Monthly Economic Briefing November 2013

UK Monthly Economic Review November 2013 (Based on October 2013 data releases)

Monthly headlines:  UK economy grew at fastest rate since 2010, with all main sectors seeing growth  UK jobs market strengthens, but real earnings continues to fall  The task of rebalancing the UK economy remains difficult and significant headwinds remain

...with growth recorded across all sectors...

Significantly, UK output increased in all four of the main sector groupings - agriculture, production, construction and services (see Chart 2). The service sector, which accounts for over three-quarters of UK economic output, was the key driver of growth in Q3 with output rising by 0.7%. This mirrors the Q3 2013 QES with services firms seeing improving balances. Construction, which accounts for around 6% of UK economic output, grew by 2.5%. Industrial output rose by 0.5% in Q3, in line with the findings from the latest QES. ...as the IMF upgrades its UK GDP forecasts IMF (International Monetary Fund) upgraded their forecast for UK GDP growth this year to 1.4%, from their previous estimate of 0.9% published in July. The IMF also raised its UK GDP forecast for 2014 to 1.9%, from 1.5%. The BCC’s latest UK GDP forecast for 2013 of 1.3% is slightly below the IMF's latest forecast (1.4%). However, the BCC expects slightly stronger growth in 2014 and 2015 (see Table 1). Overall, our view that the recent improvement in the UK economy will continue is supported by the latest upward revisions to the IMF's UK growth forecasts.

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Chart: 1 Real GDP and Domestic Sales

1.5

60 40

0.5

-1.5

0

Balance %

2013 Q3

2013 Q1

2012 Q3

2012 Q1

2011 Q3

2011 Q1

2010 Q3

2010 Q1

2009 Q3

-1.0

2009 Q1

-0.5

20 2008 Q3

0.0 2008 Q1

Quarterly GDP Growth %

1.0

-20 Quarterly GDP growth Domestic sales (Manufacturing) Domestic sales (Services)

-2.0 -2.5

-40

-3.0

-60 Sources: BCC, ONS

3.0

Chart 2: UK GDP Q3 2013, by Sector

2.5 Quarterly change %

GDP growth reaches three year high...

The first official estimate of economic output (GDP) put UK GDP growth at 0.8% in the third quarter of 2013, the fastest rise since Q2 2010 (see Chart 1).

This mirrors the Q3 2013 BCC Quarterly Economic Survey (QES) which recorded a strengthening economic recovery with most UK balances improving. Although the level of economic output in the UK is still 2.5% below its peak in Q1 2008, the latest economic growth figures support our view that the UK economic recovery is gathering momentum.

2.0 1.5 1.0 0.5 0.0 Agriculture

Production

Construction

Services Source: ONS

Table 1: BCC and IMF GDP Forecasts

BCC (%)

IMF (%)

Difference (%)

2013

1.3

1.4

-0.1

2014

2.2

1.9

+0.3

2015

2.5

2.3

+0.2

UK Economic Review

Sources: BCC, IMF

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20

29.4

10

29.2

0

29.0

-10

28.8

2013 Q3

2013 Q1

2012 Q3

2012 Q1

2011 Q3

2011 Q1

-40 2010 Q3

28.2 2010 Q1

-30 2009 Q3

28.4 2009 Q1

-20

2008 Q3

28.6

Balance %

30

29.6

2008 Q1

Employment, millions

40

29.8

Sources: BCC, ONS

Chart 4: Unemployment Rate, by UK Region and Nation

11 10 9 8 7 6 5

Sources: BCC, ONS

Chart 5: UK Inflation

50

CPI inflation (LHS) Expectations to increase prices (manufacturing) Expectations to increase prices (services)

UK Economic Review

2013 Q3

-10 2013 Q1

0 2012 Q3

0 2012 Q1

1 2011 Q3

10

2011 Q1

2

2010 Q3

20

2010 Q1

3

2009 Q3

30

2009 Q1

4

2008 Q3

40

2008 Q1

5

Balance %

6

2007 Q3

...and real earnings continue to decline CPI inflation was unchanged in September at 2.7%.

Although we still expect inflation to fall gradually this year, the pace appears to be slower than we had anticipated. Furthermore, with the Q3 2013 QES revealing that intentions among firms to raise prices is growing (see Chart 5) and large increases in utility prices on the way, higher inflation remains a risk.

With inflation still well above the Bank of England's 2% target and earnings growth declining from 1.0% some to 0.8% in the three months to August 2013, the squeeze on household budgets is increasing and remains a risk to the UK economic recovery.

30.0

Employment QES Employment Balance (manufacturing) QES Employment Balance (services)

Unemployment rate %

...but there are local disparities‌ Although the UK labour market picture remains positive, there are notable disparities between the UK's regions and nations. Seven out of the twelve regions and nations in the UK currently have an + unemployment rate that is above the UK average of 7.7% (see Chart 4). In the three months to August 2013, the North East of England recorded the highest unemployment rate (10.3%), followed by the West Midlands (9.4%) and Yorkshire & the Humber (8.8%).

In contrast, the East of England (5.9%) has the lowest unemployment rate in the UK, followed by the South East (6.0%) and the South West (6.3%).

Chart 3: UK Employment

Annual CPI inflation %

The UK jobs market continues to improve‌ The latest jobs data provides further evidence that the UK labour market is strengthening. In the three months to August 2013, the number of people in work rose by 155,000 to a record high of 29.87 million. The number of people who are unemployed fell by 18,000 over the same period. The Q3 2013 QES also points to a strengthening jobs market with a marked improvement in the employment balances (see Chart 3). However, the number of people who were working part-time because they could not find full-time work rose to 1.45 million, the highest figure since records began in 1992.

Sources: BCC, ONS

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2 1

-3 -4 -5

Chart 7: UK Export Sales 30

10

3Q13

1Q13

3Q12

1Q12

3Q11

1Q11

3Q10

1Q10

3Q09

Source: BCC

Chart 8: IMF GDP Forecasts for 2013

10 8 6 4 2

Jul-13

Oct-13

Italy

Spain

Euro area

France

Germany

-4

UK

Russia

USA

Japan

World

-2

India

0 China

...even as the global economic outlook weakens The International Monetary Fund (IMF) has cut its forecast for global GDP growth. The IMF now expects global growth of 2.9% this year, down from July's estimate on 3.1% (see Chart 8). Despite an improvement in growth in advanced economies such as the UK (see Table 1), the IMF thinks that slower growth in emerging economies such as China and India, could hold back global growth. The continued debt crisis in the US is also a key risk to global growth. The Eurozone, the UK's major trading partner, is still expected to contract in 2013, but at a slightly smaller rate.

Export sales (services) Export sales (manufacturing)

-30

Annual change %

towards exports.

1Q09

-20

3Q08

services provides further evidence of the potential of

1Q08

-10

3Q07

0 1Q07

Balance %

20

of the export balances in both manufacturing and British businesses to rebalance the UK economy

Source: ONS

40

Although the export balances for the service sector fell

pre-recession levels in 2007 (see Chart 7). The strength

2010 AUG 2010 OCT 2010 DEC 2011 FEB 2011 APR 2011 JUN 2011 AUG 2011 OCT 2011 DEC 2012 FEB 2012 APR 2012 JUN 2012 AUG 2012 OCT 2012 DEC 2013 FEB 2013 APR 2013 JUN 2013 AUG

-2

national export balances for manufacturing firms.

sectors, the export balances are also higher than their

0 -1

...but there is hope of a future improvement…

The Q3 2013 QES recorded an improvement in the

slightly, they remain at historically high levels. In both

Chart 6: UK Trade Balance

3

£ billion

UK’s trade position remains weak...

The UK's trade deficit improved slightly in August, falling from £3.4 billion to £3.3 billion (see Chart 6). A breakdown of the data showed that exports of goods to countries outside the EU increased by £0.7 billion, more than offsetting a £0.4 billion fall in exports to countries within the EU. However, although some progress has been made, the pace of rebalancing the UK economy towards exports remains slow. In the three months to August 2013, exports were 1.0% lower compared to the three preceding months, while imports rose by 0.5% to their highest level on record.

Source: IMF

Bottom line: October’s data release provides further evidence that the upturn in the UK economy is gathering momentum. However, the UK is still lagging behind countries such as the US and Germany which have recovered the output lost during their own economic downturns. Therefore more must be done to secure the recovery, including better access to finance and export support.

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

.

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

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)**

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

No change May-13

Jun-13

Improving Jul-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. **Annual changes. ***Quarterly changes. ****Latest figures are estimates.

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UK Economic Review

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