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Economic Review, March 2013

Released: 03 April 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

Despite small upward revisions to GDP growth in both 2011 and 2012, the overall picture is one of lacklustre growth since late 2010. The path of the economy has been volatile over this period, partly as a result of a series of special factors. Growth has been held back by falling North Sea oil and gas production and by the weakness of the financial sector. In the final quarter of 2012, the economy was still 2.9% smaller than it was immediately prior to the 2008-09 recession.

Latest ONS figures paint a mixed picture for the early part of 2013, with a dip in manufacturing output in January offset by a 0.3% rise in the output of the services sector. Retail sales rose strongly in January, but exports have continued to be highly volatile.

Households have retrenched sharply since the 2008 economic downturn, in response to the squeeze in real incomes and heightened economic uncertainty. Companies too have in aggregate boosted their financial surpluses. The counterpart to these shifts has been a larger public sector deficit. The current account of the balance of payments has consistently run a deficit throughout the period since 1999, but there was a sharp deterioration in 2012.

UK economy grew by 0.3% in 2012

Latest estimates show that the UK economy expanded by just 0.3% between 2011 and 2012, following growth of 1.0% in calendar year 2011. In both cases growth has been revised up slightly as new information has been incorporated into the estimates. Figure 1 shows that the income and expenditure based estimates of GDP both grew faster than the output-based measure which is the source of initial estimates of economic growth.

Figure 1: Annual estimates of GDP for 2010, 2011 and 2012, SA

Annual estimates of GDP for 2010, 2011 and 2012, SA

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Growth in 2012 was led by the services sector, which grew by 1.2%. However this was partly offset by falling output in manufacturing and construction and in North Sea oil and gas production. The mining and quarrying sector contracted by 10.7% in 2012 as a whole, thanks to an identical drop in output in the final quarter of the year as a result of maintenance of North sea oil rigs. Manufacturing output fell by 1.5% in 2012 and construction by 8.1%, in both cases following two years of expansion.

Growth in expenditure in 2012 was driven by modest growth in domestic demand, but there was a substantial negative contribution from net trade as the volume of imports rose by 2.7% while exports fell slightly. This reverses the pattern seen in 2011, when a fall in domestic demand was countered by healthy growth in the volume of exports.
Employment incomes, from wages, salaries and employers’ pension contributions, grew by 3% in 2012 (in nominal terms), but companies’ gross operating surpluses fell following two years of growth.

The economy has experienced a lacklustre period of growth since the third quarter of 2010, although quarterly growth rates have been volatile, with four quarters of positive growth and five negative. In part this pattern reflects a series of “special events” during this period, including additional bank holidays in spring of both 2011 and 2012 as well as the London 2012 Olympics. Since the autumn of 2010, the economy has grown by 0.9% in total. In the final quarter of 2012, the economy was still 2.9% smaller than it was immediately prior to the 2008-09 recession.

Growth since the third quarter of 2010 has been depressed by declining North Sea oil and gas production; excluding this sector, growth in the rest of the economy was 1.6%. The weakness of the finance sector has cut growth by a further 0.3 percentage points. The strongest output growth has been seen in business services, in particular “professional, scientific, administrative and support services”.

Mixed indicators for the start of 2013

In the past month, ONS has published figures for output and overseas trade in January and retail sales in February. These paint a mixed picture, with a dip in manufacturing output in January offset by a 0.3% rise in the output of the services sector. Retail sales volumes also grew strongly in February following a muted figure for January. Exports of goods were weak in January, but this continues the pattern of significant monthly volatility that has been seen over the past year.

Figure 2: Output by sector, SA

Output by sector, SA

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Oil and gas extraction was also weak in January. Output has been adversely affected by repair and maintenance in recent months (most notably at the Buzzard oil field), and it fell by 4.3% between December and January. This could be in part the consequence of a leak on the Cormorant Alpha platform, which compromised a pipeline supplying crude oil from 27 fields in the North Sea, equivalent to roughly 10% of the UK’s oil output.

Construction output fell 6.3% between December and January. But the monthly series is not seasonally adjusted, and this fall is less than half the 13% fall seen between the corresponding months a year earlier. The decline was led by new work, down 7.9% in the month, with repair and maintenance work contracting by 3.4%.

In contrast to the subdued pace of output growth, the labour market has been relatively buoyant. In the three months to January, employment was 131,000 higher than in the previous three month period, a rise of 0.4%. Total employment has grown by 2% over the past year, and the employment rate has risen to 71.5%. However, unemployment was broadly unchanged between the two latest three month periods.

The changes in employment and unemployment can be reconciled in part by a significant drop in the number of economically inactive people – those neither in employment or actively seeking employment within the last four weeks - which fell to 8.95 million, the lowest figure since 2006. This may partly reflect changes in the state pension age for women with fewer women retiring between the ages 60 and 64.

New measure of inflation includes owner occupiers’ housing costs

As measured by the consumer prices index (CPI), the annual rate of inflation rose to 2.8% in February, having remained at 2.7% for the preceding four months. The main upward contributions to the rate came from gas and electricity bills, games and photographic equipment, and rises in the price of air fares and motor fuels.

ONS has begun publishing a new measure of the consumer prices index, called CPIH, which includes the costs associated with owning, maintaining and living in one’s own home. CPIH uses an approach called rental equivalence to measure owner occupiers’ housing costs (OOH). This uses the rent paid for an equivalent house as a proxy for the costs faced by an owner occupier. Housing costs account for just over 12% of the expenditure weight of the CPIH index.

As measured by CPIH, the rate of inflation has increased at a slower rate than CPI inflation throughout the period since 2006, when the series begins, mainly due to the subdued growth in private sector rents. In February 2013 OOH inflation was 1% over the previous 12 months, compared with CPI inflation at 2.8%, resulting in CPIH inflation of 2.6%.

Figure 3: CPI and CPIH, SA

CPI and CPIH, SA

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Sectoral financial positions

The financial transactions that take place between institutional sectors, and the resulting changes in their financial positions, provide a key insight into the behaviour of the UK economy. Sectors that spend more on both current and capital items than their income in a period are net borrowers from other sectors, acquiring financial liabilities in excess of financial assets. Since they all involve both a party and counterparty, the sum of all transactions within the economy must necessarily balance out. Thus if one sector increases its surplus, then there must be a counterpart move to reduce surpluses (or increase deficits) by the same net magnitude across the remaining sectors.

 

Figure 4: Net lending/borrowing by sector as a percentage of GDP, 4 quarter moving average, SA

Net lending/borrowing by sector as a percentage of GDP, 4 quarter moving average, SA

Notes:

  1. PNFC - Private non-financial corporation
  2. FINCO - Financial corporation
  3. NPISH - Non-profit institutions serving households

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Figure 4 shows the aggregate financial balances for the four main sectors of the UK economy – companies, households, government and overseas – expressed as a per cent of GDP. One notable trend since the recession has been the deleveraging undertaken by households as they have sought to reduce indebtedness. In the 10 years leading up to the 2008 economic downturn the UK underwent a period of sustained expansion and credit was freely available. During this period households accumulated large amounts of debt. Following the sharp economic downturn in 2008, households retrenched sharply, cutting back on their spending as incomes were squeezed and uncertainty about job prospects escalated. Having touched zero briefly at the start of 2009 – in that period households were spending more than they earned in income from all sources – the saving ratio jumped sharply to a peak of more than 8% by early 2009. 

Figure 5: Households’ Saving Ratio, CP SA

Households’ Saving Ratio, CP SA

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In Figure 4, this shows as a sharp adjustment to a position of financial surplus. As would be expected, there has also been a steadying of the stock of household liabilities. The heavy borrowing that commenced in 2000 has been brought virtually to a standstill as households attempt to deleverage themselves. The uptake of liabilities has become much more muted in the wake of the recession. Figure 6 shows that households’ debts (expressed as the stock of net financial liabilities as a per cent of their total annual available resources) rose from around 100% of incomes in 1996 to peak at 167% of annual incomes by 2008. Since then their shift to a net surplus position has enabled households to reduce their debts relative to incomes to a ratio around 140%. This is still considerably higher than in the period prior to 2004.

Figure 6: Household financial liabilities (NSA) as a percentage of Household resources (SA), CP

Household financial liabilities (NSA) as a percentage of Household resources (SA), CP

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Companies rely on a mix of internal and external sources of funds to run their businesses, typically investing in capital equipment in order to generate future returns. As a result in any period they might be expected to run financial deficits. Unusually in the period since 2003, they have run surpluses and thus been net lenders to other sectors. However they also cut back on their investment and other outlays since 2008. Companies in aggregate are therefore sitting on a considerable surplus, although this does not of course apply to every individual company.

As the counterpart to the private sector’s move into surplus since 2008, the public sector has moved into substantial deficit. As households and companies have reduced their levels of activity, tax revenues have weakened while government spending in demand-sensitive areas has increased.

The fourth sector is the overseas sector. Its surplus is equivalent to the deficit on the UK’s current and capital accounts of the balance of payments. The current account has consistently been in deficit throughout the period since 1999. But there was a sharp deterioration in the deficit from £20 billion in 2011 to nearly £58 billion in 2012. At 3.7% of GDP, this is the biggest calendar year deficit since 1989. As well as a rising deficit on trade in goods and services in 2012, the normal surplus on income (more than £25 billion in 2011) was almost eliminated, mainly because direct investment earnings of UK private non-financial companies fell while profits earned by foreign-owned companies in the UK rose. 

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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