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Economic Review, August 2013

Released: 09 August 2013 Download PDF

Abstract

This note draws together key economic stories from National Statistics produced over the latest month. This is in order to paint a coherent picture of the UK's economic performance using recent economic data.

Summary

  • The preliminary estimate of GDP growth indicated that the economy grew by 0.6% during the second quarter of 2013, with the construction, production and services sectors expanding simultaneously for the first time since Q3 2010.

  • While the construction, production and services sectors all grew during the second quarter of 2013, their performance has varied considerably since the start of the economic downturn. While the services sector has almost returned to its pre-downturn level of output, both production and construction remain more than 10% below the level in Q1 2008.

  • Monthly estimates of output growth suggest that after a strong start to the second quarter, output grew slowly between April and May. The production sector grew strongly in June.

  • New data released with Blue Book 2013 provides further evidence that pressure on Real Household Disposable Income had a role to play in depressing the growth of consumption during the period since 2008. Low interest rates and automatic stabilisers helped to prevent a steep fall in real household disposable incomes during 2008 and 2009, but incomes have grown only slowly since then. Real Household Disposable Income per head fell by 1% between 2006 and 2012.

  • Revised Blue Book 2013 data indicates that the volume of Business Investment fell by around 10% between 1998 and 2012. This weakness has continued into Q1 2013, and is 5.5% lower than in the same quarter of 2012.

Preliminary estimate of GDP

The preliminary estimate of GDP growth indicated that the economy grew by 0.6% during the second quarter of 2013, with the construction, production and services sectors expanding simultaneously for the first time since Q3 2010. The economy has grown by 4.1% since the trough of the economic downturn and has recovered just over half the output lost between Q1 2008 and Q3 2009.

While the construction, production and services sectors all grew during the second quarter of 2013, their performance has varied considerably since the start of the economic downturn. Figure 1 shows the quarterly path of output in these sectors indexed to their pre-downturn peak, and highlights this varied performance.

Figure 1: Output in production, construction and services sectors, CVM SA

Figure 1: Output in production, construction and services sectors, CVM SA

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While each sector experienced a decline in output during the downturn, the services sector suffered the smallest fall, contracting by 5.4% from the peak in Q1 2008 to the trough in Q2 2009, and has grown most strongly since the trough. As a result, the output of the services sector has almost returned to its pre-downturn peak level. By contrast, output in the production and construction sectors fell more rapidly in 2008 and 2009 and both have suffered renewed contractions since the beginning of 2010. In Q2 2013, output in the production and construction sectors remained 13.4% and 16.5% below their pre-downturn peak levels respectively.

The services sector was the main driver of growth during Q2 2013. Services output grew by 0.6% during the three months to June and contributed 0.48 percentage points to GDP growth. Figure 2 shows the profile of output growth since 2003 for the services subsectors. It highlights that while the recent acceleration of growth has been broadly based, the rate of expansion has slowed substantially compared to the pre-downturn period. Between Q1 1998 and Q1 2008, services output grew at a compound quarterly rate of 1.0%, yet between the trough of the downturn and Q2 2013, services output growth has slowed to a compound quarterly rate of just 0.4%.

Figure 2 also suggests that while Government & Other Services have supported output growth throughout the downturn, all of the other services subsectors have recovered much of the output they lost during 2008 and 2009. However, the composition of several of these sectors has changed markedly since the downturn. In particular, the recent growth of Business Services & Finance has been driven by the growth of Real Estate and Professional Scientific Admin & Support, rather than output growth in Financial & Insurance Activities. Output in this sector remained 13.3% below the pre-downturn peak in Q2 2013.

Figure 2: The profile of the economic downturn in services output: Chain-volume measure (CVM), seasonally adjusted (SA)

Figure 2: The profile of the economic downturn in services output: Chain-volume measure (CVM), seasonally adjusted (SA)

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Production output also grew by 0.6% during the second quarter of 2013, but contributed just 0.08 percentage points to GDP growth as it accounts for a smaller fraction of the whole economy than the services sector. Manufacturing was the main driver of production output growth, and expanded by 0.7% during Q2 2013. Mining & Quarrying output grew for the second consecutive quarter, following a fall of 10.3% during the final three months of 2012.

Output in the construction sector grew by 0.9% during the three months to June and contributed 0.05 percentage points to GDP growth over the same period. Construction output, which accounts for 6.3% of the economy, remains 10.7% below the level attained in Q2 2011.

Monthly output data

In addition to quarterly estimates of output growth, ONS produces seasonally-adjusted monthly estimates of output in the construction, production and services sectors. Table 1 shows these latest monthly estimates, which are available for construction and production until June 2013, and for the services sector until May 2013. The seasonally adjusted monthly construction output statistics included in Table 1 were published for the first time during July. From January this year, three years of monthly construction data were available, which is the minimum series length required to undertake seasonal adjustment under Eurostat regulations.

According to the newly published series, construction output grew by 5.0% in April but lost some of this ground during the following two months. Total production output remained static during April and May, and grew by 1.1% during June. Output in the services sector, for which only two months of data are available, grew by 0.3% in April and by 0.2% in May. Services output during June was estimated to be -0.1%, based on forecasts and early responses to the June Monthly Business Survey at the time of producing the preliminary estimate of GDP in the second quarter.

Table 1: Monthly estimates of output growth

Month on previous month, seasonally adjusted
Sector April May  June
Services1 0.3 0.2 -0.1
Production 0.0 0.0 1.1
Construction  5.0 -0.2 -0.7

Table notes:

  1. The Index of Services will be published on the 23rd August, 2013. The monthly estimate for June is based on forecasts and early responses to the June Monthly Business Survey

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Weighting together the monthly series of construction, production and services output growth permits the estimation of a monthly path for total output consistent with the quarterly GDP data, covering 99.3% of activity in the economy. This series is calculated by weighting the volume indices for each sector by their share in total output and converting the resulting series into an index form. This monthly output index excludes output growth in the agricultural sector (which accounts for the remaining 0.7% of the UK economy) and is based on monthly series, which tend to be more volatile than quarterly equivalents, and so should be interpreted with care. However, the index does present a picture of how the economy is growing on a monthly basis within the quarters and is shown in Figure 3.

Figure 3: Monthly output index

Figure 3: Monthly output index

Notes:

  1. Weighted monthly output estimates. June 2013 based on data for construction and production only. Data for services consistent with the preliminary estimate of GDP growth in Q2 2013.

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Figure 3 suggests that output in the economy has been on a broadly upward trajectory since December 2012. Output grew by a total of 1.2% between December 2012 and May 2013, and has been less volatile during the past six months than during any period since the end of 2010. Output grew relatively more strongly in February (0.6% month on month) and April (0.5%), the former a result of growth in both production and services, the latter a consequence of strong growth in construction. Growth was weaker during March, as a result of a sharp decline in construction output which fell by 4.1% on the month.

The most recent monthly data suggests that much of the growth recorded during Q2 2013 occurred during the first month of the quarter and that growth during May was relatively subdued by comparison. In the absence of firm estimates of services sector output growth during June, the estimate for June in Figure 3 is provisional and retains the assumption of a 0.1% decline in services output on the month, which was used to produce the Q2 2013 GDP estimate.

Demand side indicators

Alongside these output estimates there is a wide range of data available which summarise demand conditions in the UK economy, a selection of which are shown in Reference Table 1. The momentum which the economy carried into the second quarter is reflected in the available monthly estimates of retail activity. The Retail Sales Index increased by 0.2% in volume during June, consolidating the level of sales achieved as a result of strong growth of 2.1% between April and May. As a consequence, retailing as a whole grew by 0.9% during the second quarter, contributing to the strong performance of the Distribution, Hotels & Restaurants sector. Non-food store sales grew consistently during the quarter, while non-store retailing – which includes internet sales – was the most volatile.

This growth in domestic demand was combined with a small boost in international demand for UK products during the second quarter. Export volumes increased at a faster rate than import volumes during the three months to June, reducing the UK’s trade deficit from £6.1 billion during the first quarter to £5.9 billion during the second. The deficits during both Q1 and Q2 of 2013 are substantially smaller than the average quarterly deficit during 2012 of £8.5 billion, suggesting a relative strengthening of the UK trade position.

Real household disposable income

New data released with Blue Book 2013 provides further evidence that pressure on Real Household Disposable Income (RHDI) had a role to play in depressing the growth of consumption during the period since 2008. Between 1998 and 2008 RHDI grew at an average annual rate of 2.6%, reflecting the strong growth of wages relative to inflation. However, between 2008 and 2012 RHDI grew at an average annual rate of 0.6%, and recorded the only calendar year fall of the past fifteen years during 2011.

The profile of RHDI growth during recent years has been different from that of real GDP. Whereas real GDP fell sharply during 2008 and 2009, RHDI continued to grow, albeit slowly. In 2010 and 2011, growth in RHDI was weaker than that in GDP.

Table 2 shows the contributions to RHDI growth between 2006 and 2012. It shows that Compensation of Employees – which encompasses wages, salaries and social contributions – contributed an average of 2.6 percentage points to the annual growth rate of gross disposable income during this period. Net Property Income and Taxes & Benefits contributed 0.3 and 0.1 percentage points respectively. Since 2008, the growth in Compensation of Employees has been outweighed by the impact of inflation, reflecting the squeeze on real earnings during this period.

Table 2: Contributions to household disposable income growth

  Percentage points % Percentage points %
  Compensation of Employees Net Property Income Taxes & benefits Other Growth in Gross Disposable Income Impact of inflation (implied) Growth in real gross disposable income
2006 4.9 0.4 -1.2 1 5.2 -2.6 2.6
2007 4.6 -0.6 -2.1 1.4 3.1 -2.6 0.5
2008 2.1 0.3 1.1 -0.1 3.5 -3.2 0.3
2009 0.4 1.2 2.6 -1.3 3.6 -2 1.6
2010 2.2 0.6 -0.4 2.4 4.8 -4.1 0.7
2011 1.9 0.8 -0.7 0.9 2.7 -3.9 -1.2
2012 2.1 -0.4 1.1 1 4 -2.6 1.4
2006-2012 Average  2.6 0.3 0.1 0.8 3.8 -3 0.8

Table notes:

  1. Figures may not sum due to rounding

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During 2009, Compensation of Employees added just 0.4 percentage points to real income growth as a result of the weakness of the labour market and the rise in unemployment. Income growth during 2009 was instead driven by the impact of Taxes & Benefits – which contributed 2.6 percentage points – and Net Property Income – which contributed 1.2 percentage points to disposable income growth.

The contribution of Taxes & Benefits to household income growth in 2009 was the largest in more than fifteen years, and reflects rising social benefit payments and lower taxes due to the operation of the automatic fiscal stabilisers. Taxes and Benefits made a positive contribution to RHDI growth in 2012, contributing 1.1 percentage points. This reflects the high uprating of benefits in April 2012, based on the annual rate of inflation of more than 5% in September 2011. The contribution of Net Property Income reflects the large falls in interest rates during 2008 and 2009 which reduced the mortgage interest repayments faced by households.

The recent pressure on household disposable income has been greater when considered on a per head basis. In the five years prior to the economic downturn, RHDI per head grew at an average annual rate of 1.1%. However, since 2008 RHDI per head contracted at an annual average rate of 0.2% (see Figure 4).

Figure 4: Real household disposable income, chained volume measures

Figure 4: Real household disposable income, chained volume measures
Source: Office for National Statistics

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GFCF and Business Investment

Alongside revised estimates of real household disposable income, ONS has recently published revised estimates of gross fixed capital formation (GFCF) and Business Investment with Blue Book 2013. These show expenditure on capital goods, intangible assets and new buildings and dwellings by households, private and public corporations and government. GFCF measures the acquisitions less disposals of fixed assets and the improvement of land, including investment undertaken by government and private firms. Business Investment captures the portion of GFCF undertaken by firms and public corporations and excludes investment in dwellings. Improved methods to the measurement of GFCF were introduced as part of Blue Book 2013, which are designed to reflect underlying price changes for total GFCF and its component series more accurately. The revised estimates also incorporated new data on Artistic Originals as an asset category within Intangible Fixed Assets. A more detailed explanation of these methodological changes can be found here.

Figure 5 shows the quarterly path of investment in each of the asset classes included in GFCF, excluding the impact of price changes. In Q1 2013, GFCF totalled £51.6bn, around 41% of which was accounted for by investment in Other Buildings & Structures. A further 25% was accounted for by investment in Dwellings, while investment in Plant & Machinery, and Intangible Fixed Assets (including software) accounted for a further 21% and 12% respectively. Transport Equipment accounts for the remainder.

Figure 5: Gross fixed capital formation by type of asset, CVM (reference year 2010) SA

Figure 5: Gross fixed capital formation by type of asset, CVM (reference year 2010) SA

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The revised data suggest that GFCF fell sharply following the onset of the economic downturn, as businesses revised priorities in the face of a reduction in domestic and international demand, and as conditions in credit markets tightened. The downturn in the housing market also had a substantial impact on investment in Dwellings, which fell from £15.8bn in Q1 2008 before the economic downturn, to just £10.9bn in Q3 2009. Investment in Plant & Machinery also fell, while investment Other Buildings & Structures and Intangible Fixed Assets remained relatively static during this period.

Excluding investment in Dwellings and investment by general government from total GFCF generates estimates of business investment. The revised business investment estimates are shown in Figure 6. The series is quite volatile on a quarterly basis with a notable spike in 2005 due to the re-classification of British Nuclear Fuels Ltd. Over the period since 1998 as a whole, the volume of business investment has fallen by around 10%. The level of business investment contracted during 2012, and was 5.5% lower in Q1 2013 compared with the same quarter of 2012. Comparing Q1 2013 with the same quarter in 2008 – the pre-downturn peak – total business investment has fallen by 33.8%.

Figure 6: Business Investment CVM SA (reference year 2010)

Figure 6: Business Investment CVM SA (reference year 2010)
Source: Office for National Statistics

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Supply side indicators

The performance of the labour market as a whole has been particularly resilient given the severity of the 2008-09 economic downturn. In previous downturns, when output fell by less and recovered more rapidly, the unemployment rate peaked at more than 10%. 

During this downturn, by contrast, the number of people who are jobless has risen more slowly and stabilised more quickly than in previous downturns. Unemployment, which rose from 5.2% in the first three months of 2008 to a peak of 8.4% in the last three months of 2011, has been broadly stable over the past year and currently stands at 7.8%. The employment rate has risen over the same period, from 70.8% to 71.4% while the inactivity rate has remained relatively stable.

The new forward guidance issued with the Bank of England’s August Inflation Report stated that the Monetary Policy Committee (MPC) does not intend to raise the Bank Rate from its current level of 0.5% until the rate of unemployment has fallen below 7.0%, subject to three ‘knock-out’ conditions. Figure 7 shows the path of the unemployment rate since 2005, and indicates that it was last below this threshold level in early 2009 – a period when unemployment was increasing consistently.

Figure 7: Labour force survey measure of unemployment: % of those aged 16 and over, rolling three-month on rolling three-month period

Figure 7: Labour force survey measure of unemployment: % of those aged 16 and over, rolling three-month on rolling three-month period
Source: Labour Force Survey - Office for National Statistics

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While the headline unemployment rate remains above the Bank’s threshold level, the latest release of labour market statistics suggests that the relative demand for part-time as opposed to full-time workers has changed during the past six months. During and immediately following the 2008-09 economic downturn, the number of part-time workers increased substantially, while full-time workers fell. These trends signified a marked shift in working patterns as a consequence of the downturn. However, over the last three years, the rates of growth in the number of full-time and part-time workers have been broadly similar at around 2.7-2.8%, or just under 1% per annum. However, the growth in part-time working has fluctuated considerably during this period, with big increases in 2010 and 2012, while falling in 2011. The latest labour market statistics show that the number of part-time workers fell during the second half of 2012, while growth in the level of full-time employment has continued to increase, although most recently growth rates have converged somewhat.

Figure 8: Full-time & Part-time employment: % change, rolling three month period on rolling three month period

Figure 8: Full-time & Part-time employment: % change, rolling three month period on rolling three month period
Source: Labour Force Survey - Office for National Statistics

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Reference tables

Reference Table 1: Demand side indicators

Change on previous period, volume series
 CDID 7 2012 2012 2013 2013 2013 2013 2013 2013
      Q4 Q1 Q2 Mar Apr May Jun
GDP1 ABMI 0.2 -0.2 0.3 0.6  
Index of Services        
All Services1 S2KU 1.3 0.0 0.5 0.6 0.0 0.3 0.2  
Business Services & Finance1 KI7L 1.7 0.4 -0.1 0.5 0.2 0.1 0.3  
Government & Other1 KI7T 1.6 -0.6 0.4 0.1 0.3 0.0 -0.3  
Distribution, Hotels & Rest. 1 S2MV 0.9 -0.5 1.2 1.5 -0.3 0.1 1.2  
Transport, Stor. & Comms. 1  KI7B 0.2 0.6 1.4 0.6 -0.8 1.4 -0.2  
       
Index of Production        
All Production1 K222 -2.4 -2.2 0.3 0.6 0.0 0.0 0.0 1.1
Manufacturing1 K22A -1.7 -1.7 -0.2 0.4 0.9 -0.2 -0.7 1.9
Mining & Quarrying1 K224 -9.6 -10.3 3.2 1.5 -5.0 1.4 4.0 0.7
       
Construction 1 L2N8 -8.3 1.7 -1.8 1.4 -4.1 5.0 0.2 -0.7
       
Retail Sales Index        
All Retailing1 J5EK 1.0 -0.5 0.5 0.9 -0.4 -1.0 2.1 0.2
All Retailing, excl.Fuel1 J467 1.4 -0.3 0.6 0.8 -0.4 -1.1 2.1 0.2
Predom. Food Stores1 EAPT -0.1 -1.1 0.2 -0.9 1.8 -4.0 3.0 -0.1
Predom. Non-Food Stores1 EAPV 1.7 -0.3 -0.2 2.3 -3.3 2.5 0.9 0.6
Non-Store Retailing1 J5DZ 9.8 5.3 9.2 1.1 5.2 -6.5 5.4 -0.4
       
Trade        
Balance 2, 3  IKBJ -33.9 -8.3 -6.1 -5.9 -2.3 -1.8 -2.6 -1.5
Exports4 IKBH 0.0 -2.0 1.5 2.5 3.2 -1.5 0.6 3.2
Imports4 IKBI 2.0 -1.1 -0.2 2.2 2.8 -1.8 1.4 0.6
       
Public Sector Finances        
PNSB-ex 5,8 J5II 35.8 -2.3 11.2 15.7 3.0 -23.9 4.8 3.4
PNSB-ex, ex RM & APF 6,8 L65P 8.0 -2.3 4.7 0.0 3.0 -0.5 0.9 -0.5
PNSD-ex as a % GDP8 HF6X 74.2 74.7 74.2 74.9 74.2 73.9 74.2 74.9

Table notes:

  1. Percentage change on previous period, seasonally adjusted, CVM
  2. Level change on previous period, seasonally adjusted, CP
  3. Expressed in £ billion
  4. Percentage change on previous period, seasonally adjusted, CP
  5. Public Sector net borrowing, excluding the impact of financial interventions. Level change on a year earlier, not seasonally adjusted
  6. Public Sector net borrowing, excluding the impact of financial interventions, the Royal Mail Pension Plan and transfers from the Bank of England Asset Purchase Facility. Level change on previous period, not seasonally adjusted
  7. Where applicable, CDIDs refer to the index series on which the growth rates are based.
  8. 2012-13 Financial year

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Reference Table 2: Supply side inidcators

CDID 2012 2012 2013 2013 2013 2013 2013 2013
      Q4 Q1 Q2 Mar Apr May Jun
Labour Market1        
Employment Rate2, 3 LF24 71.1 71.6 71.4   71.4 71.5 71.4  
Unemployment Rate2, 4 MGSX 7.9 7.8 7.8   7.8 7.8 7.8  
Unemployment Rate 18-242 YBVQ 19.2 18.6 18.6   18.6 18.6 18.7  
Inactivity Rate2, 5 LF2S 22.6 22.3 22.4   22.4 22.4 22.5  
Claimant Count Rate6, 8 BCJE 4.7 4.7 4.6 4.5 4.6 4.5 4.5 4.4
Total Weekly Earnings7 KAB9 £469 £471 £468   £466 £485 £476  
       
CPI        
All-item CPI6 D7BT 2.8 2.6 2.8 2.7 2.8 2.4 2.7 2.9
Transport6 D7C2 2.3 2.3 1.7 0.9 1.7 -0.1 1.1 1.6
Recreation & Culture6 D7C4 0.2 0.9 1.2 1.5 1.8 1.4 1.5 1.3
Utilities6 D7BX 5 2.6 4.1 4.2 4.5 4.2 4.2 4.4
Food & Non-alcoh. Bev. 6 D7BU 3.3 3.7 3.8 4.2 3.7 4.6 4.3 3.8
       
PPI        
Input9  K646 1.4 0.2 1.6 1.9 0.7 -0.2 1.8 4.2
Output9  JVZ7 2.8 2.3 2.1 1.3 1.9 0.9 1.2 2
       
HPI 8 WMPQ 1.7 2.3 2.2   2.7 2.6 2.9  

Table notes:

  1. Labour market figures show the data at a point in time
  2. Monthly data shows a three month rolling average (e.g. The figure for May is for the three months ending in May)
  3. Headline employment figure percentage change in the number of people aged 16-64 in employment divided by the economically active working population 16-64
  4. Headline unemployment figure percentage change in the number of unemployed people (aged 16+) divided by the economically active population (aged 16+)
  5. Headline inactivity figure percentage change in the number of economically active people aged 16 to 64 divided by the 16-64 population
  6. Percentage change on previous period, seasonally adjusted
  7. Estimates of total pay include bonuses but exclude arrears of pay (£)
  8. Calculated by JSA claimants divided by claimant count plus workforce jobs
  9. Percentage change on previous period, not seasonally adjusted

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Background notes

  1. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

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