UK Economic Update – 28 May 2015
UK inflation falls below zero for the first time since 1960
The main headline emerging from the UK during the last 10 days was without doubt the further reduction in inflation during April.
With CPI now having fallen below the zero level, to -0.1%, some have begun to speculate that this will make it more difficult for the Bank of England to eventually raise rates.
While we are somewhat surprised that UK inflation has remained upon its downward path, even after oil prices have begun to recover, we do not believe that this will drastically alter the BOE’s thinking on rates.
We note in support of this view that up to the most recent press conference, policy makers have continued to dismiss the current disinflationary dynamic as a transitory occurrence.
Second estimate confirms that GDP growth definitely took a hit in the first quarter, although consumption seems to have picked up so far in Q2
Second estimate for UK GDP growth in Q2 surprised on the downside this morning with a print of 0.3%, which was in line with the reading of the first figure, so no upward revision.
On a brighter note, business investment figures released last week for the UK appeared to highlight a sharp increase in the value of capital spending among within the business community. This was as spending jumped by 1.7% during the period, which is much higher level than the 1.2% projection provided by ONS officials.
Furthermore, if UK retail sales are anything to go by then the weakening of growth seen in the first quarter probably began to moderate in Q2. This is as Retail Sales for April surpassed almost all estimates with the month on month pace of growth coming in at 1.2%, against forecasts for a more meagre 0.4% expansion.
On the whole, we see no reason to alter our conviction that the UK economy will probably muddle on through from the Q1 period of weakness and, despite that inflation has fallen below zero, we believe that the Bank of England will probably still push ahead with an initial rate rise at some time during the final months of the year.
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