Mixed Messages: The UK's Economic Signals Are Confusing, Having Changed Dramatically over the Past Couple of Months. David Ross Considers Whether a Further Cut in Interest Rates Is on the Horizon. (Economics)

By Ross, David | Financial Management (UK), September 2002 | Go to article overview

Mixed Messages: The UK's Economic Signals Are Confusing, Having Changed Dramatically over the Past Couple of Months. David Ross Considers Whether a Further Cut in Interest Rates Is on the Horizon. (Economics)


Ross, David, Financial Management (UK)


First, the good news: data from National Statistics shows that the UK economy grew by 0.9 per cent in the second quarter and by 1.5 per cent on the previous year (see graph). National Statistics also revised away the standstill widely predicted for the fourth quarter of 2001 and the first quarter of this year, which appears to have been the low point in the current cycle.

[GRAPHICS OMITTED]

There have now been 40 consecutive quarters in which GDP has risen. The recovery has had a benign effect on inflation. The headline rate stood at 1 per cent in June, while the underlying rate was 1.5 per cent, the lowest figure since records began in 1975. If this sinks any further, the governor of the Bank of England will have to write to the chancellor to explain why inflation has fallen more than one percentage point below target. Yet, according to the Nationwide, house prices rose by 21 per cent in the year to July-the highest rate of growth since the second quarter of 1989.

But it's not all good news. Consumer confidence seems to be ebbing and retail sales growth is slowing. The latest research suggests a bumpy ride ahead too. Although the official, backward-looking data shows that manufacturing output has been recovering, the forward-looking evidence tells a different story. The Chartered Institute of Purchasing and Supply (CIPS) purchasing managers' index fell for a third successive month, from 50.6 in June to 48.9 in July. It was the first drop below 50--the level that divides contraction from expansion--since January.

There is as much confusion in the US about where the economy is heading. The Federal Reserve raised its forecast of likely GDP growth this year only two weeks before official data showed that the economy had slowed much more than expected in the second quarter. Annualised growth of 1.1 per cent in the quarter (0.3 per cent on a quarter-on-quarter basis) was less than half the rate forecast by market analysts.

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Mixed Messages: The UK's Economic Signals Are Confusing, Having Changed Dramatically over the Past Couple of Months. David Ross Considers Whether a Further Cut in Interest Rates Is on the Horizon. (Economics)
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