Inflation Report May 2016 Demand and output

Chart 2.1 GDP growth was 0.4% in Q1 Output growth and Bank staff’s near-term projections (a) Sources: ONS and Bank calculations. (a)Chained-volume measures. GDP is at market prices. (b)The latest backcast, shown to the left of the vertical line, is a judgement about the path for GDP in the mature estimate of the data. The observation for 2016 Q2, to the right of the vertical line, is consistent with the MPC’s central projection. (c) The magenta diamond shows Bank staff’s central projection for the preliminary estimate of GDP growth in 2016 Q1 at the time of the February Report. The green diamond shows the current staff projection for GDP growth in 2016 Q2. The bands on either side of the diamonds show uncertainty around those projections based on one root mean squared error of past Bank staff forecasts for quarterly GDP growth made since 2004.

Chart 2.2 Output growth has slowed since 2014 Contributions to average quarterly GVA growth by output sector (a) (a)Chained-volume measures at basic prices. Contributions may not sum to the total due to rounding. Figures in parentheses are weights in nominal GDP in 2012.

Chart 2.3 The household financial balance has fallen into deficit over recent years Financial balances by sector (a)Includes non-profit institutions serving households. (b)Excludes public corporations.

Chart 2.4 Nominal income growth and low inflation have supported consumption growth in 2015 Contributions to annual consumption growth (a) (a)Chained-volume measure, including non-profit institutions serving households. (b)Household post-tax income excluding flows into employment-related pension schemes. (c)Measured using the consumption deflator (including non-profit institutions serving households). (d)Household saving out of available income, as defined in footnote (b).

Chart 2.5 Household interest rates have stabilised at low levels Household deposit and lending interest rates (a) (a)Sterling-only end-month quoted rates, unless otherwise stated. The Bank’s interest rate series are weighted average rates from a sample of banks and building societies with products meeting the specific criteria (see Data are non seasonally adjusted. (b)Average monthly effective rate.

Chart 2.6 Consumer confidence has eased Measures of consumer confidence Source: GfK (research carried out on behalf of the European Commission). (a)Net balance of respondents reporting that they expect their personal financial situation or the general economic situation to improve over the next twelve months. (b)Net balance of respondents reporting that, in view of the general economic situation, now is the right time for people to make major purchases such as furniture or electrical goods.

Chart 2.7 Housing starts and completions continue to rise House building and investment in new dwellings Sources: Department for Communities and Local Government, ONS and Bank calculations. (a)Chained-volume measure. Excludes improvements to existing dwellings. (b)Number of permanent dwellings financed and built by private developers. Private permanent dwelling starts in Wales are assumed to grow in line with Welsh total permanent dwelling starts since 2011 Q2. UK data for 2015 Q3 and 2015 Q4 have been grown in line with data for England. Data have been seasonally adjusted by Bank staff.

Chart 2.8 Housing transactions rose sharply in March Mortgage approvals for house purchase and housing transactions Sources: Bank of England and HM Revenue and Customs. (a)Number of residential property transactions for values of £40,000 or above.

Chart 2.9 Extraction investment has recently depressed overall business investment growth Business investment (a) (a)Chained-volume measures. (b)Total business investment less investment within the mining and quarrying sector.

Chart 2.10 Investment data are more volatile and prone to revision than other expenditure components Volatility of, and degree of past revisions to, growth in expenditure components (a) (a)Four-quarter growth in chained-volume measures between 1993 and The size of each circle represents the component’s share of 2015 nominal GDP. (b)The root mean square of revisions between the first estimate and estimates published five years later. (c)Standard deviation of the estimates published five years later.

Chart 2.11 Growth in bank lending to companies fell back in March Lending to UK non-financial businesses (a) (a)Rate of growth in the stock of lending. Lending by UK monetary financial institutions. Data cover lending in sterling and foreign currency, expressed in sterling. Non seasonally adjusted. (b)Small and medium-sized enterprises (SMEs) are those businesses with annual debit account turnover on the main business account less than £25 million. (c)Large businesses are those with annual debit account turnover on the main business account over £25 million.

Chart 2.12 Import and export values have fallen over the past year Imports and exports (a) (a)Excluding the impact of MTIC fraud. (b)Chained-volume measures. (c)At current market prices.

Chart 2.13 The current account deficit widened in 2015 Q4 UK current account

Tables

Table 2.A Monitoring the MPC’s key judgements

Table 2.B Domestic demand growth was resilient in 2015 H2, while net trade subtracted from GDP growth Expenditure components of demand (a) (a)Chained-volume measures unless otherwise stated. (b)Includes non-profit institutions serving households. (c)Investment data take account of the transfer of nuclear reactors from the public corporation sector to central government in 2005 Q2. (d)Excludes the alignment adjustment. (e)Percentage point contributions to quarterly growth of real GDP. (f)Includes acquisitions less disposals of valuables. (g)Excluding the impact of missing trader intra-community (MTIC) fraud.

Table 2.C Net finance raised by companies continued to rise in 2016 Q1 Net finance raised by PNFCs (a) (a)Includes sterling and foreign currency funds from UK monetary financial institutions and capital markets. (b)Non seasonally adjusted. (c)Includes stand-alone and programme bonds. (d)As component series are not all seasonally adjusted, the total may not equal the sum of its components.

Uncertainty and GDP growth

Chart A Uncertainty has risen in recent months Range of uncertainty measures Sources: Bloomberg, Consensus Economics, Dow Jones Factiva, GfK (research on behalf of the European Commission), Thomson Reuters Datastream and Bank calculations. (a)Range includes: the average standard deviation of monthly Consensus Economics forecasts for GDP one and two years ahead, seasonally adjusted by Bank staff; the number of media reports citing uncertainty in four national broadsheet newspapers; survey responses of households to questions relating to their personal financial situation and unemployment expectations; and the three-month implied volatility for the FTSE 100 and twelve-month implied volatility for sterling ERI — realised volatilities have been used prior to April 1992 and September 2001 respectively. A higher number indicates greater uncertainty. (b)The first principal component extracted from the set of indicators.

Chart B Individual measures of uncertainty have followed different paths Indicators of uncertainty (a) Sources: Bloomberg, CBI, Consensus Economics, Dow Jones Factiva, GfK (research on behalf of the European Commission), Thomson Reuters Datastream and Bank calculations. (a)Includes CBI measures of demand uncertainty as a factor likely to limit capital expenditure for manufacturing and services — excluding distribution and financial services — weighted together using shares in value added. Other indicators are as described in footnote (a) to Chart A.