This note provides some wider economic analysis to support the Statistical Bulletin relating to the latest GDP release and other major economic releases during the latest month. By drawing on the wider array of economic releases surrounding the GDP release, for example the labour market, trade, retail sales and inflation releases, this note attempts to provide a more comprehensive picture of how the economy has performed in the latest quarter and, where relevant, the latest month.
The second estimate of GDP growth in the fourth quarter of 2011 confirmed the preliminary estimate of a contraction of 0.2 per cent. However the expenditure breakdown of growth showed positive contributions to growth from household expenditure (following four consecutive quarterly falls) and from net trade, with negative contributions from inventories and business investment. This presents a more positive picture of the expenditure side of the economy than in the previous quarter when growth was solely attributable to the rebuilding of inventories. The labour market also continues to be subdued with employment rising only slowly in the final quarter of the year. Consumer price inflation fell sharply in January, as expected, as the impact of the January 2011 rise in the rate of VAT fell out of the annual figures. But the drop in headline measures of inflation masked a jump in the rate of CPI inflation excluding indirect taxes (CPIY) in January which has barely fallen back since the inflation peak in September 2011.
The second estimate of GDP growth between the third and fourth quarters of 2011 was unchanged and showed a fall of 0.2 per cent. Compared to the fourth quarter of 2010, GDP grew by 0.7 per cent and during 2011 as a whole GDP grew by 0.8 per cent. So over the four quarters of 2011, GDP grew by an average of 0.2 per cent. During the four quarters of 2010, GDP grew by an average of 0.4 per cent a quarter. So the average quarterly growth rate halved between 2010 and 2011.
The main sources of weakness in the three measures of GDP were:
Production industries (in the output measure of GDP)
Gross fixed capital formation and inventories (expenditure measure)
Compensation of employees (income measure)
The expenditure breakdown of growth showed positive contributions to growth from household expenditure (following four consecutive quarterly falls) and from net trade, with negative contributions from inventories and business investment. This presents a more positive picture of the expenditure side of the economy than in the previous quarter when growth was solely attributable to the rebuilding of inventories.
Although household consumption picked up in the fourth quarter, it remains more than 5 per cent lower than its pre-recession peak, and has not regained the ground lost during 2011, being still almost one per cent lower than its level in the third quarter of 2010.
A further source of growth was from net exports. Exports strengthened, particularly of goods to non-EU trade partners, while imports weakened. The fourth quarter saw a fall in imports of services as well as lower imports of semi-manufactures, basic materials and fuels, which may reflect the slowing of manufacturing growth during the second half of 2011. Lower imports of inputs were more than offset by stronger imports of finished manufactured goods, which may be associated with the improvement in household consumption. Strong export growth to non-EU partners was driven by exports of goods to the US and Asia.
Business investment and a slowing in the pace of inventory accumulation pulled down GDP growth by 1.0 percentage point. Business investment fell by 5.6 per cent between the third and fourth quarters, while investment in other sectors grew by 1 per cent and made a small positive contribution to GDP growth. Business investment in the final quarter of 2011 was more than 20 per cent below its pre-recession peak.
The strong net trade performance contributed 1.2 percentage points to GDP growth between the two calendar years 2010 and 2011, greater than the figure for total GDP growth of 0.8 per cent. This was offset by negative contributions from household final consumption (contributing –0.5 points to GDP growth) and fixed investment (-0.3 points).
Compensation of employees declined in the fourth quarter reflecting a combination of modest wage growth and weak employment data in the fourth quarter. This was more than offset by growth in gross operating surplus of corporations and other sources of income, so that nominal GDP grew by 0.5 per cent. This reflects the combination of the easing in inflation towards the end of 2011 and the weakness of real GDP growth.
Although production sector output increased by 0.5 per cent in December, output was 3.3 per cent lower than a year earlier. Between the third and fourth quarters of 2011, output fell by 1.4 per cent, the largest such fall since the first quarter of 2009, and slightly more than the estimate of a 1.2 per cent fall that was shown in the Preliminary GDP release. Manufacturing output growth was slightly less negative than in the Preliminary release.
The marked weakening of production sector output towards the end of 2011 is due to a gradual weakening of manufacturing output growth, which fell in the final quarter of the year, coupled with a sharp contraction of mining and quarrying output – largely North Sea oil and gas. The mining and quarrying sector contracted by 15.5 per cent in 2011, the largest such fall since 1974.
Construction sector output is predominantly driven by changes in the amount of new work undertaken, with repair and maintenance making a smaller contribution to construction sector growth (chart below).
The construction industry made a strong contribution to GDP growth during 2010, but this was more limited in 2011. During 2010 the construction sector grew by an average of 2.7 per cent a quarter, compared with only 0.2 per cent in 2011.
On a quarterly basis, the services sector was unchanged between the third and fourth quarters of 2011. This followed relatively strong growth in the third quarter of 0.8 per cent. But since the second half of 2009, services sector growth has been somewhat volatile. The chart below illustrates the ‘choppiness’ of growth in the services sector during this period, and this has contributed significantly to the volatile path for GDP growth.
Since the second quarter of 2009, when growth of output resumed following the recession, the strength of growth in the services sector has predominantly come from two sub-sectors - the professional, scientific admin and support sector, and health services - whilst financial and insurance services have been weak.
Within the final quarter, the services sector experienced reasonably solid growth in November and December, following a weak performance in October. The weakness in October was due to the transport and storage and business and financial services sectors, but both sectors recovered in November and were then broadly flat in December. The 0.2 per cent growth in services output in December was driven by the distribution sector, which recovered by 1.1 per cent in December, reversing the 1.3 per cent fall during October and November.
In December, the trade balance narrowed significantly, largely due to a drop in imports of goods, but also due to a slight rise in exports. The drop in imports was due particularly to falls in imported fuels and semi-manufactures, which may correspond to the slowing in manufacturing output growth during the latter months of 2011. The trade balance was at its lowest in December since April 2003, and the goods deficit was at its lowest since February 2010. The surplus on the services balance of trade narrowed very slightly due to a small rise in imports of services.
Within exports of goods, there was much stronger growth to non-EU countries than to EU economies, not only in December but more particularly during the final three months of the year. This may reflect weakness of the euro area and periphery EU27 countries, as well as the strengthening US economy and continuing healthy growth rates in emerging market economies.
The chart shows how the UK’s net trade performance, expressed as the ratio of export to import volumes (both excluding oil and erratic items), has improved towards the end of 2011, almost wholly due to the strengthening of trade performance with non-EU countries.
The volume of retail sales grew for a fourth successive month in January, despite the backdrop of falling real disposable incomes as a result of high inflation and subdued earnings growth. The volume of retail sales grew by 2.0 per cent in January when compared to January 2010 and by 0.9 per cent when compared to December. According to the year on year measure, growth was solid across all four sectors of retail sales in January, with particularly strong contributions from predominantly non-food stores and non- store retailing. Non-store retailing which consists mainly of internet sales has been a strong driver of retail sales over the past two years despite its relatively small weight.
The labour market indicators showed mixed signals in the fourth quarter of 2011, with employment and total weekly hours increasing while on the other hand unemployment continued its upward trend and redundancies also increased.
Although employment increased over the quarter, this was insufficient to reverse the fall in the previous quarter. Both employment and total hours worked remain below the levels reached in the final quarter of 2008. The fall in total weekly hours has been proportionately bigger than the fall in total employment as the average number of weekly hours worked has declined, in part reflecting the growth in part-time employment. The proportion of part-time workers looking for a full-time job increased further in the latest quarter to 17.4 per cent of the total.
The level of unemployment for 18-24 year olds continued to increase. For 18-24 year olds, the unemployment levels reached 826,000 of which 669,000 are unemployed and not in full time education. Furthermore, inactivity for 18-24 year olds has reached 1.71 million of which 605,000 are inactive and not in full time education. The total number of 18-24 year olds unemployed and not in full time education, in addition to those who are inactive and not in full time education, stands at 1.274 million in the latest quarter.
Average weekly earnings growth for the public sector (excluding financial services) is now 1.1 per cent, compared to 2.3 per cent in the private sector, showing the effects of the public sector pay freeze.
Public sector net borrowing (excluding the temporary effects of financial interventions) was £93.5 billion between April and January this financial year, £16 billion lower than in the same period of 2010/11, when net borrowing was £109.1 billion. The month of January always sees high tax receipts from self- assessment income tax returns and corporation tax. This January, net borrowing was negative to the tune of £7.8 billion, ie. a surplus, compared with a surplus of £5.2 billion in January 2011. However the fall in total public sector borrowing compared with last January was due to a drop in borrowing by local authorities, which tends to be volatile from month to month. Borrowing by central government was unchanged from the January 2011 level.
Because of the high inflow of tax revenues in January, total public sector net debt dropped back below the one trillion pound mark that it breached in December, to a level of £988.7 billion, equivalent to 63.0 per cent of GDP.
Producer price inflation in the manufacturing sector has been falling since September 2011, both in terms of input and output prices. Excluding food and petroleum (as well as alcohol and tobacco), which have tended to experience some of the strongest price growth in recent years, input price inflation in the manufacturing sector was 5.4 per cent and output price inflation 2.4 per cent in January this year. If food, petroleum, alcohol and tobacco are included then input prices have risen 7.0 per cent and output prices have risen by 4.1 per cent. Food, petroleum, alcohol and tobacco have been adding an average of 2.2 percentage points to output prices and an average of 3.9 percentage points to input prices since January 2011.
This easing in input and output price growth over the last five months reflects the wider moderation in commodity and energy price growth in recent months.
Annual rates of both CPI and RPI inflation fell in January, by 0.6 and 0.9 percentage points to 3.6 per cent and 3.9 per cent respectively. A large part of the improvement in inflation was due to the 2½ percentage point rise in the rate of VAT in January 2011 which fell out of the annual calculations this January.
The impact of the VAT rise on headline inflation can be seen by comparing CPI and CPIY, the measure of inflation that excludes indirect taxes, which predominantly consist of VAT. Both CPI and CPIY converged to 3.6 per cent in January. However the large drop in headline measures of inflation has masked a jump in the rate of CPI inflation excluding indirect taxes (CPIY) in January which has barely fallen back since the inflation peak in September 2011.
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