Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?
According to the Office of National Statistics for March 2008
- Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
- Manufacturing grew at only 0.9%
- Services grew at 3.2%
I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.
Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.
- However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.
Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.
- However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.
Food Prices. According to the ONS food sales were the main driving force behind retail sales. Perhaps this reflects the rising price of food, especially bread and wheat. Demand for food is inelastic, therefore, as prices rise people just spend more on food. Therefore total food sales are increasing.