UK Monthly Economic Review March 2014 (Based on February 2014 data releases)
Monthly headlines: UK GDP unrevised in Q4, business investment and net trade helping to drive growth. Bank of England's forward guidance updated as the jobs market continues to improve. Inflation falls below target and there are early signs that the squeeze on wages is easing. .Economic growth in Q4 unrevised at 0.7%...
05/03/2014
-1.0
20
-1.5
Quarterly GDP growth
-2.0
Manufacturing domestic sales
0 -20 -40
Services domestic sales
-2.5
Balance %
0.0
-0.5
2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4
Quarterly GDP Growth %
40 0.5
-3.0
-60 Sources: BCC QES Q4 2013, ONS Second GDP estimate Q4 2013
20
30
15
20
10
10
5 0
2013 Q3
2013 Q1
2012 Q3
2012 Q1
2011 Q3
2011 Q1
2010 Q3
2010 Q1
2009 Q3
2009 Q1
-20
2008 Q3
-10
2008 Q1
0 -5
Quarterly Change %
Chart 2: Business Investment 40
-10
-30
-15
-40 Services Investment - plant & machinery (LHS)
-50
-20
Manufacturing Investment - plant & machinery (LHS) Business investment (RHS)
Sources: BCC QES Q4 2013, ONS Business Investment Q4 2013
Chart 3: UK's Net Trade Position 2013 Q4
2013 Q2
2012 Q4
2012 Q2
2011 Q4
2011 Q2
2010 Q4
2010 Q2
2009 Q4
2009 Q2
2008 Q4
-2
2008 Q2
0 2007 Q4
...the UK's trade balance improves... .The second estimate of Q4 2013 GDP revealed that exports played a positive role in boosting growth in the quarter. The deficit in the UK’s trade balance (difference between what we export and import) narrowed from £8.2 billion in Q3 2013 to £6.6 billion in Q4 2013 (see Chart 3) with exports increasing by 0.4% and imports falling by 0.9%. As a consequence, net trade contributed 0.4 percentage points to GDP growth in Q4. This is in contrast to Q3 when net trade was a drag on growth, wiping 1.1 percentage points off GDP growth in the quarter.
60
1.0
Balance %
...as business investment boosts growth... The latest Q4 2013 GDP estimate revealed that the UK economy was less reliant on consumer spending to drive growth compared to previous quarters. Consumer spending rose by just 0.4% in Q4, while business investment grew by 2.4% over the same period. This improvement is in line with the latest QES results with all of the national investment balances increasing in Q4 (see Chart 2). However, the improvement recorded in the official figures is from a very low base and business investment remains 20% below its pre-crisis peak in Q1 2008.
Chart: 1 Real GDP and Domestic Sales
1.5
-4 Billions £
The second official estimate for Q4 2013 growth in GDP was unrevised at 0.7% (see Chart 1). This mirrors the Q4 2013 Quarterly Economic Survey (QES) in which most of the national balances improved. In annual terms, the UK economy grew by 2.7% in Q4, down slightly from the previous estimate of 2.8%. GDP growth for 2013 as a whole was revised down slightly to 1.8%, from 1.9%. However, these revisions do little to alter the UK’s growth picture. Overall, the latest GDP figures support our view that the economic recovery is strengthening.
-6 -8
-10 -12 -14 -16
UK Economic Review
Source: ONS Second GDP estimate Q4 2013
Source: ONS Retail Sales, December 2013
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...and UK growth likely to quicken this year... The Bank of England has once again upgraded its outlook for the UK economy. The central bank increased its UK GDP forecast for 2014 to 3.4% (see Table 1), from their previous estimate of 2.8%. The Bank of England also upwardly revised its UK GDP forecast for 2015 to 2.7%, from 2.3%. The European Commission also lifted its forecast for UK growth in 2014 to 2.5%, from 2.2%. These upgrades are in line with the BCC’s view that the recovery is gathering momentum. The BCC's next economic forecast - to be released on 10th March - is likely to show a further upgrade to its UK growth forecasts.
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2015 (%)
Bank of England
3.4
2.7
BCC
2.7
2.4
European Commission
2.5
2.4
Sources: BCC, Bank of England and European Commission
Chart 4: Public Sector Debt (as a % of GDP) 80 70
% of GDP
60 50 40 30
1994 JAN 1994 NOV 1995 SEP 1996 JUL 1997 MAY 1998 MAR 1999 JAN 1999 NOV 2000 SEP 2001 JUL 2002 MAY 2003 MAR 2004 JAN 2004 NOV 2005 SEP 2006 JUL 2007 MAY 2008 MAR 2009 JAN 2009 NOV 2010 SEP 2011 JUL 2012 MAY 2013 MAR 2014 JAN
20
Source: ONS Public Finances, January 2014
Chart 5: UK Unemployment
25 20 15 10 5 0
2003 NOV 2004 APR 2004 SEP 2005 FEB 2005 JUL 2005 DEC 2006 MAY 2006 OCT 2007 MAR 2007 AUG 2008 JAN 2008 JUN 2008 NOV 2009 APR 2009 SEP 2010 FEB 2010 JUL 2010 DEC 2011 MAY 2011 OCT 2012 MAR 2012 AUG 2013 JAN 2013 JUN 2013 NOV
UK jobs market continues to strengthen... In the three months to December 2013, the number of people in employment rose by 193,000. Unemployment dropped by 125,000 over the same period and the unemployment rate fell from 7.6% to 7.2%. This mirrors the latest QES with the national employment balances rising in Q4. However, high youth unemployment remains a major blackspot for the UK economy. Despite falling by 48,000, the unemployment rate for 16-24 year olds in the three some months to December 2013 was 19.9%, almost three times the national unemployment rate of 7.2% (see Chart 5).
2014 (%)
%
...but the public finances remain weak. Public sector borrowing (excluding the temporary effects of financial interventions) showed a surplus of £4.7bn in January (usually a strong month for tax receipts), £1.3bn lower than the £6bn surplus +recorded in the same month a year ago. Although the economy is growing, tax receipts fell by 1.2% in annual terms in January. While tax revenue from 'consumer' taxes such as stamp duty have risen by over a third (35%) over the past year, receipts from income tax (-7.7%) and corporation tax (-2.8%) have fallen over the same period. Public sector net debt currently stands at 74.6% of GDP (see Chart 4).
Table 1: UK GDP Forecast Comparisons
UK Economic Review
Youth Unemployment Rate (16-24)
UK Unemployment Rate
Source: ONS Labour Market Statistics, January 2014
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BCC Forecast
%
4 3 2 1
Q1 2016
Q3 2015
Q1 2015
Q3 2014
Q1 2014
Q3 2013
Q1 2013
Q3 2012
Q1 2012
Q3 2011
Q1 2011
Q3 2010
Q1 2010
Q3 2009
Q1 2009
Q3 2008
Q1 2008
0
Sources: BCC Economic Forecast Q4 2013, Bank of England
Chart 7: CPI Inflation
6
Annual inflation rate %
5 4 3 2 1 0
Source: ONS Consumer Price Inflation, January 2014
Chart 8: Real Earnings Growth 6 4 2
Jan-Mar 2014
Aug-Oct 2013
May-Jul 2013
Feb-Apr 2013
Nov-Jan 2013
Aug-Oct 2012
May-Jul 2012
Feb-Apr 2012
Nov-Jan 2012
May-Jul 2011
-6
Aug-Oct 2011
Feb-Apr 2011
Nov-Jan 2011
Aug-Oct 2010
May-Jul 2010
Feb-Apr 2010
Nov-Jan 2010
Aug-Oct 2009
-4
May-Jul 2009
-2
Feb-Apr 2009
0 Nov-Jan 2009
...the wage squeeze is starting to ease. Following the decline in CPI inflation over the second half of 2013, there are tentative signs that the squeeze on wages is starting to ease. With annual CPI inflation of 1.9% in January and total annual pay growth currently at 1.1%, real earnings declined by an estimated 0.8% in January 2014, a marked improvement on the recent low of -2.2% recorded in March 2013 (See Chart 8). Although the softening of the squeeze on wages is moderate, we expect to see pay increases rising gradually above inflation from the middle of 2014 onwards.
5
2014 JAN 2013 NOV 2013 SEP 2013 JUL 2013 MAY 2013 MAR 2013 JAN 2012 NOV 2012 SEP 2012 JUL 2012 MAY 2012 MAR 2012 JAN 2011 NOV 2011 SEP 2011 JUL 2011 MAY 2011 MAR 2011 JAN 2010 NOV 2010 SEP 2010 JUL 2010 MAY 2010 MAR 2010 JAN 2009 NOV
...and with inflation falling below target... CPI inflation fell from 2.0% in December to 1.9% in January. This is the first time since November 2009 that inflation has been below the Bank of England's 2% inflation target (see Chart 7). The largest downward pressure came from recreational goods and services, furniture and household goods and alcoholic beverages and tobacco. Recent gas and electricity price rises have had little impact on inflation so far, with price rises largely offset by reductions from the Energy Companies Obligation scheme. We expect that inflation will remain close to the 2% target this year.
Chart 6: UK Interest Rates 6
%
...leading to ‘new’ forward guidance... Following the improvement in the jobs market, the Bank of England has changed the emphasis of its forward guidance policy on interest rates from just looking at the unemployment rate, to assessing a wider range of economic indicators, including the amount of spare capacity in the economy. This should avoid a situation when shifts in a single indicator lead to unwarranted expectations of an imminent interest rate rise. The important point here is that interest rates are unlikely to increase any time soon and the BCC currently expects that interest rates will only start to rise towards the end of 2015 (see Chart 6).
Real earnings growth Annual earnings growth CPI inflation
-8
Source: ONS Labour Market Statistics, January 2014
Bottom line: The positive economic data released in February confirms that the UK’s economic recovery is well underway. However, while growth in Q4 was better balanced, more must be done to increase the quality of the recovery, including providing more export support and better access to finance for growing firms. 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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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 (BCC)**
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
No change Nov-13
Dec-13
Improving Jan-14
Labour market Employment (ONS) Unemployment (ONS) Claimant count (ONS) Earnings (ONS) Economic Inactivity (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 % of GDP (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. 05/03/2014
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Feb-14