8 November 2016

Economic Update

In the CBI’s latest economic forecast, GDP growth is still predicted to come in at 2.0% for 2016, unchanged from our May forecast, as a stronger first half of the year is offset by a slower, albeit relatively resilient, second half. Growth is subsequently expected to slow to 1.3% in 2017 (we expected growth at 2.0% back in May), as uncertainty starts to push down on business investment. Growth is expected to slow a little further to 1.1% in 2018 as consumer spending growth is eroded by rising inflation and business investment remains weak.

GDP is estimated to have grown by 0.5% in Q3, slowing from a 0.7% expansion in Q2 but ahead of expectations for a more pronounced slowing (consensus expectations were for growth to slow to 0.3%).

In the final “Super Thursday” of the year, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.25% and for no change to the extension of quantitative easing announced at its August meeting. Alongside the decision, the Bank also released its quarterly Inflation Report in which it raised its expectations for GDP growth this year (to +2.2% from +2.0%) and next year (+1.4% from +0.8%), but slightly lowered its forecast for 2018 (+1.5% from 1.8%).

October’s Industrial Trends Survey (ITS) showed that output and orders among manufacturers grew over the third quarter, with export volumes expanding at the strongest pace for two-and-a-half years. Competitiveness in EU markets also rose at the fastest pace since the series began in 2000, with competitiveness outside the bloc also improving at the quickest rate since 2009. Optimism about the business situation fell slightly again following last quarter’s sharp decline, and numbers employed fell slightly for the first time since 2010 and look set to fall faster over the quarter ahead.

Meanwhile, the SME trends survey indicated that export orders among small and medium-sized manufacturers had ceased falling for the first since mid-2014. Robust growth in export orders is anticipated over the next three months, with expected growth the strongest since the data series began (in October 1988). But, average unit costs at home were reported to be rising at the fastest pace since April 2013 and are expected to continue to increase over the next three months.

Retailers reported in the Distributive Trades Survey (DTS) that sales had grown at the strongest pace in eleven months over the year to October, with sales expected to expand at similar pace next month. The volume of orders placed upon suppliers was broadly unchanged in October, having declined steadily during the previous six months, but orders are expected to fall further year-on-year in November. Growth in internet sales volumes picked up slightly over the year to October, but remains below the survey long-run average.

The Markit/CIPS composite PMI increased to 54.8 in October from 53.9 in September, a further improvement from its pre-referendum level of 52.4 in June. This improvement was underpinned by the services PMI, which climbed to 54.5 from 52.6, signalling the fastest pace of growth since January. The manufacturing PMI maintained a robust rate of expansion, albeit stumbling slightly to 54.3 from 55.5 in September, while the construction PMI – which Markit excludes from their composite – edged up to a seven-month high of 52.6 from 52.3.