ING believes that BoE will end up tightening monetary policy sooner rather than later
July 25, 2014: UK 2Q14 GDP growth has come in at 0.8%QoQ or 3.1% YoY, in line with market expectations. This is the fastest rate of annual GDP growth since 4Q 2007 and means that the UK economy has finally regained all of the lost output from the recession.
At this stage we just get an industry led breakdown, which shows that service sector output drove growth in 2Q, rising 1%QoQ. In contrast, manufacturing output rose only 0.2%QoQ, total production industry rose 0.4% and construction output fell 0.5%.
However, we believe that it is just temporary softness in these indicators with business surveys, such as the purchasing managers’ indices, suggesting activity and order books remain very firm.
Indeed, the Bank of England believe on their measures that the economy grew 0.9% in 2Q and expect Q1 GDP to be eventually revised up to 0.9% from the 0.8% currently reported. Furthermore, there are going to be significant revisions to the UK GDP statistics this September with a briefing paper released in June suggesting that the recession may have been shallower than originally thought — to the tune of around 1% of GDP.
These revisions will bring the UK in line with international conventions and will likely show that the UK actually got back to its pre-crisis size at the turn of the year. The revisions will also show that the level of UK activity is around 5% greater than currently published as coverage is expanded to include more categories such as research & development and weapons production for the first time.
The key outcome from all this will be to suggest that the UK has less spare capacity than previously thought and so inflation pressures could start to build earlier than currently forecast by the BoE. As such, it is likely to support our view that the BoE will end up tightening monetary policy sooner rather than later with November being our favoured date for the first rate hike.