Monthly Economic Briefing January 2014

UK Monthly Economic Review January 2014 (Based on December 2013 data releases)

Monthly headlines:  Annual UK economic growth revised up for Q3 2013, QES indicates more growth in Q4  BCC forecasts that the UK economy in 2014 will grow at its fastest rate since 2007  UK's trade position deteriorates and the public finances remain weak

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2013 Q3

2013 Q1

2012 Q3

2012 Q1

2011 Q3

2011 Q1

2010 Q3

2010 Q1

2009 Q3

2009 Q1

2008 Q3

-2

2008 Q1

0 2007 Q3

GDP Growth %

2

-4 Quarterly growth Annual growth

-6 -8

Source: ONS Quarterly National Accounts, Q3 2013

Chart 2: UK GDP by Sector, Q3 2013 3 2 1 0 Agriculture

Production

Construction

Services

-1 -2 -3 -4

Source: ONS Quarterly National Accounts, Q3 2013

Chart 3: UK Manufacturing and Services Output 10

6 4

5

2 Aug-13

Oct-12

Mar-13

May-12

Dec-11

Jul-11

Feb-11

Sep-10

Apr-10

Nov-09

Jan-09

Jun-09

Aug-08

Oct-07

-5

Mar-08

0 0 -2 Manufacturing

-10 -15

UK Economic Review

Services (RHS)

Annual change %

...while improving official sector level data...

Industrial output rose by 0.4% in October, with manufacturing production, which also increased by 0.4% in the month, the largest contributor to total production growth. In annual terms, manufacturing output rose by 2.7% in October, the biggest rise since May 2011 (see Chart 3). This is in line with the QES which also indicates an improving picture for the sector. Output from the service sector grew by 0.1% in October and by 2.1% in annual terms. Construction output, which accounts for around 6% of UK economic output, grew 2.2% in October.

4

Quarterly Growth %

...and growth recorded across the economy...

The rise in UK GDP in Q3 2013 was broadly based with three - services, production and construction out of the four main sector groupings recording growth (see Chart 2). The agricultural sector (-3.2%) recorded the only decline. The service sector, which accounts for over three-quarters of UK economic output, remains the key driver of growth with output rising by 0.8% in Q3. This mirrors the positive services balances recorded in the Quarterly Economic Survey (QES). Construction output grew by 2.6% and industrial production rose by 0.6% in Q3.

Chart 1: Real GDP Growth

6

Annual change %

Annual UK economic growth revised up...

The third official estimate of economic growth (GDP) for Q3 2013 was unrevised at 0.8%. However, due to upward revisions for previous quarters, the UK's economic performance over the past year was better than previously thought. In annual terms, the UK economy grew by 1.9% in Q3 (see Chart 1), up from the previous estimate of 1.5%. UK GDP is now estimated to be 2% below its pre-recession peak in Q1 2008, an improvement on the previous estimate of 2.5%. We expect UK GDP to surpass its prerecession peak in the second half of 2014.

-4 -6

Sources: ONS Production, Services and Construction Statistics, October 2013

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Unemployment rate %

8 7.5 7 6.5 6 5.5

UK unemployment rate

5 4.5

Bank of England's 7% threshold 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, December 2013

Chart 5: Domestic Sales

60 40 20

-20

4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13

0

Services -40

Manufacturing

-60 Source: BCC Quarterly Economic Survey, Q4 2013

Chart 6: CPI inflation

6 5 4 3 2 1 0

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 2007 NOV

...but key risks to the recovery remain...

Although CPI inflation fell to 2.1% in November (see Chart 6) utility price rises are likely to increase the upward pressure on prices in the coming months.

This is supported by the latest QES with the intention to raise prices rising for the second successive quarter in Q4. With inflation outstripping earnings growth, the squeeze on household budgets is also a concern, particularly with the continued reliance on consumer spending to support growth. Despite signs some of improvement, the underlying weakness in the Eurozone remains a key risk to the UK's economic recovery.

8.5

Balance %

...and the QES indicates more growth in Q4...

For the Q4 2013 QES, most of the key balances across manufacturing and services reached higher than their pre-recession levels in 2007, and some were at all-time highs. The services sector balance + for domestic sales rose to its highest level since Q2 2004 (see Chart 5) and domestic orders rose to their best level since Q1 1997. Although the domestic sales  balance for manufacturing fell slightly in the quarter, it is still close to a record high, while confidence and employment balances reached all-time highs in Q4.

Overall, the latest QES and external economic data points to continued economic growth in Q4.

Chart 4: UK Unemployment 9

Annual inflation rate %

...a strengthening labour market...

Businesses continue to drive job creation with the private sector accounting for 98% (246,000) of the 250,000 rise in the number of people in employment in the three months to October 2013.The number of people who are unemployed fell by 99,000 over the same period and as a result the UK's unemployment rate fell to 7.4%, the lowest since March 2009 (see Chart 4). However, high youth unemployment and weak pay growth remain a concern. We expect that the Bank of England's 7% threshold before they consider raising interest rates will be reached in Q3 2015.

UK Economic Review

Source: ONS Consumer Price Inflation, November 2013

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% of GDP

60 50 40 30 Nov-93 Sep-94 Jul-95 May-96 Mar-97 Jan-98 Nov-98 Sep-99 Jul-00 May-01 Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13

20

Source: ONS Public Sector Finances, November 2013

Chart 8: UK Current Account Position (as a % of GDP)

5 3

-1 -3

1987 Q3 1988 Q4 1990 Q1 1991 Q2 1992 Q3 1993 Q4 1995 Q1 1996 Q2 1997 Q3 1998 Q4 2000 Q1 2001 Q2 2002 Q3 2003 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2010 Q1 2011 Q2 2012 Q3

1

-5 -7 Source: ONS Balance of Payments, Q3 2013

40

Chart 9: Export Sales

30 20 10 0 -10

4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13

…but there is hope of a future rebalancing.

The Q4 2013 QES provided further evidence of the potential of British businesses to rebalance the UK economy towards exports. Within the service sector, the balance for export sales increased in Q4 2013 to a joint all-time high. The balance for manufacturing export sales remained at its best level since Q4 2010 (see Chart 9). The service export orders balance rose to a record high in the final quarter of 2013 and although the manufacturing balance for export orders weakened slightly in Q4, it remains nearly three times higher than its historical average.

Chart 7: Public Sector Debt (as a % of GDP)

70

% of GDP

...as does the UK's current account position...

The UK ran a current account deficit (the difference between what we earned from other countries and what we spent) of £20.7 billion in Q3 2013, more than three times the deficit of £6.2 billion recorded in the previous quarter. This deterioration was driven by the UK's growing trade deficit - which doubled from £5 billion to £10 billion in the third quarter - and weaker investment income from abroad. As a result, the UK's current account deficit was equivalent to 5.1% of GDP in Q3, the highest deficit as a percentage of GDP since Q3 1989 (see Chart 8). These figures confirm that rebalancing the UK economy remains a challenge.

80

Balance %

...and the public sector finances remain weak...

Despite the strengthening economy, the UK's public finances remain weak. Public-sector borrowing, excluding the effects of financial interventions, totalled £16.5 billion in November, £0.9 billion higher than the same month in 2012. As a consequence, the UK's public sector net debt in November 2013 rose to 76.6% of GDP (see Chart 7). Although the economy is growing, tax revenues remain subdued and while tax revenue from 'consumer' taxes such as stamp duty and VAT are improving, corporation tax revenues have fallen by 5.1% over the past year.

-20

Services Manufacturing

-30

Source: BCC Quarterly Economic Survey, Q4 2013

Bottom line: Taken together, the data releases in December support our view that the UK economy is growing at a solid pace. The BCC expects that the UK economy will grow by 2.7% this year, and this would be the fastest growth since 2007. However, the UK economy will continue to face major challenges and more must be done to help businesses drive a rebalancing of the UK economy towards exports.

For more information please contact: Suren Thiru, UK Economist. Email: s.thiru@britishchambers.org.uk. Tel: 020 7654 5801

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For more 08/01/2014

information please contact: Suren Thiru, UK UKEconomic Economic Advisor. Email: s.thiru@britishchambers.org.uk Review PAGE 3 OF 4

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)**

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

No change Sep-13

Oct-13

Improving Nov-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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UK Economic Review

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Dec-13