The UK economy is expected to have picked up pace in the second quarter even though the risks to more sustainable economic growth persist.
Analysts' central view is that the economy in Britain grew at a pace of 0.7% in the second quarter, which would be an improvement from the 0.4% growth in the previous quarter. The Office for National Statistics (ONS) is releasing the first estimate on Tuesday, July 28.
The Bank of England expects growth at 0.7% both in the second and third quarters, the July MPC minutes revealed on Wednesday last week. The National Institute of Economic and Social Research (NIESR) also estimates the UK economy picked up pace to 0.7% in the second quarter, as spare capacity continued to be absorbed.
While the UK economy strides forward in its post-crisis recovery, the Bank of England is slowly but surely preparing households and markets for the time when monetary policy in Britain eventually turns toward more normal settings.
Unbalanced economy
But economic growth in the UK still looks highly unbalanced. Much of the GDP growth is still overly dependent on the domestic consumption, while even this segment of the economy is not that much of a sure shot given the most recent official figures showing retail sales slowed in the second quarter, compared to the previous one.
The retail sector and overall domestic consumption in Britain has been considered one of the most fundamental pillars of the economy. It is hardly any wonder, then, that sterling plunged markedly after the news broke out on Thursday this week showing retail sales volumes unexpectedly declined at the end of the second quarter. Much will now depend on incoming data in the months to come to see if the June dip in sales was only a one-off event, or an indication of an underlying trend sifting into UK households' budgets.
Expectations for domestic spending in Britain have been mixed recently, with some forecasters warning it could deteriorate even further once the Bank of England (BoE) begins to raise its base rate from the record low of 0.5%, given the burden of household debt and rising house prices.
The latest business surveys published by Markit Economics also showed the economy remained highly unbalanced during the second quarter.
"Growth is looking increasingly unbalanced. The recent weakness of the manufacturing PMI means industrial production looks likely to have declined in the second quarter, leaving the economy once again dependent on the service sector to sustain any growth," Markit's chief economist Chris Williamson commented on the June Services PMI report.
Policy normalization looms
Still, July's MPC minutes revealed more policymakers than before judged the normalization of policy should come sooner rather than later. The logs showed that for these members, the balance of risks to the medium-term inflation outlook relative to the 2% was "becoming more skewed to the upside at the current level of the Bank Rate."
The July MPC minutes also showed that policymakers viewed the recent sterling appreciation to have "a direct effect on inflation, bearing down on the CPI relative to the outlook described in the Committee’s May forecast, although the speed and degree of pass-through from movements in sterling was uncertain." The latest CBI survey on manufacturing orders showed on Monday that a stronger sterling continued to weigh notably on exports in the quarter to July.
Rift at MPC expected either in August or September
So far, three MPC rate-setters indicated they would prefer the BoE to begin increasing rates sooner rather than later.
BoE's David Miles said recently he had "one more meeting on the Committee and it will coincide with the MPC’s August Inflation Report. It also comes at a time when I think the case for beginning a gradual normalisation in the stance of monetary policy is stronger than at any time since I joined the committee over 6 years ago."
Ian McCafferty said this week he did not think "its mechanical you say 'well, the earlier you start the more gradual you can be', but at the same time, I think if we are minded to be gradual for good reasons, then I think we need to be careful not to leave it too late."
Similarly, BoE policymaker Martin Weale suggested recently that the MPC should stand ready to start raising the base interest rate as early as in August this year as the UK labor market continued to tighten markedly.
Last but not least is the comment from Governor Mark Carney who said on July 14: "The point at which the interest rates may begin to rise is moving closer, given the performance of the economy, consistent growth above trend, affirmative domestic costs, kind of balanced somewhat by disinflation that we are are importing from abroad in part due to the strength of the currency."
The strength of sterling as well as divergence in monetary policy paths in the euro zone and the UK may either postpone the hike or make the subsequent increases significantly slower and more gradual.
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