The economic outlook - Santander

Economic outlook
Economic outlook

Spring is here and the economic outlook for 2016 is beginning to take shape. Letitia Booty asks some leading banks and economists for their predictions for Q2 2016…

Very low inflation supports robust consumer spending growth

Barry Naisbitt, chief economist at Santander “Over the past few months the headline economic news in the UK has been rather mixed. The ‘big’ economic figure, GDP, had its growth in the third quarter of last year marked down a touch from 0.5% to 0.4% but then the estimates for the final quarter of the year showed growth edging up to 0.5% again. Within that growth it was the service sector that played the dominant role, growing by 0.7% in the quarter. Manufacturing output was flat in the quarter and construction down by 0.4%. That mixed performance across sectors has continued so far this year. The readings on the survey indicators of activity for the first two months showed a marked slowing in all three sectors in February. However, the official manufacturing output figure showed a 0.7% rise in the month in January, which was stronger than expected given the continued global uncertainties. On the basis of what we have seen so far, it looks likely that GDP growth in the first quarter of this year will be slower than at the end of last year. But we have recently seen the European Central Bank applying more stimulatory measures to the Eurozone economy and this, together with the depreciation of sterling over the past three months, might give a boost to UK exporters in the coming months.

“With an increase in the mentions of downside risks in the global economy and a continuing low inflation background, the pressures for a further and early in the year rate rise in the USA have abated from those in December. This does not mean that US monetary policymakers have abandoned the idea of further rate increases, rather it probably marks a more gradual path than many commentators thought would be the case a few months ago. The US Federal Reserve is now in a ‘data dependent’ mode and how inflation and the labour market develop will be key factors in any decisions it makes.

“Here, inflation is at 0.3% in January and now looks likely to stay below 1% for much of this year, in large part because of the lower oil, energy and food prices. The means that the Monetary Policy Committee has become more ‘dovish’, with the one member who voted previously to raise rates now voting to hold. For the Governor of the Bank of England, it means more letter writing to the Chancellor to explain the undershoot of the inflation target. Yet the very low inflation is providing a boost to households’ real (after inflation) incomes, and this is supporting continued robust consumer spending growth. With the unemployment rate now down to 5.1% and some reports of skill shortages in some sectors, it looks possible that average earnings growth may pick up further, again supporting spending and economic activity.”