United Kingdom – Continued Improvement in Economic Activity

This post in pdf format is here:
United Kingdom – Continued Improvement in Economic Activity

United Kingdom GDP grew by 0.8% (3.2% at annual rate) during the third quarter (preliminary estimate) . In the second quarter it was 0.7 % (2.8% AR). We see on the first chart a nice sequence of three successive increases in GDP. Compared to the third quarter of 2012, growth is 1.6%. Carry over growth is almost 1.3% for 2013 at the end of the third quarter (This is a measure of the average growth for 2013 if Q4 GDP remains at Q3 level). GDP level is still 2.5% below it Q1 2008 peak.

UK-2013-q3-gdpOn page 2 (of the document attached)  there are three graphs on the detail of this GDP number. As in the second quarter the rapid improvement in GDP came from Private Services and, but at a lower scale, from construction. The Goods Producing sector is up for the third quarter in a row but gains are still modest.
In the Goods Producing sector the bulk of the increase comes from the manufacturing sector. Electricity production was a drag to GDP growth. On the Service Sector impulses come from two sectors – Business Services and Distribution and Hotels.

This improvement of the economic momentum is interesting to understand.

The main change comes from the labor market. On the second graph we see the rapid increase in the number of jobs. The jobs number is well above it pre-crisis peak contrary to what can be seen in the USA and in the Euro Area.
We also see a change in the type of jobs. Until 2012 it was mainly Part-Time Jobs (the red line), but now the trend is decreasing. Conversely Full Time Jobs have increased a lot since the beginning of 2012 (blue line). It is now the main engine to new jobs.

UK-2013-August-employmentThis has a strong impact on the consumer confidence index as it reduces uncertainty. On the third graph we see the rapid increase in confidence which is back to November 2007 level. Looking at the details of this survey we see very positive prospects on the economic environment for the coming months. Households’ horizon has changed recently, they can see behind the immediate future. They perceive this future as stronger than what they’ve seen in the immediate past. They can then change their mind and be able to imagine buying with a credit as the future is less uncertain. That’s a real and deep change.

UK-2013-september-cons-confidenceWe see on the fourth chart that retail sales are up since the beginning of the year. This was financed by a new arbitrage: as the future appears less uncertain there is a reduction in saving and there is also an increase in consumer credit (see graph 4).

UK-2013-september-retail tradeThis new means that help them to spend was necessary as real regular pay is still trending downward. We see on the fifth graph that nominal regular pay is up by just one percent in August but that the inflation rate was at 2.7 in August and in September. There are not enough pressures on the labor market to improve wages. Improvement will first come from a lower inflation rate. Nominal wages will remain on a low momentum. Also among supports of growth we can find construction and real estate.

UK-2013-august-earningsSo the economic situation is improving rapidly. We expect now a range of 1.40-1.45% GDP growth for 2013. But it is still conditioned by external factors that could be a drag for growth. The Euro Area is not growing too fast and is not a relay for UK growth momentum.

What is also interesting is that the Bank of England was surprised by the rapid improvement of the UK economy. We can wonder if the Monetary Policy Committee will not change its mind on the moment where it will be necessary to change the monetary policy stance. In July Mark Carney spoke of 2016 but recently the BoE chief economist, Spencer Dale, let understood that it could be sooner than later. It will be interesting to follow these evolutions.

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