Concerns over productivity levels have seen the Bank of England revise down its growth forecast for the UK, despite positive unemployment data and wage results. Katie Gregory looks at what this means for interest rates and the new government.
More people are in work in the UK than at any other point in the last 7 years - and they're being paid more - with wages slowly on the UP. It would appear the sun is shining on the UK economy... But the Bank of England has revised its growth forecast down from 2.9% to 2.5% this year. Governor Mark Carney says that's due to a stronger currency and a weaker outlook for productivity. (SOUNDBITE) (English) BANK OF ENGLAND, GOVERNOR, MARK CARNEY, SAYING; "Such strong growth in labour supply is unlikely to be sustained. Going forward, growth in the UK economy's potential will increasingly depend on productivity. In the medium term, productivity growth, doing more with less, is the key determinant of income growth and our shared prosperity depends on it." Low unemployment and a pick-up in wage growth is perhaps not the good news the UK economy needs right now - adds James Bevan from CCLA. (SOUNDBITE) (English) CHIEF INVESTMENT OFFICER, CCLA, JAMES BEVAN, SAYING; "That points to the structural challenge in the UK economy in that we have very poor productivity and that is in part composition related, in other words we have an over dependence on finance and construction, not enough on genuine manufacturing. That says to me that if the economy grows faster we will see a significant inflation risk." It all means interest rates are unlikely to change for a while... possibly not until the second quarter of next year... (SOUNDBITE) (English) REUTERS REPORTER, KATIE GREGORY, SAYING; "Of course, the Bank of England's forecast doesn't take into account any cuts and spending the new Conservative government will put in place after last week's election win. As part of the previous coalition government the party took tough austerity measures, and already they've set out a broad network of spending cuts, set to reach around 30 billion pounds." Cuts the Central Bank won't be able to ignore. (SOUNDBITE) (English) CHIEF INVESTMENT OFFICER, CCLA, JAMES BEVAN, SAYING; "That will squash economic activity levels and that should encourage Mr Carney to be very patient in raising money rates." And - while shoppers may not like it - inflation is expected to pick up before the end of the year. The BoE sees 2 percent as the ideal rate - and it hopes to reach that within two years.