Nina Adamenko

Market Commentary

For the week ending 14 September 2018
Report by Nina Adamenko
Back to Latest
Nina Adamenko


Despite Brexit-related doom and gloom and a toxic political backdrop, the British economy is still booming based on the data released this week.

Gross Domestic Product (GDP) in the three months through to July increased by 0.6%, the fastest pace in almost a year, on the back of unusually warm weather and a positive boost from the World Cup. This put annualised growth at 2.4%, well above the pace policy makers believe will fuel inflation. Separate figures showed the trade deficit narrowed to just £111million in July. This was the fourth best trade balance figure in the past 20 years. Moreover, it was not caused merely by slower imports, but rather by a strong jump in exports, which continue to feel a tailwind from Sterling depreciation.

But the real surprise came from the employment data. The Bank of England (BoE) has been forecasting since 2014 that wage growth is set to explode to around 4%. This is based on their output gap model, which shows the economy has very little slack left. They have been wrong so far, attracting a lot of criticism. However, in July annual regular earnings growth rose to 3.1%, a joint post-crisis high. Private sector regular pay growth accelerated to 3.4%, and construction wages continue to increase at 5.2%. Importantly, the gains in wages have outpaced inflation for several consecutive months, suggesting an ongoing expansion in consumer demand and services, which would feed into future GDP growth.

The unemployment rate was steady at 4%, the lowest level since 1975 and one of the lowest in Europe. Interestingly, the employment rate for people aged 65 and older increased to 10.7% (from 6.6% in 2006). Various explanations have been offered from better health, desire for social interaction and status, to a simple lack of choice due to the lower interest rate environment affecting pension and saving incomes.

And on the subject of interest rates – Thursday brought no change. As expected, the Monetary Policy Committee (MPC) voted 9-0 in favour of keeping rates stable. The main reason is Brexit uncertainty. If the process is smooth and orderly the MPC is bound to move in May 2019. However, the risk is that with the continuing strength of the economy, policy makers may find themselves behind the curve. Luckily, the Bank of England Governor Mr Carney agreed to lend his helping hand for a little bit longer (he will remain Governor until January 2020) to navigate them through critical times.