The first estimate of UK gross domestic product should show the economy kept 'firing on all cylinders' during the second quarter. Still, the BoE remains cautious about tightening policy as the weaker segments of the economy continue to puzzle policymakers.
"The UK economy is starting to head back to normal and as the economy normalizes, the Bank Rate will need to start to rise in order to achieve the inflation target," Bank of England (BoE) Governor Mark Carney said on July 23 in Glasgow.
The economy is indeed getting on a strong footing, with central estimates suggesting gross domestic product (GDP) growth should keep its momentum in the second quarter by rising 0.8%, which would be unchanged from growth in the previous quarter. The Office for National Statistics (ONS) releases the data on Friday morning.
Markit Economics' PMI surveys showed the three major pillars of the economy surged during the second quarter, and the latest estimate from the National Institute of Economic and Social Research (NIESR) showed even stronger growth between April and June, up 0.9%.
Like NIESR, the BoE's July Monetary Policy Committee (MPC) minutes also offered a more upbeat view on growth, suggesting the GDP to have risen 0.9% in the second quarter, with the expectations of growth slowing modestly into the third and fourth quarters.
However, the central bank's GDP forecasts usually takes the mature estimate of growth, while Friday's estimate is the first one and based only on less than 50% of all the available data for the whole quarter.
Despite the overall growth rising at a sustainable pace, and the UK labor market tightening faster than expected, the central bank remains cautious on its monetary policy decisions.
Wage growth in Britain remains significantly below consumer price inflation, not to mention house price inflation which on average has risen 10% on the year and as much as 21% in London.
Apparently, such significant contrasts keep BoE policymakers on alert by raising their concerns about the massive indebtedness of UK households at a time of such suppressed earnings growth, and a possible detrimental impact on spending and growth as soon as rates begin to rise. Therefore, the central bank reiterates slow and gradual tightening in order not to choke off business investments and households budgets and spending.
After the two phases of forward guidance, we might therefore experience the third phase which will very closely watch over the wage growth data in the upcoming months, provided both by the official statistics as well as commercial surveys.
"It is the prospects for household indebtedness that concern us. UK households start from a vulnerable position, with debt at 140% of disposable income and the share of riskier mortgage lending rising markedly over the past year. Housing debt can represent a major risk because mortgages are both the largest asset of UK banks and the largest liability of UK households," Mark Carney said on July 23.
On wages, Carney said that a key judgment for the MPC is when and to what extent the labor supply and spare capacity tightening will translate into real wage growth, and in turn that wage growth into price pressures.
All major macro fundamentals, whether it is labor or wage growth, production, services or spending will be very closely watched by the central bank. Plus the August Inflation Report is expected to shed significantly more light on the central bank's forecasts which should eventually determine the immediate monetary policy decisions towards the end of this year.