GDP rise keeps December rate hike alive, says RSM
Thomas Pugh, economist at RSM UK, said: ‘The 0.6% month-on-month rise in GDP in September meant that GDP in Q3 rose by 1.3% q/q (consensus: 1.5%). That’s in line with the Bank of England’s (BoE) forecast for Q3 and increases the chance that the Monetary Policy committee (MPC) will raise rates from 0.1% to 0.25% in December.
‘But beyond the strong headline figure, the composition of growth was more concerning. The 0.7% m/m growth in services output was largely driven by a 4.7% m/m rise in the healthcare sector as GPs did more face-to-face appointments. Output in consumer-facing services fell by 0.6%, which suggests that consumers are still wary about spending.
‘Consumer spending took centre stage in Q2 as a whole, rising by 2.0 per cent q/q as the economy continued to open up. But the modest 0.4% increase in business investment in Q3, which remains 12.4% below its pre pandemic level, is more concerning. Lower business investment could reduce the future supply capacity of the economy meaning the economy could grow less quickly without generating inflation.
‘The economy is likely to slow in the fourth quarter as supply shortages, surging prices and the removal of fiscal support weighs on consumption. The BoE anticipates growth of around 1%, which feels about right to us.
‘Depending on how you measure it, the economy is either 0.6% below its pre-crisis level (based on the monthly data) or 2.1%, based on the quarterly data. The BoE cares more about the quarterly level, which suggests the economy is running a little cooler than the monthly data suggests.
‘Nonetheless, unless there is evidence over the next month that the end of the furlough scheme in September caused a significant disruption in the labour market, the MPC will probably hike rates in December.’