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Economic Review, June 2013

Released: 05 June 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 second estimate of GDP confirmed growth of 0.3% in the first quarter of 2012. Early information on the composition of expenditure shines little light on the sources of growth. Inventories provided the mainstay of GDP growth, but this is largely due to the alignment adjustment used to balance the different sets of information on GDP. While household spending grew slightly, investment and exports both fell.

Forthcoming ONS analysis shows that the preliminary estimate of GDP growth, published around 25 days after the end of the quarter, is a good and unbiased indicator of the third estimate that is published two months later as part of the quarterly national accounts. In 18 out of the last 24 quarters, revisions have been of 0.1 percentage points or less.

While GDP grew, the employment rate dropped 0.2 points in the quarter to 71.4% of the population. But the number of people in employment has increased compared with the same quarter in 2012. The rates of long-term and youth unemployment both increased.

During the 2008-2009 recession, GDP in the UK fell by more than in the US, Canada and France but by less than other G7 economies. However since the trough of the recession, the average rate of growth in the UK has been one of the slowest among the G7 economies, similar to France but otherwise weaker than all apart from Italy. In part this may be due to higher UK inflation which has dented the growth in the volume of household consumption.

GDP unrevised at 0.3% in the first quarter of 2013

The second estimate confirmed that GDP increased by 0.3% between the final quarter of 2012 and the first quarter of 2013. The services sector accounted for the whole of this increase, although there was also a 4% rebound in mining and quarrying output following a 10% fall in the final quarter of 2012.

The early information on the composition of expenditure offers little information on the sources of growth. At first glance, inventories provided the only substantive source of growth although this almost entirely reflects the inclusion here of the alignment adjustment which is used to reconcile quarterly growth rates of output and expenditure measures of GDP. Household spending also showed growth of just 0.1% in volume terms, the sixth consecutive quarter of growth, and has consequently increased by 1.6% over the last 2 years. However, spending remains below pre-recession levels.

Investment and exports both fell in the latest quarter. The volume of UK exports has fallen continuously over the past five quarters and is now 3.2% lower than the final quarter of 2011. In contrast, imports to the UK have grown by 0.6% over the same time period.

These initial estimates of expenditure measure of GDP are subject to revision as additional information becomes available.

Figure 1: Contributions to GDP growth, 2013 Q1 compared with 2012 Q4, chained volume measure

Figure 1: Contributions to GDP growth, 2013 Q1 compared with 2012 Q4, chained volume measure
Source: Office for National Statistics

Notes:

  1. Change in inventories includes Alignment Adjustment

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Revisions to GDP growth estimates

ONS will be publishing shortly a newly updated analysis of the record on revisions to GDP growth. Revisions to the quarterly estimates of GDP growth in the period closest to publication are usually due to more information becoming available, whereas the later annual revisions are due to new data sources being used and for changes in methodology.

Table 1 shows the quarterly revisions between the preliminary estimate for a quarter and the third estimate, published around 13 weeks after the end of the quarter, over the period since 2007 Q1. Revisions over this timescale are small, typically 0.1 or 0.2 percentage points in either direction with no evidence of bias. Indeed 18 out of the last 24 quarters have only been revised by a maximum of plus or minus 0.1 percentage points and quarterly estimates have been revised down by 0.01 percentage points on average since 2007 Q1.

Table 1: Revisions to quarterly GDP growth between the preliminary and quarterly national accounts estimates

Revision Number of Occasions
-0.5% 1
-0.4% 0
-0.3% 0
-0.2% 1
-0.1% 9
0.0% 6
0.1% 3
0.2% 2
0.3% 2

Table source: Office for National Statistics

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Delaying the first estimate by 8 or 13 weeks would not therefore materially change the initial estimate of GDP in most cases, and the fact that the preliminary estimate is based on only 44% information does not appear to have a significant impact on the quality of the figures.

Over a longer timescale, the estimate of the quarterly growth in GDP can be revised for a number of reasons:

  • Quarterly sources for the expenditure and income components of GDP become more complete; having information for all three measures of GDP can lead to small balancing revisions. Nonetheless, the output measure continues to be the main driver of the GDP estimate until Supply and Use balancing takes place.

  • Supply and Use balancing can lead to revisions to annual growth rates. 

  • There can be revisions to the quarterly path arising from annual revisions.

  • New improved methods and sources can change the picture.

  • New international standards and frameworks mean that what ONS is trying to measure changes retrospectively.

These issues will be discussed more fully in the forthcoming article “Why is GDP revised?”, which will be an update of a previously published article (National Accounts articles, Why is GDP revised?)

Labour market

During the first quarter of 2013, the labour market was unable to sustain the momentum seen during much of 2012. The employment rate dropped 0.2 percentage points to 71.4% of the population aged 16 to 64 while the unemployment rate edged up to 7.8%. However thanks to the strong employment growth in 2012, the employment rate remains 0.8 percentage points above its value in the first quarter of 2012.

The duration of unemployment was broadly stable prior to the 2008/2009 economic downturn, but since then the average duration has risen sharply. As a proportion of total unemployment, the number of people unemployed for over 12 months has increased from roughly 24.5% in 2008 Q1 to 35.8% in 2013 Q1. The proportion of unemployed that are out of work for less than 6 months has fallen by more than a quarter.

In large part, this is a matter of arithmetic. As unemployment rises in response to the fall in demand during a recession, six months later there will be a corresponding increase in the share of the total that has been unemployed for longer than that period. So as unemployment started to rise during the course of 2008, this was initially concentrated among those unemployed for less than 6 months. By the end of 2008, the proportion of unemployed people that had been so for between 6 and 12 months started to rise, from 15.5% in the third quarter of 2008 to almost 22% a year later. During the following year, the share in this category began to fall back a little as many people moved into the group of those unemployed for a year or more. The latter rose from around a quarter of the total unemployed in the third quarter of 2009 to just over a third by the same quarter in 2010, and has continued to rise since then, reaching nearly 36% by the latest period. These trends can be seen in Figure 2.

Figure 2: Share of total unemployed by duration of unemployment

Figure 2: Share of total unemployed by duration of unemployment
Source: Office for National Statistics

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The age composition of unemployment has also changed significantly as a result of the recession, with youth unemployment increasing at a much faster rate than the national unemployment rate. Youth unemployment (aged 18-24) grew by an average of 2.5% a quarter between 2008 Q1 and 2013 Q1, compared with an average growth rate of 0.7% between 2000 Q1 and 2007 Q4. As a result, the rate of youth unemployment is now 18.6%, around 7.6 percentage points higher than during the 2000-2007 period.

Figure 3: Youth unemployment rate, aged 18 to 24

Figure 3: Youth unemployment rate, aged 18 to 24
Source: Office for National Statistics

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Last month ONS published the first quarterly estimates for the number of young people not in education, employment or training (NEET) in the UK. These show that 17.6% (1 million) of all people aged from 18 to 24 were NEET in the first quarter of 2013, a slight increase in the quarter. A downward trend in the proportion of NEET young people has occurred since 2011 Q3.

Figure 4: Number of 18-24 year old NEETs as a percentage of all 18-24 year olds

Figure 4: Number of 18-24 year old NEETs as a percentage of all 18-24 year olds
Source: Office for National Statistics

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Retail sales

Retail sales fell sharply between March and April, especially sales by mainly food retailers which saw a fall in volumes of 4.1%. Anecdotal evidence suggests that the cold spring weather may have had an impact on sales.

Comparing April 2013 with a year earlier, the volume of sales increased by 0.5%, and the value by 1.3%. Total sales volumes have been broadly flat since 2008, but the performance of the retail subsectors has varied considerably. Sales growth in predominantly food stores has been weaker than the total, while in predominantly non-food stores it has been a little stronger. Sales in petrol stations have fallen by 14.7% between 2007 Q1 and 2013 Q1. This implies that consumers are either using more efficient vehicles or cutting their mileage by reducing the amount or distance of journeys they take. It is possible that some consumers may have substituted their car travel with alternative forms of transport. Non-store retailing (mainly internet sales) has more than doubled since 2000 and if anything appears to have accelerated since the economic downturn in 2008-2009.

Figure 5: Index of Retail Sales volumes

Figure 5: Index of Retail Sales volumes
Source: Office for National Statistics

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The 2008-2009 UK recession in an international context

The UK was one of the fastest growing among the seven major advanced (G7) economies during the years prior to the recession. But five years on from the start of the 2008-2009 downturn, the UK economy remains 2.6% smaller than at its pre-recession peak, a bigger shortfall than in any of the other G7 economies apart from Italy.

The peak-to-trough fall in output in the UK during the recession was similar in magnitude to other G7 economies, similar in scale to Germany and Italy and smaller than Japan. The US and Canada experienced smaller falls in output.  But as Table 2 shows, the UK has grown more slowly than the other G7 economies with the exception of Italy, and at a similar rate to France, since the trough in activity in 2009.

Table 2: GDP growth over selected periods, G7 countries

% quarterly annual growth rates Cumulative % change
Pre-recession 2 Peak to trough Post-recession3 Pre-recession peak to present Pre-recession peak to recession trough
Canada 0.6 -1.4 0.6 5.1 -4.2
France 0.5 -0.8 0.2 -0.8 -4.3
Germany 0.6 -1.2 0.5 1.3 -6.8
Italy 0.3 -1.1 -0.1 -8.6 -7.2
Japan 0.4 -1.8 0.5 -1.3 -9.2
UK 0.7 -1.1 0.3 -2.6 -6.3
USA 0.7 -0.6 0.5 3.2 -4.7

Table notes:

  1. The G7 consists of the following nations: Canada, France, Germany, Italy, Japan, the UK and the US.

  2. The pre-recession period runs from 2004 Q1 to the quarter before the start of each country’s recession.
  3. The post-recession period runs from the quarter after each country’s trough up until 2013 Q1, excepting Canada, where it runs up to 2012 Q4.
  4. Source: OECD

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In the first year after the trough of the recession, the UK economic recovery was fairly steady, with year-on-year growth of 1.3% in the second quarter of 2010. As Figure 6 indicates, the growth profile was very similar to that of France and the US over this period, and only slightly slower than Canada and Germany. However since mid-2010, the US economy has grown by 5.6% in total while the UK grew by only 1.8%.

Figure 6: GDP levels, G7 countries

Figure 6: GDP levels, G7 countries

Notes:

  1. Source: OECD

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The UK’s relatively slow growth performance since the downturn is reflected in the productivity statistics. Several major countries experienced a sharp fall in productivity (measured as output per hour worked) during the recession itself, followed by a slow recovery, including the UK. The striking exception was the US, where productivity rose sharply from early 2009 as employment fell in response to the weakening of demand. However taking the period since the trough of the recession as a whole, productivity has been relatively weaker in the UK - broadly unchanged since 2009, behind Italy (0.1%), France (0.3%), Germany (0.3%) and the US (0.6%).

Figure 7: Real productivity per hour worked, selected G7 countries

Figure 7: Real productivity per hour worked, selected G7 countries

Notes:

  1. Real productivity per hour for the United States only covers the non-farm business sector.
  2. Data for Italy, France and Germany were provided by Eurostat
  3. Data for United States were provided by U.S. Bureau of Labor Statistics

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Eurostat report that the UK employment rate has fallen 0.8 percentage points since the start of the recession. Comparing this to figures from the International Labour Organisation (ILO), this is behind Germany and Japan, where the employment rate rose by 3.9 percentage points and 0.8 percentage points respectively, and the same as France. Productivity gains in the German economy have therefore been the result of output slightly outpacing a labour market even stronger than that of the UK. The opposite is true of the US where the ILO reported that the employment rate fell by 4.2 percentage points over the same period.

One factor that has been suggested to explain rising UK employment despite sluggish output growth is the decline in real earnings. The resulting weakness in real household disposable incomes has contributed to the slow rate of growth in household spending.

Measured in nominal terms, the value of household expenditure in the UK has grown at a quarterly rate of 1.1%, similar to that in Canada, and faster than the other G7 economies.

Figure 8: Household final consumption expenditure in G7 countries (excluding USA), current prices

Figure 8: Household final consumption expenditure in G7 countries (excluding USA), current prices

Notes:

  1. Source: OECD

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Table 3: Average growth of private final consumption expenditure for selected periods, current prices

%
Pre-recession peak to trough Post-recession
Canada 0.3 1.0
France 0.0 0.5
Germany 0.1 0.7
Italy -0.1 0.3
Japan -0.9 0.2
UK -0.6 1.1

Table notes:

  1. Source: OECD

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Measurement in current price terms includes the effect of price inflation. Figure 9 removes this by showing movements in the volume of household spending in each country. For all countries, the growth path is more subdued – markedly so in the case of the UK.

During the recession itself, the UK saw the biggest rate of decline by a large margin in the volume of household spending among all G7 economies. In the subsequent recovery phase, the UK has also experienced a relatively slower rate of growth than many G7 economies, with the clear exception of Italy. This contrasts with the much faster UK growth – relative to other G7 economies - when measured in nominal terms.

Figure 9: Household final consumption expenditure in G7 countries (excluding USA), constant prices

Figure 9: Household final consumption expenditure in G7 countries (excluding USA), constant prices

Notes:

  1. Source: OECD

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Table 4: Average growth of private final consumption expenditure for selected periods, constant prices

%
Pre-recession peak to trough Post-recession
Canada 0.1 0.6
France -0.2 0.1
Germany 0.1 0.2
Italy -0.4 -0.3
Japan -0.7 0.5
UK -1.1 0.2

Table notes:

  1. Source: OECD

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The principle reason for this discrepancy between nominal and real terms performance lies in the UK’s rate of consumer prices inflation which averaged 3.3% during the post-2008 period. Figure 10 shows that this was the highest of all G7 economies for much of this period. This may have been caused by a number of factors, including successive increases in the rate of VAT in 2010 and 2011 (although this does not count in 2009 when the rate of VAT was reduced), the potentially inflationary impact of sterling’s substantial depreciation in 2008, and the impact of administered and regulated prices such as the increase in higher education tuition fees from October 2012.

Figure 10: Consumer prices inflation in G7 countries (change on the same month a year earlier)

Figure 10: Consumer prices inflation in G7 countries (change on the same month a year earlier)

Notes:

  1. Source: OECD

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Table 5: Average consumer prices inflation for selected periods (change on the same month a year earlier)

%
Pre-recession peak to trough Post-recession
Canada 1.7 1.7
France 2.4 1.4
Germany 2.3 1.4
Italy 2.7 2.2
Japan 1.1 -0.6
UK  3.3 3.3
USA 2.6 1.9

Table notes:

  1. Source: OECD

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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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