Summary
- the first estimate indicates that GDP expanded 0.5% in the final quarter of 2014
- the median independent forecast for growth in 2015 is 2.6%
- the latest PMI surveys for manufacturing, construction and services are consistent with growth in the region of 0.5% in the opening quarter of this year
- inflation, at 0.5%, remains below the Bank of England’s 2.0% target and outside the +/-1% range
- inflation-adjusted wage growth stands at +0.7%
- the median independent forecast for inflation in 2015 is 1.0%
- the rate of unemployment stands at 5.8%
- the Monetary Policy Committee voted unanimously to maintain Bank Rate at 0.5% at the January meeting
- the bond market indicates that interest rates will rise in mid-2016 toward a rate of 2.0% in five years’ time
- the 10-year gilt yields at 1.6%
- the average Standard Variable Rate mortgage stands at 4.5%
- the iShares £ Corporate Bond ETF has a distribution yield of 3.4%
- sterling remains strong versus the euro, yen and Aussie dollar but has fallen 6.6% against the US dollar (12 month figures)
- house prices gained 0.3% in January compared with December
- the average home costs £188,446
The first estimate from the ONS ‘indicated that the UK economy grew by 0.5% in the fourth quarter of 2014, slightly slower than the 0.8% and 0.7% growth recorded in Q2 and Q3 2014 respectively’.
Actually, that 0.5% pace of quarter-on-quarter growth might become a little familiar in the months ahead.
We’re not expecting a substantial revision to the Q4 number and it looks like Q1 in 2015 will be much the same. The most recent data from the UK series of Markit/CIPS Purchasing Managers’ Index surveys supports that picture.
As it happens, that represents a ‘reassuringly robust start to the year’ as the ‘data will allay fears that the economy is slowing sharply’ with growth cooling ‘during the winter to a more sustainable pace’.
Let’s hope that that pace is sustainable; the outlook is finely balanced. In fact there is an outside chance that the Bank of England will re-engage in some form of stimulus.
The year-on-year rate of growth in the CPI slumped to just 0.5% in January, well below the 1% to 3% comfort zone.
The huge fall in oil prices and energy costs will have the effect of depressing headline inflation measures for much of this year. Therefore we suspect that the MPC will be keen to monitor just how a sustained period of below-target inflation erodes medium-term expectations.
At the January meeting, members observed that the… ‘balance of evidence pointed to inflation expectations remaining well anchored’. But there… ‘was some concern about the recent pace of decline in all measures of inflation expectations, in the United Kingdom and internationally, especially as there could be more downside news on inflation to be digested’.
Of course there are balancing factors. Lower oil prices have already forced market interest rates to very low levels; de facto monetary easing of sorts – the yield on the 10-year gilt averaged 1.6% in January, a lower monthly average than at any point during the Bank’s £375 billion asset purchase programme. Currently the market is not signalling a rate rise until June next year.
With rates at depressed levels we could see spare capacity eaten up quickly and there are, according to the meeting minutes, ‘early signs of a pickup in private sector average weekly earnings growth’.
The risk then, is that inflation bounces back ‘sharply once the near-term effects of lower oil prices had passed through’.
We don’t mind admitting that the inflation outlook remains pretty unclear.