Scope for pick-up in growth as inflation falls

It’s fair to say that there was a certain amount of relief following this week’s GDP figures, which showed that the economy re-gained a bit of pace in Q3. But this hasn’t alleviated concerns that a further slowdown in consumer spending growth, and thus GDP growth, is in store. Since the key driver of the consumer slowdown has been the sterling-induced rise in inflation, the big question is when can we look forward to a period when inflation eases and is no longer a constraint on growth? We still think that there is a strong case for expecting CPI inflation to fall back next year, as the inflationary effect of the pound’s fall dwindles. This would allow real pay to recover and consumer spending growth to regain some vigour. As a result, the economy should be able to sustain Q3’s 0.4% GDP growth rate – if not grow a bit quicker.