According to a comprehensive report by WorldWay: It is certain that the UK economy has exceeded its pre-financial crisis level. However, in stark contrast, wage growth remains sluggish, which has become a major factor in the Bank of England's delay in initiating interest rate hikes, and even its reluctance to clearly signal that a rate hike will occur soon. In addition, stagnant growth in the Eurozone and geopolitical risk factors will also make the Bank of England more cautious when initiating interest rate hikes.
Consolidated Recovery Momentum
Revised data released by the UK Office for National Statistics on the 15th shows that the UK's Gross Domestic Product (GDP) grew by 3.2% year-on-year in the second quarter of this year. This growth rate is slightly higher than the initial estimate of 3.1% released last month, while the quarter-on-quarter economic growth was 0.8%, consistent with the initial estimate.
Data shows that in the second quarter, UK industrial output grew by 0.3% quarter-on-quarter, service sector output grew by 1.0%, construction output saw zero growth, while agricultural output experienced a 0.2% quarter-on-quarter contraction. Currently, service sector output accounts for approximately 77.8% of the UK's GDP, while the shares of industry, construction, and agriculture are 15.2%, 6.3%, and 0.7%, respectively.
The initial UK GDP estimate released last month was based on an estimation of approximately 40% of economic activity; the revised data better reflects the overall economic growth situation. The revised data confirms that the UK's second-quarter GDP exceeded its pre-financial crisis level—specifically, the level of the first quarter of 2008—by approximately 0.2%; service sector output was 3% higher than the level in the first quarter of 2008; however, manufacturing output remains 7.5% lower than its pre-financial crisis level. This indicates that the UK's economic recovery is primarily supported by the domestic consumer market.
The UK economy has grown for six consecutive months, and the recovery momentum has further consolidated. Chris Williamson, an economist at Markit, stated that surveys by the Office for National Statistics indicate that the UK economy may grow by 0.7% quarter-on-quarter in the third quarter of this year. The Bank of England projected this month that the UK economy will grow by 3.5% and 3.0% this year and next, respectively, both of which are 0.1 percentage points higher than previous forecasts.
Sluggish Wage Growth
The last time the UK's economic growth rate exceeded 3.5% was in 2003. In November of that year, the benchmark interest rate was at 3.75%, and it was raised by 0.25 percentage points each quarter over the following year to 4.75%.
Currently, it is clearly difficult for the Bank of England to raise interest rates to such a high level in a short period of time. However, the UK's economic growth rate ranks among the top of developed countries such as the United States, Germany, and France. At the same time, exchange rate appreciation and inflationary pressures are not obvious. The outside world still generally expects the UK to be the first major economy to start raising interest rates, with the timing expected in the first quarter of next year. However, many analysts believe that if the minutes of the Bank of England's latest monetary policy meeting, to be released this week, show that officials have begun to vote in favor of a rate hike, the timing of the hike may be brought forward.
A major factor in the Bank of England's delay in initiating interest rate hikes, and even its reluctance to clearly signal that a rate hike will occur soon, is that wage growth remains sluggish, which is considered a key factor that could lead to a slowdown in economic growth.
13th data shows that the UK unemployment rate in the second quarter of this year was 6.4%, a new low since the end of 2008. However, the average wage level of the UK's employed population fell by 0.2% year-on-year, the first decline since 2009; the average wage level excluding bonuses rose by 0.6% year-on-year, the lowest growth rate since 2001. The Bank of England has significantly lowered its average wage growth forecast for this year, expecting the average wage of the UK's employed population to grow by only 1.25% this year. This level does not even outpace the inflation rate.
The Bank of England expects the inflation rates for 2014 to 2016 to be 1.9%, 1.7%, and 1.8%, respectively, all below the Bank's 2% inflation target.
Samuel Tombs, an economist at the UK economic analysis firm Capital Economics, stated that the further decline in the unemployment rate and the continued sluggish wage growth indicate that there is still a large amount of spare capacity in the labor market.
Other analysts have pointed out that the Bank of England still needs time to observe whether the sluggish wage growth is due to temporary or structural reasons. If the reason is temporary, such as the time required for the increase in the employment rate to be reflected in wage growth trends, wage growth will accelerate in the coming months.
WorldWay Editor
