UK Economy Overview and Outlook

1. Overview and Outlook for the UK Economy Brian Sloan, Agency for the North West Insurance Institute of Liverpool Medicash, 9 October 2018

2. Summary – Growth • Q2 growth rebounded as expected • Construction output rose in May, strongest in 2 years • Retail sales have grown at fastest rate in 3 years • Net trade projected to support UK growth • Brexit uncertainty persists and investment projected to grow at 3½% over forecast • Household spending expected to increase in line with real income growth • Leaves annual forecast growth of 1¾% over forecast

3. Summary – Inflation • CPI inflation had eased back to 2.4% in June • Overshoot reflects past sterling depreciation and higher energy prices • Latest projection a little higher than May • External pressures are easing and domestic pressures starting to build as slack is absorbed • Wage growth expected to have picked up to 2¾%, weaker than pre-crisis due to low productivity growth • Unit labour costs increasing to 2¼%, consistent with MPC’s 2% target

6. Chart 1.8 The paths for interest rates have flattened slightly in the UK and euro area Sources: Bank of England, Bloomberg Finance L.P., ECB and Federal Reserve.

7. Chart 1.2 Growth in trade and capital goods flows slowed in Q2 Sources: CPB Netherlands Bureau for Economic Policy Analysis, European Central Bank, Thomson Reuters Datastream, US Bureau of Labor Statistics, US Census Bureau, World Bank and Bank calculations.

8. Chart 1.5 Global financial conditions have tightened but remain accommodative overall Sources: Bloomberg Finance L.P., Thomson Reuters Datastream and Bank calculations.

9. Chart 1.4 Metals prices have fallen Sources: Bloomberg Finance L.P., S&P indices, Thomson Reuters Datastream and Bank calculations.

10. Chart 1.6 Measures of euro-area and US confidence remain robust : Sources: European Commission (EC), The Conference Board, Thomson Reuters Datastream, University of Michigan and Bank calculations.

11. Chart 2.1 GDP growth is expected to have picked up in Q2 following temporary weakness in Q1 Sources: ONS and Bank calculations.

12. Chart 2.9 UK export growth appears to have slowed in Q2 although survey indicators remain robust Sources: Bank of England, BCC, CBI, EEF, IHS Markit, ONS and Bank calculations.

13. Chart 2.2 Retail sales growth rose sharply in Q2 Sources: Bank of England, British Retail Consortium (BRC), CBI, ONS, Visa and Bank calculations.

14. Chart 2.3 Manufacturing output has weakened since the start of 2018 Sources: Bank of England, BCC, CBI, EEF, IHS Markit, ONS and Bank calculations.

15. Chart 2.6 Mortgage approvals for house purchase have been stable but subdued

16. Chart 2.7 House price inflation has slowed particularly sharply in London Sources: IHS Markit, Nationwide and Bank calculations.

17. UK House Price Index Year on year percentage change to May 2018

18. Chart 2.8 Slowing rent inflation has been largely concentrated in London

19. Chart 3.1 The unemployment rate is projected to fall to 4.0% in Q3 Sources: ONS and Bank calculations

20. Chart A Recruitment and retention difficulties have increased on balance

21. Chart B Recruitment and retention difficulties have pushed up pay

22. Chart 3.3 Net migration is projected to fall from current levels

23. Chart 3.4 Wage growth has remained subdued as the unemployment rate has fallen

24. Chart 4.2 Inflation is expected to fall during 2018 H2 as the contribution from fuels diminishes Sources: Bloomberg Finance L.P., Department for Business, Energy and Industrial Strategy, ONS and Bank calculations.

25. Chart 4.3 Sterling wholesale energy prices have risen further in recent months Sources: Bank of England, Bloomberg Finance L.P., Thomson Reuters Datastream and Bank calculations.

26. Outlook for monetary policy • An ongoing policy of limited and gradual tightening • Forecast conditioned on the market implied-path for Bank Rate – three 25bps increases over next 3 years • Inflation remains above 2% target at two-year horizon • Two issues will determine actual policy path: • Brexit. Forecast assumes smooth transition. Actual policy will be dependent on response of households, businesses and financial markets • r*, a way to think about forces acting on economy

27. r* – The equilibrium interest rate: Long run, real interest rates are determined by the balance between desired wealth and capital holdings

28. r* – The equilibrium interest rate (cont) r* = R* + s* Where: r* is the equilibrium real interest rate R* is the trend real rate s* is the shorter term component Longer term: Aging global population, increased saving Decline in productivity, reduced demand for capital Shorter term: Headwinds to demand following financial crisis Increased uncertainty Tighter financial conditions for households and firms

29. r* – The equilibrium interest rate: Long run, real interest rates are determined by the balance between desired wealth and capital holdings

30. Chart 5.1 GDP projection based on market interest rate expectations, other policy measures as announced

31. Chart 5.3 CPI inflation projection based on market interest rate expectations, other policy measures as announced