UK Monthly Economic Review April 2014 (Based on March 2014 data releases)
Monthly headlines: UK GDP growth in Q4 confirmed at 0.7%, more growth likely in Q1. BCC and OBR upgrade growth forecasts as the UK economic outlook improves further. Weak public finances and rebalancing the economy remains significant challenges. .UK GDP growth at fastest rate since 2010...
Annual GDP growth %
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0% -2% -4% -6% Sources: ONS Quarterly National Accounts Q4 2013
Chart 2: UK Services and Industrial Output 6 4 2 Jan-14
0 -2 -6 Industrial Production
-10 -12 -14
Sources: ONS index of services and index of production, February 2014
Chart 3: UK Employment and Earnings 400
UK Economic Review
Changes in Employment (000's)
...a strengthening labour market… In the three months to January, the number of people who are unemployed fell by 63,000 to reach 2.33 million. This improvement mirrors the latest QES with most of the key employment balances at, or near record highs. However, although the UK jobs market remains strong, there are early signs that the trend of improving labour market conditions maybe starting to slow. The number of people in employment rose by 105,000 in the three months to January, the smallest rise since July 2013 (see Chart 3).
Annual change %
...while rising services and industrial output... The service sector, which accounts for more than three-quarters of the UK economy, continues to improve with output rising by 0.4% in January. In annual terms, output from the services sector was up by 3.2% (see Chart 2). Industrial production rose by 0.1% in January, driven by a 0.4% increase in manufacturing output. In annual terms, industrial output was up by 2.9%. This mirrors the improvement in most of the key manufacturing and services balances recorded in the latest QES. Construction output rose by 1.8% in January.
Chart 1: Annual GDP Growth
The third GDP estimate revealed that economic growth for Q4 2013 was unrevised at a healthy 0.7%. This mirrors the BCC's latest Quarterly Economic Survey (QES) in which most of the key balances rose. Due to downward revisions for previous quarters, UK economic growth for 2013 was revised down slightly to 1.7% from the previous estimate of 1.8%. However, this was still the fastest growth since 2010 (See Chart 1). Overall, the latest GDP figures support our view that the UK's economic recovery remains on course.
0 -1 -2 -3 -4
Annual pay growth (RHS) Sources: ONS Labour Market Statistics, February 2014 Source: ONS Retail Sales, December 2013
PAGE 1 OF 4
...the OBR confirms a stronger outlook... The Office for Budget Responsibility (OBR) have also upgraded their outlook for the UK economy. The OBR increased its GDP forecast for 2014 to 2.7%, slightly below the BCC forecast of 2.8% (see Table 1). Their growth forecast for 2015 has also been upgraded to 2.3%, from their previous estimate of 2.2%. Their growth forecast for 2016 was unrevised at 2.6%. Overall, the upward revisions in the BCC's and OBR's growth forecasts is in line with similar recent some upgrades by other key organisations, including the Bank of England, and suggests that the UK economy will grow at a reasonable pace in the near term.
3 month-on-three month change %
-1 -1.5 -2 -2.5 Sources: ONS Retail Sales, February 2014
Chart 5: UK GDP Forecast
107 105 103 101 99 97 95
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 2014 Q1 2014 Q2
...as BCC raises its GDP growth forecasts... The BCC has upgraded its UK economic growth forecast for 2014 from 2.7% to 2.8%. GDP is also expected to exceed its Q1 2008 pre-recession peak in Q2 2014 (see Chart 5) – one quarter earlier than we +predicted in December 2013. We also upgraded our growth forecasts for 2015 from 2.4% to 2.5%. For 2016, we are expecting growth of 2.5%.The upgrades to our growth forecasts are largely due to upward revisions to historic GDP data by the Office for National Statistics (ONS). Household spending and output from services are expected to drive UK growth in the near term.
Chart 4: Retail Sales
Q1 2008 =100
...and better sales data signals more growth… Retail sales rose by 1.7% in February. The growth in retail sales was led by food stores which contributed more than half of the total rise in sales. In annual terms, retail sales were increased by 3.7%. On the rolling three month-on -three month measure – a better indicator of the underlying trend – retail sales rose by 1.6% in February, the strongest growth since August 2013. This also marked the twelfth consecutive period of growth, the longest period since November 2007 (see Chart 4). Overall, we are expecting the UK economy to grow by 0.7% in Q1 2014.
Source: BCC Quarterly Economic Forecast, Q1 2014
Table 1: BCC and OBR UK GDP Forecast Comparison
UK Economic Review
Sources: BCC and OBR UK GDP Forecasts, Q1 2014
PAGE 2 OF 4
Annual inflation rate %
4 3 2
Source: ONS Consumer Price Inflation, February 2014
Chart 7: UK Public Sector Borrowing 10
2012 FEB 2012 MAR 2012 APR 2012 MAY 2012 JUN 2012 JUL 2012 AUG 2012 SEP 2012 OCT 2012 NOV 2012 DEC 2013 JAN 2013 FEB 2013 MAR 2013 APR 2013 MAY 2013 JUN 2013 JUL 2013 AUG 2013 SEP 2013 OCT 2013 NOV 2013 DEC 2014 JAN 2014 FEB
-10 -15 Source: ONS Public Sector Finances, February 2014
Chart 8: UK Current Account position (as a % of GDP)
...and rebalancing is still a major challenge. The UK's current account deficit (the gap between what the UK earns and spends) reached £22.4 billion or 5.4% of GDP (see Chart 8) in Q4 2013, just below the all-time high of £22.8 billion in Q3 2013. Although the UK's trade deficit fell from £10 billion in Q3 2013 to £5.7 billion in Q4 2013, the strength of sterling helped to widen the UK's income account deficit (the gap between our income from overseas investments and what other nations earn on UK investments) to £10.3 billion in Q4 2013, from £5.9 billion in Q3. Rebalancing the economy remains a significant task.
% of GDP
...but the public finances remain weak... Public sector borrowing (excluding the temporary effects of financial interventions) totalled £9.3 billion in February 2014, £0.1 billion higher than the £9.2billion recorded in February 2013 (see Chart 7). The OBR expects public sector net borrowing to reach £95.5 billion in 2014/15. The OBR also predicts that the UK will have a small budget surplus in 2018/19. However, we think that eradicating the deficit will take a couple of years longer than the OBR predicts, because tax receipts have suffered from a fall in oil and gas output and problems in the financial sector.
Chart 6: CPI inflation 6
2014 FEB 2013 NOV 2013 AUG 2013 MAY 2013 FEB 2012 NOV 2012 AUG 2012 MAY 2012 FEB 2011 NOV 2011 AUG 2011 MAY 2011 FEB 2010 NOV 2010 AUG 2010 MAY 2010 FEB 2009 NOV 2009 AUG 2009 MAY 2009 FEB 2008 NOV 2008 AUG 2008 MAY 2008 FEB
...and inflation falls to four-year low... CPI inflation fell from 1.9% in January to 1.7% in February, the lowest rate since October 2009 (see Chart 6). The largest contribution to the fall in the CPI inflation rate came from motor fuels, which was only partly offset by upward contributions from furniture & household goods and recreation and culture. With inflation now below the Bank of England's 2% target and total annual pay growth rising from 1.2% to 1.4% in the three months to January (see Chart 6), the gap between pay growth and price increases is narrowing. We expect to see pay increases outstrip inflation from the middle of this year.
-2 -3 -4 -5 -6
Source: ONS Balance of Payments, Q4 2013
Bottom line: March's economic data releases provides further evidence that the UK's economic recovery is gaining momentum. However, more must be done to improve the balance of the recovery, including better access to finance for growing companies, more export support and a clear, consistent tax environment. For more information please contact: Suren Thiru, UK Economist. Email: email@example.com. Tel: 020 7654 5801 03/04/2014
UK Economic Review
PAGE 3 OF 4
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 confidence (BCC)*** Business lending (Bank of England) Service sector output (ONS) Production output (ONS) Investment intentions (BCC)**
No change Dec-13
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)
10 year Government bonds (Bloomberg) Public sector net borrowing (ONS)** Public sector net debt % of GDP (ONS)** Tax receipts (ONS)** Current Budget (ONS)**
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. Also a depreciation in the exchange rate refers to an improvement and an appreciation in the exchange rate refers to a deterioration. Dates refer to the release dates for each indicator. **Annual changes. ***Quarterly changes. ****Latest figures are estimates.
UK Economic Review
PAGE 4 OF 4