July 18 2014.

Data from the ONS showed that the labour market strengthened in the three months to May, with 30.6 million people now in work. The rise in employment has mainly been driven by a 216,000 gain in full-time employees. The unemployment rate fell to 6.5%, the lowest since the end of December 2008, with the level of unemployment standing at 2.12 million. However, despite the ongoing strength in the labour market, pay growth remained weak.

Meanwhile, CPI inflation picked up to 1.9% in the year to June (from 1.5% in May), stronger than the consensus forecast of 1.6%. The new figure continues the trend of below-target inflation over 2014 so far. Looking ahead, we expect CPI inflation to remain close to the 2% target in the near-term.

According to the ONS, house prices increased by 10.5% in the year to May, up from 9.9% in April and the fastest rise since May 2010. Property prices increased strongly across most parts of the UK although London continues to distort the national picture, with prices in the capital up by 20.1% on a year ago, the strongest since the data began in early 2003. Excluding London, house price inflation was slightly more subdued, at 7.3% on a year ago (up from 7.0% in April).

Construction output fell by 1.1% on the month in May 2014, largely offsetting growth of 1.2% in April. As a result, the average level of output during April-May is now below that in Q1 as a whole. This suggests that in the absence of a strong rebound in June (in excess of 2.5% m/m), the contribution of construction to GDP growth in Q2 is likely to be broadly neutral at best, or slightly negative.

Meanwhile, Industrial production fell 0.7% in May, the first decline in four months, well below consensus forecasts that it would grow (by 0.3%). Manufacturing performed particularly badly, dropping by 1.3% against a consensus forecast of 0.4% growth.