UK Monthly Economic Review February 2014 (Based on January 2014 data releases)
Monthly headlines: UK economic growth reaches six-year high, and the IMF raises its forecast for UK GDP Although most sectors saw a rise in output in Q4, services remains the key driver of growth UK employment reaches historic high, but an early interest rate rise is not expected
05/02/2014
6.0 4.0 2.0
2013 Q4
2013 Q2
2012 Q4
2012 Q2
2011 Q4
2011 Q2
2010 Q4
2010 Q2
2009 Q4
2009 Q2
-1.0
2008 Q4
-0.5
2008 Q2
0.0
-1.5
-2.0 -4.0
Quarterly GDP growth Annual GDP growth
-2.0
0.0
% Balance
0.5
2007 Q4
Quarterly GDP Growth %
1.0
-6.0
-2.5 -3.0
-8.0 Source: ONS Preliminary GDP estimate, Q4 2013
Chart 2: UK GDP by sector, Q4 2013 1.0 0.8
GDP Growth %
0.6 0.4 0.2 0.0
Agriculture
Production
Construction
Services
-0.2 -0.4 Source: ONS Preliminary GDP estimate, Q4 2013
Chart 3: Retail Sales
2.0
-2.0 -3.0
UK Economic Review
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
-1.0
Dec-12
0.5
Oct-12
0.0
Aug-12
1.0
Jun-12
1.0
Apr-12
1.5
Feb-12
2.0
Change %
3.0
Dec-11
...with growth in most areas of the economy... Three out of the four main sectors of the UK economy – agriculture, production, and services – grew in Q4. Industrial output rose by 0.7% in Q4. This improvement was driven by a 0.9% rise in manufacturing output, which is in line with the latest QES. However, services remains the dominant sector of the UK economy, growing by 0.8% in Q4 (see Chart 2) and accounting for 87% of the overall increase in GDP. This mirrors the latest QES with all key service sector balances rising in Q4. Construction was a slight drag on growth, falling by 0.3% in Q4. . ...retailers enjoyed a bumper December… Retails sales rose by 2.6% in December. In annual terms, retail sales were up 5.3%, the fastest rise since October 2004. However, the underlying trend remains fairly subdued, with retail sales growing by just 0.4% in Q4. December’s bumper outturn was preceded by just a 0.1% rise in November and a 0.9% fall in October. This suggests that UK consumers merely shifted their purchases closer to Christmas, rather than a marked improvement in sales. In 2014, we expect household consumption to be a major contributor to growth.
Chart: 1 Real GDP Growth
1.5
Change %
UK GDP grew by 0.7% in Q4 2013... The first official estimate of GDP revealed that the UK economy grew in real terms by 0.7% in Q4 2013 (see Chart 1), only slightly below the growth of 0.8% recorded in Q3. This means that for 2013 as a whole, the UK economy grew by 1.9%, the fastest growth since 2007. UK economic output is now estimated to be just 1.3% below its pre-recession peak in Q1 2008. This is in line with the latest Quarterly Economic Survey (QES) in which most of the key national balances rose in Q4 and supports our view that the UK economic recovery is gathering momentum.
0.0 -0.5
Monthly change Quarterly change (RHS)
-1.0 Source: ONS Retail Sales, December 2013
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...and more growth expected this year The International Monetary Fund (IMF) upgraded its 2014 forecast for UK GDP growth from 1.9% to 2.4%.This is slightly below the BCC’s latest UK GDP forecast for 2014 of 2.7% (see Table 1). Although the IMF’s UK growth forecast for 2015 was also upgraded from 2.0% to 2.2%, it supports the BCC’s view that UK growth will slow slightly next year. The upgrade to the IMF's UK growth forecasts follows similar upgrades by other key economic forecasters, including the Bank of England and the Office for Budget Responsibility (OBR) and supports our view that the UK’s economic outlook is improving.
Bank of England
2.8
2.3
BCC
2.7
2.4
OBR
2.4
2.2
IMF
2.4
2.2
Chart 4: UK Unemployment
9
Unemployment rate %
8 7.5 7 6.5
UK Unemployment Rate
6 5.5
Bank of England's 7% threshold
5 4.5
Aug-13
Oct-12
Dec-11
Feb-11
Apr-10
Jun-09
Aug-08
Oct-07
Dec-06
Feb-06
Apr-05
Jun-04
Aug-03
4
Source: ONS Labour Market Statistics, January 2014
Chart 5: CPI inflation
6 5 4 3 2 1 0
2013 AUG
2013 DEC
2013 APR
2012 AUG
2012 DEC
2012 APR
2011 AUG
2011 DEC
2011 APR
2010 AUG
2010 DEC
2010 APR
2009 AUG
2009 DEC
2009 APR
2008 AUG
2008 DEC
UK Economic Review
2008 APR
05/02/2014
2015 (%)
8.5
2007 DEC
...and with inflation back on target... CPI inflation fell from 2.1% in November to 2.0% in December. This is the first time since November 2009 that inflation has been at or below the Bank of England's 2.0% inflation target (see Chart 5). The largest downward pressure on inflation came from food and non-alcoholic drinks, which was only partly offset by an upward contribution from motor fuels. CPI inflation has now fallen by almost a third since reaching 2.9% in June 2013. However, the latest QES some suggests that the possibility of higher inflation remains a concern for businesses with expectations of further price rises increasing in Q4.
2014 (%)
Sources: BCC, Bank of England, IMF and the OBR
Annual inflation rate %
UK employment reaches a record high… The latest UK jobs data revealed a significant improvement in labour market conditions. In the three months to November 2013, the number of people in employment rose by 280,000, the biggest +quarterly increase on record. Unemployment fell by 167,000 over the same period. The unemployment rate fell from 7.6% to 7.1%, its lowest level since April 2009 and is now only marginally above the 7% threshold at which the Monetary Policy Committee (MPC) may consider raising interest rates (see Chart 4). This improvement is in line with the increases in the employment balances recorded in the latest QES.
Table 1: UK GDP Forecast Comparisons
Source: ONS Consumer Price Inflation, December 2013
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...the better global outlook should aid UK trade In addition to raising its UK GDP forecast (see Table 1), the IMF has upgraded its forecast for global GDP growth for 2014 to 3.7%, up slightly from its previous estimate of 3.6% published in October 2013. The IMF also raised its 2014 GDP forecast for the Eurozone, the UK’s major trading partner, from 0.9% to 1.0%. The US economy is now expected to grow by 2.8% rather than 2.6% in 2014. (see Chart 8). However, risks to the global recovery remain, including the potential impact of the early withdrawal of economic stimulus measures by advanced economies such as the US.
4
0 -2 -4
Sep-Nov 2008 Dec-Feb 2009 Mar-May 2009 Jun-Aug 2009 Sep-Nov 2009 Dec-Feb 2010 Mar-May 2010 Jun-Aug 2010 Sep-Nov 2010 Dec-Feb 2011 Mar-May 2011 Jun-Aug 2011 Sep-Nov 2011 Dec-Feb 2012 Mar-May 2012 Jun-Aug 2012 Sep-Nov 2012 Dec-Feb 2013 Mar-May 2013 Jun-Aug 2013 Sep-Nov 2013
%
2
Real earnings growth Annual earnings growth CPI inflation
-6 -8
Source: ONS Labour Market Statistics, January 2014
Chart 7: UK's Net Trade Position 1
2013 NOV
2012 NOV
2011 NOV
2010 NOV
2009 NOV
2008 NOV
2007 NOV
2006 NOV
2005 NOV
2004 NOV
-1
2003 NOV
0
Billions £
While the UK's trade deficit remains large... Though still large by historical standards, the UK's trade deficit narrowed slightly in November to £3.2 billion, from the upwardly revised deficit of £3.5 billion in October (see Chart 7). A trade surplus of £6.2 billion on services was more than offset by a deficit of £9.4 billion on goods. Although exports of goods to countries within the EU rose in November to £12.8 billion, imports from the EU rose to £19.2 billion over the same period, a record high. Much of this increase in imports will have been due to the UK economy growing faster than most of its EU trading partners, and imports tend to rise in such circumstances.
Chart 6: Real earnings growth
6
-2
-3
-4
-5 Source: ONS UK Trade, November 2013
8
Chart 8: IMF GDP Forecasts, 2014
7
Annual Change %
...an early interest rate rise is not expected. Although the UK unemployment rate is now only slightly above the 7% threshold, the minutes from the latest Monetary Policy Committee (MPC) meeting suggests that even when the unemployment rate falls below 7%, the committee sees no immediate need to increase interest rates. This is because with inflation now back on target (see Chart 5) and earnings growing by less than inflation (see Chart 6), there is plenty of scope for interest rates to remain at their current level. The BCC currently expects that interest rates will start to rise towards the end of 2015.
6 5
Oct-13
4
Jan-14
3 2 1 0
Source: IMF World Economic Outlook Update, January 2014
Bottom line: Overall, last month’s data releases provide further evidence that the UK economy is recovering well and supports our view that UK GDP will surpass its pre-recession peak in the second half of this year. However, more must be done to secure the recovery, including more support for exporters and improved access to finance. For more information please contact: Suren Thiru, UK Economist. Email: s.thiru@britishchambers.org.uk. Tel: 020 7654 5801
For more information please contact: Suren Thiru, UK Economic Advisor. Email: s.thiru@britishchambers.org.uk
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Chart 9: UK economic summary chart Deteriorating Sector Household
Indictors (sources) Retail Sales (ONS) Consumer Confidence (GfK NOP) House Prices (Halifax) New car sales (SMMT)** Mortgage approvals (Bank of England)
Business
Business confidence (BCC)*** Business lending (Bank of England) Service sector output (ONS) Production output (ONS) Investment intentions (Bank of England)**
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
No change Oct-13
Nov-13
Improving Dec-13
Labour market Employment (ONS) Unemployment (ONS) Claimant count (ONS) Earnings (ONS) Economic Activity (ONS) Financial
FTSE100 (Bank of England) Wholesale funding (Bank of England) Retail funding (Bank of England) Oil prices (Bank of England) Gold prices (Bank of England)
Government
10 year Government bonds (Bloomberg) Public sector net borrowing (ONS)** Public sector net debt stock (ONS)** Tax receipts (ONS)** Current Budget (ONS)**
External
UK trade balance (ONS) Exchange rate (Bank of England) Eurozone GDP (Eurostat)**** Export deliveries (BCC)*** Export orders (BCC)***
*Colours indicate an improvement or deterioration of each indicator and refer to monthly changes unless stated. For example, an improvement in employment refers to an increase, while an improvement in unemployment refers to a fall. Dates refer to the release dates for each indicator. **Annual changes. ***Quarterly changes. ****Latest figures are estimates.
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Jan-14