However, robust growth has not so far been accompanied by a material pick-up in productivity. Instead, employment gains have been exceptionally strong and unemployment has fallen much more rapidly than expected. The UK Labour Force Survey (LFS) headline unemployment rate is likely to reach the Bank’s Monetary Policy Committee (MPC) 7% threshold by the spring of this year. Even so, the Committee judges that there remains spare capacity concentrated in the labour market.
Inflation is likely to remain close to the target over the forecast period. Given this, and with spare capacity remaining, the MPC judges that there remains scope to absorb slack further before raising the Bank Rate. Moreover, the continuation of significant economic headwinds — both at home and from abroad — mean that the Bank Rate may need to remain at low levels for some time to come.
The UK economy grew by 1.9% in 2013, the strongest annual growth rate for six years. Much of that expansion was driven by consumer spending, as lifting uncertainty and easing credit conditions prompted households to reduce their rate of saving (possibly not a good trend). The brightening in the economic environment also prompted a revival in the housing market, with housing transactions in 2013 Q4 up more than 25% on a year earlier, accompanied by a pick-up in house price inflation. This revival helped support strong growth in housing investment.
In contrast, business investment has remained subdued, although surveys of investment intentions suggest that it is likely to gather pace this year. Despite stronger activity in the United Kingdom’s main overseas markets, export performance continued to disappoint. The strength of domestic activity contributed to a slight firming in short-term market interest rates and a further appreciation in sterling.
