services contributed 0.06 percentage points to the downward revision to UK GDP, the biggest contributor. Within services, the largest contributor to the downward revision is business services and finance. However, within this section, at the more detailed level, the revisions are small and broad-based, primarily reflecting late survey returns.

We can really drill down to see the state of play here.

Total services output rose by 0.2% in Quarter 1 (Jan to Mar) 2017, driven by 0.6% growth in business services and finance, and 0.4% growth in government and other services (Figure 3). Meanwhile, distribution, hotels and restaurants, and transport, storage and communication both recorded negative quarterly growth – falling by 0.6% and 0.2% respectively. This is the first negative quarter-on-quarter growth rate in each series since Quarter 4 (Oct to Dec) 2012 and Quarter 3 (July to Sep) 2013.

What about the individual experience?

The aggregate levels above do not allow for changes in the population so for example a growing population would normally lead to higher economic output and GDP, but that higher GDP would not necessarily indicate people being better off. This often gets ignored by politicians and much of the media because it has shown that we are not doing as well as the headline number would suggest.

In Quarter 1 (Jan to Mar) 2017, gross domestic product (GDP) per head was flat compared with Quarter 4 (Oct to Dec) 2016. GDP per head is now 1.7% above the GDP pre-downturn peak in Quarter 1 2008, having surpassed it in Quarter 4 2015.

That compares with us being some 8.7% higher on the headline number and the gap has just widened even further as we were on a road to nowhere on an individual basis at the start to 2017.

GDP per head in volume terms was flat between Quarter 4 2016 and Quarter 1 2017.

If the trend from the migration data also released today continues then the numbers may be pulled back closer together.

Net long-term international migration was estimated to be +248,000 in 2016, down 84,000 from 2015 (statistically significant); immigration was estimated to be 588,000 and emigration 339,000.

The catch is that these numbers are probably even more unreliable than the GDP ones.

Nominal GDP

This is the number that will attract the interest of Mark Carney and the Bank of England.

GDP in current prices increased by 0.7% between Quarter 4 2016 and Quarter 1 2017.

This is because on an economy wide level it is a measure of how we can deal with the debt issues that exist. Mostly we pay these in nominal rather than real terms. Although they avoid putting it in these terms this is why central banks target a positive rate of inflation ( mostly 2% per annum) because it is in effect a subsidy for debtors as their debts get deflated in real terms. This is also why there are regular suggestions that the target rate of inflation should be raised to either 3% or 4% so that debts can be inflated away even more quickly.

So in terms of debt worries they will be pleased to see the effect of inflation on the GDP numbers so that real growth of 0.2% becomes nominal growth of 0.7%. You may note that the period when we had solid economic growth but around 0% inflation would be pretty much indistinguishable in these terms. Of course we as workers are worse off as this from today’s monthly commentary makes clear.

Adjusted for consumer price inflation including owner occupiers’ housing costs (CPIH), average weekly earnings increased by 0.1% including bonuses, but fell by 0.2% excluding bonuses, compared with a year earlier. This is the first decline in real earnings (excluding bonuses) since the 3 months to September 2014.

There are hints that consumers are beginning to feel some of the pinch of higher inflation as well.

The slowdown in Quarter 1 2017 compared with Quarter 4 2016 reflected a decline in output from consumer focused industries, including the retail industry. As a result, private consumption was a smaller contributor to GDP growth than in recent periods, adding 0.2 percentage points.


This is something of a problem that it a hardy perennial for the UK economy and GDP. It has been at play yet again.

the total trade deficit widened by £5.7 billion to £10.5 billion between Quarter 4 2016 and Quarter 1 2017. Both the monthly and quarterly widening of the trade deficit were mainly due to increased imports of oil, chemicals, mechanical machinery and cars.

More specifically it did this.

The negative contribution to GDP came from net trade, which contributed a negative 1.4 percentage points.

So over the last two quarters it has given us a large boost and now taken it away. If we look back it has taken 1.4% away, given us 1.7% and now taken 1.4% away over the past 3 quarters. An unlikely sequence which reminds us how volatile and unreliable the trade numbers are especially for the most important sector which is the services one.


Let me open with some optimistic thoughts. Firstly this is now exactly the same rate of economic growth we had at the opening of 2016 and very little below that in 2015. So we may have a systemic problem similar to the one which has affected the United States for a while. Also we are simply not able to measure GDP to 0.1% even when all the data is in as opposed to the 80% or so we have now. If investment is any guide companies seem to be planning hopefully which coincides with the latest business surveys.

For Quarter 1 2017, the largest positive contribution to GDP came from gross capital formation, which contributed 1.2 percentage points.

However the GDP growth number has just been revised lower by 0.1% and the danger for the rest of 2017 is that the higher trajectory for inflation subtracts from economic growth. Let me leave you with a thought that I expressed to TipTV Finance which is that in any sustained slow down the Bank of England would be likely to ease monetary policy again.






23 thoughts on “The possible road to another Bank of England Bank Rate cut

  1. Shaun, I express dismay. Of course you are right to forecast what is most likely. i.e. our Ponzi economy is found ultimately wanting…. which leads to more support for its ponzi dependency…. which in a doom loop self-reinforces the ponzi continuum.

    Bring on a black swan, I really do want the UK population to experience reality and regain a healthy outlook and daily demeanour. The administered nation is obviously wrecking the lives of folk at the bottom but insidiously damaging tiers and cohorts right through to the middle classes.

    You have be able to balance the demands for productivity, decent housing, modal transport travel without pain and gouging, clean air and recreation, food quality as experienced, mental health and meritocracy in the workplace. When you evaluate the “economy” in terms of those deliverables then the UK is very very bad.

    Thinks back just 3 days, the main theme of the 2 big parties was, now lets be honest purely a cat fight over how the baby boomer’s unearned wealth of £100k in the virtual bank of property equity was going to be protected from state taxation. Quite ironically that bizarre spectacle was abruptly stopped when we noticed that the youngest cohort and future propsects of Britain were being slain by others critical of this status quo.

    Paul C.

    • “Thinks back just 3 days, the main theme of the 2 big parties was, now lets be honest purely a cat fight over how the baby boomer’s unearned wealth of £100k in the virtual bank of property equity was going to be protected from state taxation. ”

      This seems to be a European (or even western) issue: the baby boomers use their influence and dominance in head count (elections…!) to protect their property. Same here in Germany. Same thing also in other fields, the designation of land for development: in the eighties there was plenty of land for building houses (for the families of baby boomers!) but nowadays there is not. Of course then the price for existing houses and land goes up (+ in addition this quantitative easing crap)!

    • Hi Paul C

      This has been one of the most insipid election campaigns I can recall. There is a genuine issue going forwards with social care as the population ages but as you say there is no real adult conversation going on. The establishment have brain washed the population into believing that wealth from house price rises has in some way been earned and of course this is especially prevalent in London due to the boom.

      • May did try starting an adult conversation but then Labour decided they were against taxing assets of the rich preferring to tax the labour of the young. And the MSM went into overdrive.

  2. Great blog as always, Shaun, and also a great interview.
    I don’t know anything about Eddie George’s drinking habits but when people called him an “inflation nutter” he took it as a compliment. We need more central bankers like him these days. It seems that the British and Canadian economies are in oddly similar situations now. In both cases loose monetary policy has blown up housing prices. The UK risks a trade shock from Brexit and Canada a trade shock from a trade war with the US that could potentially cause a severe correction in housing prices. In both cases the central bank is poorly equipped to deal with it because the bank rate is already so low. Yesterday, the Bank of Canada announced to no-one’s surprise that it was maintaining its overnight rate at 0.5%. However, “[t]he bank also acknowledged the hot Ontario and B.C. housing markets, noting that recent government efforts to stop speculation and risky borrowing ‘have yet to have a substantial cooling effect.’” I almost miss the soothing patter about a “soft landing” for the housing market as prices continue to soar. I think the Governing Council realizes that this could all end very badly.

    • Hi Andrew and thank you

      So many people reading your reply must be thinking of the common denominator between the UK and Canada which is of course that Mark Carney was Governor of the Bank of Canada and is now of the Bank of England. So the same play is being enacted. We both face the issue of what happens when the next recession turns up? I noted in the UK GDP report that the UK has had 17 quarters in a row of growth so we are due a dip. As for Canada a danger would be more days like today with the 5% oil price drop.

  3. Shaun,

    Good post.

    A few issues I’d like to raise.

    Firstly,what exactly is the BoE’s mandate.CPI is at 2.6% in April…………are they really intending to cut rates into an inflationary upturn?

    Secondly,given that so much of our GDP is predicated upon a 5%+fiscal deficit that runs for ever, as well as a ponzi scheme in the housing market,isn’t it about time the BoE began to raie questions about our ability to repay given that they’ve made exactly that warning about sub prime PCP car loans recently?It’s funny how on the one hand they worry about people’s ability to repay and yet on the other they don’t.

    Thirdly,GDP per capita.What is the point of nominal GDP wealth can be turned into per capita GDP poverty with the introduction of a simple deflator like population size?

    I’m seriously struggling to understand how we pay clowns like those at the BoE all this money to do nothing.

    • why does the UK pay any of its top managers so much?

      As Alexi Sayle once stated about the issue

      ” its not because they are better , more productive, or have greater insight ,
      its because they can ”

      its not just the BoE …..


    • Nail meet head, couldn’t have put it better myself, when you take into account the Uk trade deficit, the 2% inflation target and then the increase in the money supply to pay for the housing bubble anyone holding sterling is looking at a 5-10% haircut on their money every year, of course the UK government is very happy to see this level of destruction of the currency as its debts are inflated away every year courtesy of Mark Carney, and when you have approaching £2 trillion in debt, it’s very important for this inflation to continue!

      To the average man in the street who has been foolish enough to have saved, he now can add to the above theft, the fact that he no longer gets interest on his savings, and the fact that inflation is grossly underestimated by official figures so that his savings will halve in value every 10 years or so.

      This as Shaun is predicting is going to get a lot worse, as Carney is just itching to cut rates again so that he can drive the £ down further, and should there be in the face of all the above stimulus for the housing market, a meaningful drop in house prices, I believe the government would bring out a raft of measures to put a brake on falls, such as massive lump sum payments to first time buyers and mortgage interest tax relief so that the cost of buying a house with a 100% mortgage would virtually be zero, a similar fall in the stockmarket would have Carney rushing out to buy stocks, £hundreds of billions at a time(think Kuroda-he’s bought nearly two thirds of the Japanese ETF market some $120billion), as the old saying goes you ain’t seen nothin’ yet.

      Carney was brought over here to re-inflate the housing bubble by Osborne and there is no way he is going to let house prices fall on his watch.

      • Insanity of destroying your currency to make sure working people cannot afford to buy and struggle to rent a house with their wages so need a cut of the 26Bln Housing Benefit bill … meaning they’ve less to spend in the economy.

        These people are financial terrorists and destroy lives by the millions.

    • I think the BoE don’t worry about the individual level of personal debt, Dutch – I think they only worry about the accumulated effect on the banks if too many loans go bad….

  4. so technically if we didnt borrow so much the economy would actually be shrinking ?

    and as we all know sex & drugs are included – so the error is compounded by items that are , frankly , a WAG .

    so if the assets correct we will find that not only the economy hasn’t grown , but in truth it has shrunk , and by quite a bit too

    also what difference now does it make to cut BoE IR to zero or below (BIRP) considering the cut from the base IR of 0.5% to 0.25% made , what , absolutely no difference at all?

    ( well not to us mere plebs – the TBTF banks will get more help )

    Frankly maybe this is all “just as planned ” to get the UK back to the 17th Century …..


    • Hi Forbin

      We have worried all along about a Dune style future. I think that another Bank Rate cut would be likely to make things worse and not better. As to the economy it was striking that the UK GDP is only 8.7% higher compared to the past peak so if we round it off and depending from when you count say we are in a decade where it has been 1% per annum or so. Thats a fair bit even below the “new normal” of 2% you mentioned a while back.

    • The 0.25% cut did make a difference to the FX rate as the £ fell 4% against the $ (although it has since regained but not for long) which has helped stoke future inflation further.

  5. Could have saved yourself a lot of analysis:

    Carney will cut rates when Mrs.may tells him due to

    The election has little to do with Brexit and most to do with the black figures coming for the indolent middle classes, who feel they are entitled to house price rises (and granny’s house too).

  6. I believe Mr Carney was at the White House a few weeks ago having an unofficial meeting with probus. Janet Yellen’s term finishes in 2018, just saying?

  7. Looking at the polls today and the trend, we should be looking at the Corbyn economic policies to see what will happen next!
    I would imagine that, if he is elected:
    1. The pound will drop;
    2. House prices will also drop, given the extra taxes on the rich;
    3. We will need quite a lot of inflation to be able to manage the debt.
    Hold on to your hats!

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