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Economic Review, July 2013

Released: 03 July 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

Economic statistics published during June cast new light on the scale of the 2008-09 economic downturn, which was deeper than previously estimated, with the subsequent recovery also slightly weaker.

ONS economic statistics for April and May suggest that the economy entered the second quarter of 2013 with a degree of momentum.

UK motor vehicle production has recovered strongly since the 2008-09 downturn and is now back above its pre-recession peak, buoyed by rising household spending on cars and a strong export performance.

GDP and Blue Book 2013

The latest Quarterly National Accounts, which are consistent with the figures to be published in Blue Book 2013, confirmed that the UK economy grew by 0.3% in the first quarter of 2013. The volume of output is 3.9% below the pre-recession peak. This is bigger than the previously published shortfall of 2.6% mainly because the downturn in 2008-09 was deeper, while the pace of recovery has also been slightly slower than previously estimated.

Figure 1 shows the path of GDP during and after the four most recent UK economic downturns, and includes both the previously published and the Blue Book 2013 profiles of GDP growth. While output was restored to its pre-recession peak between twelve and fourteen quarters after the start of the downturns in the 1970s, 1980s and 1990s, both the previously published and the Blue Book 2013 estimates suggest that UK output remains some way below this benchmark following the 2008-09 downturn.

Figure 1: Profile of the economic downturn in the UK: index numbers, pre-recession peak=100

Figure 1: Profile of the economic downturn in the UK: index numbers, pre-recession peak=100

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The revisions suggest that the initial downturn that the UK experienced was deeper than previously thought, as output dropped by 7.2% between the pre-recession peak and the trough, rather than the previous estimate of 6.3%. The revisions also delay the onset of the recovery by a quarter, as the economy returned to growth in the final quarter of 2009. By contrast, there have been relatively modest revisions to the growth picture since 2009 which have not altered the picture of the economy over this period.

The revisions introduced in Blue Book 2013 are primarily the result of improved methods and new data, which are discussed in greater detail in Hardie, Lee and Perry (2013). Improved methods of estimating price deflators reduced the growth rate of real fixed investment in 2008 and 2009 (as well as in 2001), while new quarterly data on corporate profits shifted some income from 2009 to 2008. The combined effect of these two factors is to increase the extent of the decline in real GDP during 2008 and 2009.

The new data in Blue Book 2013 affect the interpretation of the UK’s relative economic performance. Figure 2 shows the previously published and Blue Book 2013 path of UK GDP relative to the performances of the other G7 economies indexed to Q1 2008 = 100 (the UK’s pre-recession peak).

Figure 2: Profile of the economic downturn in the UK relative to selected economies, Q1 2008=100

Figure 2: Profile of the economic downturn in the UK relative to selected economies, Q1 2008=100

Notes:

  1. Source: OECD, ONS

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The revised data have slightly lowered the UK’s performance relative to the other G7 economies. From this group of countries, only Canada, Germany and the USA have achieved output above the level they attained before the economic downturn in 2008, with Canada performing the strongest. France, which followed a broadly similar trajectory to the US during the early phase of the recession has stagnated since early 2011, while in Italy output continues to contract. The Blue Book 2013 revisions suggest that the UK had a deeper initial downturn than all but Japan, and a slower recovery than all but Italy.

There have been relatively modest revisions to household expenditure, income and saving. Household deleveraging – spending less to pay off outstanding debts – has been a prominent part of the recent economic narrative. Figure 3 shows the previous and current estimates of the saving ratio alongside the change in net unsecured debt held by households, and highlights the jump in the saving ratio during 2008 and 2009. The most recent estimates suggest that the saving ratio increased from 0.2% to 8.6% between the pre-recession peak and trough, highlighting the extent to which consumers sought to reduce their spending in the light of economic developments. Data on unsecured debt from the Bank of England corroborate this change in behaviour, highlighting the extent to which consumers have reduced their burden of unsecured debt since 2009.

Figure 3: The saving ratio and unsecured lending to individuals

Figure 3: The saving ratio and unsecured lending to individuals

Notes:

  1. Source: Bank of England, ONS

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The most recent data on the saving ratio show a fall from 7.4% in the first quarter of 2012 to 4.2% in the same period of 2013. This is the lowest rate in four years and has halved from the post-recession peak of 8.6% in Q2 2009. This reflects the fall in real household disposable income at the beginning of 2013 as a result of slow earnings growth, flat employment, and slowly rising household spending. It coincides with evidence from the Bank of England of a small increase in the value of unsecured net lending to households during the first three months of 2013, the first such rise since 2009. Separate data from the Bank on housing equity withdrawal suggest that households have continued to pay down mortgage debt during 2012, rather than supporting current consumption through remortgaging activity.

Demand and output

The latest ONS economic statistics for April and May suggest that the economy entered the second quarter of 2013 with a degree of momentum, as suggested by increases in a number of key monthly activity indicators.

Table 1: Selected output and demand indicators

2012Q4 2013Q1 Apr-13 May-13
Index of production 2009=100 97.6 97.7 98.6
Index of services 2010=100 103.3 103.8 104.2
Volume of construction output % changes on a year earlier -8.2 -6.4 -1.1
Retail sales volume (total inc automotive fuel) 2009=100 101.2 101.6 100.9 103
Exports of goods volume 2009=100 117.5 115.7 119
Imports of goods volume 2009=100 115.2 113.1 112.6

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The output of both the services sector (accounting for 78% of the whole economy in 2010) and the production sector (15% of the economy) in April was higher than in the first quarter.

Within services, transport, storage & communication growth was particularly strong in April, following a period of contraction in March. Total services output in the latest three months was 0.8% higher than in the previous three months. On this basis, positive growth was recorded across each of the broad service sector categories, with particular strength in distribution, hotels & restaurants (2.0%) and transport, storage & communications (1.6%).

Manufacturing output contracted by 0.2% in April, but this follows a strong rebound in March. Between the two latest three month periods, both production and manufacturing sectors have grown, expanding by 0.8% and 0.5% respectively.

ONS will start publishing a new series for monthly construction output on a seasonally adjusted basis in July 2013.  In the meantime, unadjusted data show that the year-on-year fall in construction output in April of 1.1% was the lowest since the end of 2011.

On the demand side, both the UK’s trade deficit and the deficit on trade in goods fell during April.  Export volumes were higher in April than the average level in the first quarter of 2013, while imports were lower.

Retail sales volumes also rose strongly between April and May, more than recovering the fall in April.  Food store sales recovered a large fraction of the ground they lost in April, as did non-store retailing (mainly internet sales).

Figure 4: Volume and value of retail sales, latest three months on previous three months

Figure 4: Volume and value of retail sales, latest three months on previous three months

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Figure 4 shows the growth in the value and volume of retail sales, excluding automotive fuels, indexed to the pre-recession peak in Q1 2008. While the value of retail sales has risen strongly since early 2009, volume growth (stripping out the effect of price increases) has been much weaker. This is one of the most striking features of the 2008-09 economic downturn, and highlights the extent to which household budgets have been squeezed by rising prices. However, following some weakness at the beginning of January, the most recent data suggest that the steady rise in sales volumes during 2012 has continued into the most recent monthly data.

Supply and prices

The squeeze on real incomes caused by low earnings growth and relatively high inflation has frequently been cited as a reason for the weakness of GDP growth since the start of the economic downturn in 2008. Figure 5 shows the annual percentage change in the consumer prices index (CPI) between 2004 and 2013 alongside the equivalent series with the effect of indirect taxes stripped out. It also shows the Bank of England’s inflation target, and the +/- 1 percentage point policy range.

Figure 5: Consumer prices index, including and excluding the impact of indirect taxes, annual rate of change

Figure 5: Consumer prices index, including and excluding the impact of indirect taxes, annual rate of change

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Following an extended period of above target CPI inflation – heavily influenced by the impact of tax changes – inflation has come back towards target in recent months. Annual CPI inflation during April and May was 2.4% and 2.7% respectively. Price pressures remain elevated in utilities and food & non-alcoholic beverages, which saw respective rises of 4.2% and 4.3%. However the main reason for the 0.3 percentage point increase in annual inflation was a 1.1% increase in transport prices, a volatile monthly time series which includes air fares.

Producer price inflation – the price change of goods bought and sold by UK manufacturers – has also moderated since the end of 2011. Input prices fell by 0.3% in the year to May, following a sharper contraction of 2.3% in the year to April, and were broadly stable during the second half of 2012. The monthly changes since January 2013 are likely to be the result of the recent changes in global commodity prices. Output prices, or ‘factory gate prices’, continued to increase, rising 1.2% over the same period.

Average weekly earnings growth rose to 1.3% in the three months to April, mainly due to higher bonus payments. The labour market otherwise appears to have been relatively stable during 2013. The employment rate fell by 0.1 percentage points when comparing the three months to April with the November-January period. The unemployment rate for the whole economy remained constant, while the inactivity rate increased by 0.1 percentage points over the same period.

The stability of the labour market data at the start of 2013 does little to resolve the UK’s productivity puzzle. Whole economy output per hour worked was unchanged in the first quarter of 2013, and this follows a period of falling productivity during 2012 as hours worked rose much faster than output. By the end of 2012, output per hour worked was 2.6% lower than in the final quarter of 2011.

The UK motor vehicle industry

While output in the economy as a whole has been revised down following the publication of Blue Book 2013, there are several sectors which have proved more resilient than others since the initial economic downturn in 2008. Despite suffering a precipitous fall in output during 2008, the motor vehicle industry has recovered more rapidly than the economy as a whole.

Production of motor vehicles

The production of motor vehicles is classified within the ‘manufacture of motor vehicles, trailers and semi-trailers’ (henceforth, ‘motor vehicles’) sub-sector in the National Accounts. This sub-sector falls within the manufacturing sector. It accounts for just under 7% of total manufacturing output. Figure 6 shows the output indices for motor vehicles and manufacturing from 1997 to 2012.

Figure 6: Production output for the motor vehicles and manufacturing industries

Figure 6: Production output for the motor vehicles and manufacturing industries

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Leading up to the 2008-09 economic downturn, output was broadly flat in both motor vehicle production and manufacturing. Between February 2008 and February 2009, however, motor vehicle output more than halved as the escalating global economic downturn and the uncertainty it created led households and firms to postpone large purchases both in the UK and abroad. Manufacturing output also fell, albeit by a smaller proportion.

Following the initial economic downturn, both the motor vehicle sector and the manufacturing sector more broadly returned to growth. Motor vehicle output started to rise in March 2009, followed by the manufacturing sector as a whole several months later. However, while the motor vehicle sector has grown fairly steadily since the beginning of 2009, manufacturing output as a whole has suffered a fresh reversal since the end of 2011. The most recent data suggest that while motor vehicle manufacturing has largely recovered to the pre-recession level of output, manufacturing as a whole is still 10% below the level attained at the beginning of 2008.

Household expenditure on motor vehicles

Total household expenditure on transport has three components - expenditure on operating personal transport, the purchase of vehicles, and the use of transport services – each accounting for around a third of the total. It accounted for 14.5% of total household expenditure in Q1 2013.

In aggregate, household spending on all transport has been on a broadly downward trend since 2008 reflecting the pressure on households’ real disposable incomes from slow earnings growth combined with higher rates of consumer prices inflation. Households may also substitute away from more expensive goods and services towards cheaper alternatives.

Set against these economic constraints, two factors may have helped to boost household expenditure on vehicles. The car scrappage scheme was introduced in 2009, offering the owners of cars which were more than ten years old a financial incentive to exchange their vehicle for a new one. This scheme ended in 2010.

A more recent influence on purchases of cars may be the compensation payouts to consumers made as a result of payment protection insurance (PPI) mis-selling, amounting to a cumulative total of just over £10 billion since the start of 2011. The relatively large size of these payments offers households the potential to make large purchases, such as new cars, which they might otherwise have deferred. The timing of payments corresponds quite closely with the renewed pick-up in car purchases that began in 2011.

Figure 7 shows the path of household expenditure on vehicles and its components, and suggests that these factors may be contributing to changes in the pattern of household expenditure on transport. As household expenditure on cars accounts for 95% of expenditure on all vehicles, these are virtually identical.

Spending on car purchases fell by a quarter during the initial phase of the downturn, before recovering strongly in 2009. The timing of this spike closely matches the period of the car scrappage scheme. However the impact was short-lived, and by early 2011 spending was back down to the levels seen at the end-2008 low point.  Since 2011 there has been a renewed pick-up in expenditure, and this corresponds with the timing of PPI compensation payments.

Figure 7 also suggests that there may have been a switch towards lower cost means of transport. While household expenditure on cars and motorcycles remains below pre-recession levels, expenditure on bicycles has continued to rise throughout the period apart from a small drop during the 2008-09 downturn itself, and is now more than 12% higher than in the first quarter of 2008.

Figure 7: Household expenditure on vehicles, chained volume measure

Figure 7: Household expenditure on vehicles, chained volume measure

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Household expenditure on operating personal transport has also been on a downward trend since 2007. This series and its component parts are shown in Figure 8. Expenditure on fuels and lubricants (F&L) is the largest component, and was 2.1% lower in real terms in Q1 2013 than in 2005. This suggests that households are making fewer journeys, driving shorter distances, or switching to more efficient vehicles with lower running costs.

Figure 8: Household expenditure on personal transport, chained volume measure

Figure 8: Household expenditure on personal transport, chained volume measure

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Overseas trade in motor vehicles

As well as rising expenditure on cars in the UK, the recovery in car production has also benefited from strong overseas demand.

The domestic market remains important for motor vehicle manufacturers, but the increasingly global nature of the industry is reflected in the large trade flows associated with motor vehicles. The sector as a whole accounted for 8.3% of all UK goods exports during Q1 2013, with a total value of £6.2bn. UK firms and consumers imported £5.8bn of motor vehicles during the same period, giving the UK its largest quarterly trade surplus in passenger cars in more than fifteen years.

Figure 9 shows the quarterly value of UK motor vehicle imports, exports, and the resulting balance of trade since 1998. It shows that trade in motor vehicles fell substantially during the 2008-09 economic downturn. Exports fell by more than 40% between the pre-recession peak and the trough, while imports fell by 48%. However, the value of vehicle exports in the latest quarter was more than 2.5 times the level at the low point of the cycle, while imports have less than doubled in value.

Figure 9: Value of UK trade in motor vehicles, balance-of-payments basis, seasonally adjusted

Figure 9: Value of UK trade in motor vehicles, balance-of-payments basis, seasonally adjusted

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Figure 10 shows the volume of trade in motor vehicles and reveals a similar pattern to that of trade values, with exports rising faster than imports. Import volumes are still not back to pre-recession levels, while exports of motor vehicles are 25% higher.

Figure 10: Volume of UK trade in motor vehicles, balance-of-payments basis, seasonally adjusted

Figure 10: Volume of UK trade in motor vehicles, balance-of-payments basis, 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

Content from the Office for National Statistics.
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