UK growing at fastest pace since 2010, but non-EU exports plunge
Forward guidance involves making a promise about future interest rates
The economy is growing at its fastest pace since 2010 according to the National Institute for Economic and Social Research (NIESR) think tank.
In the latest indication that the recovery is gathering pace, NIESR estimates that GDP expanded by 0.9 per cent in the three months to August, up from 0.7 per cent in the three months to July.
Official figures yesterday showed that output from Britain’s manufacturing sector expanded by 0.2 per cent, following an impressive 1.9 per cent surge in June. But a dampener was put on rapid recovery hopes with disappointing broader industrial production figures and a widening of Britain’s stubbornly high trade deficit in July.
Industrial output was flat over the month and Britain’s trade in goods deficit rose to £9.8bn, considerably larger than City traders’ expectations of a £8.15bn gap.
There were also concerning signs of the problems in emerging markets beginning to affect British firms, with exports to non-European countries plunging by almost 16 per cent.
“The larger-than-anticipated increase in the trade deficit is a reminder of the obstacles facing the UK economy as it starts to recover,” said David Kern of the British Chambers of Commerce.
Meanwhile, the Bank of England Governor Mark Carney’s battered forward-guidance strategy was given a rare boost yesterday as a new survey showed fewer people are anticipating an imminent rise in interest rates. The proportion of people expecting a rise in rates over the next year was 29 per cent in August, down from 34 per cent three months earlier according to the Bank’s latest quarterly inflation attitudes survey. That is the lowest proportion since the financial crisis began. The public’s inflation expectations have also moderated with average expectation of inflation over the coming year falling to 3.2 per cent in August, down from 3.6 per cent in May.
The Bank has struggled to convince markets that it will hold down interest rates at their present record lows until 2016, subject to unemployment staying above 7 per cent and inflation expectations remaining under control. City traders are presently pricing in a rate rise by late next year, apparently expecting the improving economic outlook to force a rise in the base rate despite the Bank’s commitment.
But the inflation survey suggests Mr Carney’s low interest rate message might be convincing the wider public. And moderating inflation expectations could strengthen his hand in relation to the markets because it diminishes the chances of one of the Bank’s inflation “knockouts” for forward guidance being activated.
The Consumer Prices Index presently stands at 2.8 per cent, still above the Bank’s official 2 per cent target but down sharply from its recent peak of 5.2 per cent in September 2011.
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