UK GDP and services output figures released today suggest that the economy continues to grow robustly, contradicting widespread expectations of a second-half slowdown – see previous post. Downward revisions to earlier data, however, imply that productivity performance has been even weaker than thought, while indications of a rise in domestically-generated inflation have been confirmed.

The quarterly rise in GDP in the third quarter was left unrevised at 0.7% but “core” growth excluding the volatile oil and gas production sector was revised up to 0.8%. The economy started the fourth quarter solidly, with monthly output data covering services, industry and construction implying that GDP in October was 0.5% above its third-quarter level – see first chart. Quarterly growth, in other words, is on course to reach 0.7%-0.8% if GDP increases by 0.25% in November and December, in line with the year-to-date monthly average.

The main surprise in the GDP release was a significant downward revision to earlier growth estimates, resulting in a cut in the annual GDP increase in the third quarter from 3.0% to 2.6%. Aggregate hours worked in the economy rose by 2.2% in the year to the third quarter, so GDP per hour grew by only 0.4%. The MPC, by contrast, had expected an increase of 1.25%, according to this month’s minutes (see paragraph 23).

Continued productivity weakness has contributed to a rise in domestically-generated inflation. The deflator for “gross value added at basic prices” – a measure of prices of domestically-produced goods and services – increased by 2.4% in the year to the third quarter, revised up from 2.3%. Other GDP price measures cited by MPC member Kristin Forbes in an October speech as relevant for monitoring domestic inflation are rising more strongly – second chart.

The MPC’s dovish majority has counted on a slow recovery in pay growth being partially offset by a recovery in productivity expansion. The earnings pick-up, however, appears to be occurring sooner than expected – see previous post – while tentative signs of a productivity revival have been revised away. The MPC’s leading dove, Mark Carney, is likely to shift focus to other reasons for keeping interest rates on hold, such as the supposed risk of current artificially-low headline consumer price inflation “destabilising” inflationary expectations.

In further disappointing news, the current account deficit widened to a new cash record in the third quarter, with the ratio to GDP equalling the series high of 6.0% reached in the third quarter of 2013. The rise was driven by a further widening of the investment income deficit; the goods and services shortfall, by contrast, remains moderate and stable – third chart.