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.
Over the past eighteen months, the economy has experienced a mild contraction in output. This reflects the impact of global economic headwinds as well as domestic economic conditions such as the continuing high rate of inflation in the UK.
The weakness in activity is mirrored in the labour market where employment has been fairly static, notwithstanding a small rise in employment and a fall in unemployment in the latest quarter. Full-time employment fell slightly in the first three months of 2012, while earnings growth also remained subdued.
There was a substantial fall in headline consumer price inflation from 3.5 to 3.0 per cent between March and April, driven by lower air fares, while lower oil prices produced a sharp drop in rates of manufacturers’ input price inflation.
GDP has now contracted by 0.3 per cent for two consecutive quarters at the end of 2011 and the start of 2012. The level of GDP can be depicted as broadly unchanged over the past year, during which time it has fallen by 0.1 per cent, primarily due to weakness in the production and construction sectors. The services output has continued to grow, albeit at a slower rate in each of the last two quarters. Within the production sector, weakness has been concentrated in oil and gas output. Output in the mining and quarrying sector as a whole has contracted by nearly 14 per cent over the past year.
The small downward revision to the first quarter’s growth rate was due to a lower figure for construction output than previously estimated, which now shows a fall of 4.8 per cent.
In terms of expenditure, growth over the past eighteen months has depended primarily on net trade, with some expansion in exports while imports have held fairly steady. The euro-area's financial difficulties have held back exports to the EU, the UK’s main export market, but exports to the rest of the world have shown some strength.
Household final consumption expenditure has fallen a little in real terms over the same period, and there has been a sharp running down of inventory levels (although this in part reflects movements in the alignment adjustment needed to bring the expenditure and output measures of GDP into line), while investment has been broadly flat.
Imports of oil have been rising, as production from North Sea oil fields has declined. But imports of finished manufactures also held up during the latest quarter.
In the income measure of GDP, compensation of employees - the biggest component - was unchanged between the two latest quarters reflecting weak earnings growth. However it increased compared with a year earlier due to the impact of rising numbers of jobs (as measured by the workforce jobs figures) at the end of 2011.
Annual growth in the GDP deflator, which is an indicator of domestic price pressures, has fallen from an average of 2.3 per cent in 2011 to 2.0 per cent in the first quarter of 2012, corresponding to an easing in headline consumer price inflation. The GDP deflator excludes the direct impact of the rising prices of oil and other imported commodities, and has therefore grown more slowly than the CPI measure of inflation.
The production sector continued to contract in March. This was driven by falls in the energy-related components of output – mining and quarrying and utilities. Although manufacturing output grew by 0.9 per cent between February and March, this follows a substantial fall in the previous month. Manufacturing output has been declining slightly since May 2011, and was 0.9 per cent lower in March than a year earlier.
Over the past year, all of the industrial groupings in the index of production experienced falls in output, with the exception of capital goods where there was a one per cent rise. So while energy output has been the prime cause of weak industrial output, other elements have also contributed.
During the 2008-2009 recession, industrial output declined by 13.3 per cent. By early 2011, it had recovered by 4.7 per cent, but has since declined by 3.9 per cent. The level of output is therefore not far above its trough at the end of the recession.
The picture for the manufacturing sector has been more favourable, with output recovering just over 8 per cent by May 2011, but then falling 1.2 per cent by March 2012. Nevertheless, manufacturing output is still 8.5 per cent below its pre-recession peak. The two main economic headwinds facing the manufacturing sector are the weakness of domestic demand, both consumer and industrial demand, and the fragility of euro area activity
Although construction output picked up in both February and March, this was insufficient to offset the sharp drop between November and December. On a seasonally adjusted basis, output fell by 4.8 per cent in the first quarter of 2012. Construction output has not fallen on this scale since the recession in 2008 and 2009.
New work has seen the biggest decline in activity, rather than repair and maintenance. Weakness arises particularly from falls in public sector housing, infrastructure and private commercial new work. This may be related to the squeeze in public sector investment, and perhaps the winding down of Olympics-related infrastructure work. Private housing construction has by contrast been increasing since the third quarter of 2009.
Following the 4.8 per cent drop in output in the first quarter, the construction sector has still only recovered around two-fifths of the output lost during the recession.
Services sector growth for the first quarter is unrevised at 0.1 per cent. Within this, the distribution, hotels and catering and the transport, storage and communications components have both been revised up – by 0.4 and 0.3 percentage points respectively – but business services and finance has been revised down by 0.2 percentage points. This reflects revisions to January and February’s estimates as well as survey data for March replacing forecasts at the time of the preliminary GDP release. The main sources of weakness in the business services and finance sector were financial and insurance services, though real estate and professional scientific and admin support also contracted.
Services sector growth over the last year has been 1 per cent. This is lower than the average growth seen in 2010 and 2011 of 1.5 per cent, and is well below typical pre-recession growth rates.
In 2012 Q1, net overseas trade made a negative contribution to growth of 0.1 percentage point. This was primarily due to an increase in imports, in part a result of higher oil imports which have been increasing as a substitute for falling domestic oil and gas production. This is a trend that has been under way since 1997 and as a result trade in oil has subtracted from GDP growth in terms of expenditure components. This is the counterpart of the impact of lower oil and gas extraction from the North Sea on the output-based estimate of GDP.
Imports and exports of goods reached their highest level in value terms since records began. This was driven by increasing prices for both exports and imports rather than an increase in volumes. The volume of exports of goods excluding oil has risen by 10.7 per cent since 2008 while imports have risen by only 2.6 per cent.
Since 2008 Q1, the volume of goods exports excluding oil to the EU has fallen while export volumes to non-EU trading partners have increased. This reflects the relatively weak economic growth in many EU countries.
The volume of retail sales fell by 2.3 per cent between March and April. The fall was mainly driven by a decline in predominantly food stores and predominantly automotive fuel - the latter experienced the largest decline on record. The record fall of 13.2 per cent was partly due to fears of a strike by fuel tanker drivers in late March, which led consumers to buy additional petrol in order to avoid potential shortages.
To avoid the volatility caused by such factors, a clearer picture may be gained from looking at figures over a longer period. Since the end of the recession in 2009, the volume of retail sales has grown marginally, experiencing just under 2.5 per cent growth between the second quarter of 2009 and the first quarter of 2012. Much of this gain can be attributed to growth in the latest quarter. April’s fall in sales has given a weak start to the second quarter of 2012, although growth was slightly positive at 0.2 per cent between the two latest three month periods.
In the first quarter of 2012, employment increased by 105,000 and unemployment fell by 45,000, compared with the previous quarter. However, compared with a year earlier, employment has fallen marginally, by 7,000, while unemployment has risen by 170,000. Between the two latest quarters, the increase in employment was entirely due to higher part time employment, with full time employment falling very slightly. And the proportion of part time workers who want to be in full time employment continued to rise to record levels.
Total weekly hours increased in the latest quarter, despite the rise in part-time employment, as both full time and part time workers increased their average weekly hours.
Annual average weekly earnings growth has fallen to 0.6 per cent in the January-March period and is therefore lower than the growth in regular earnings of 1.6 per cent. This is due to falling bonuses, not just in the financial sector, but in a number of other sectors reflecting the adverse economic climate.
Since the start of the 2008 recession, employment has responded more slowly to changes in GDP growth than might be expected on the basis of experience from previous economic downturns. There are many possible reasons for this, such as greater flexibility in the response of hours worked, the degree of part-time working, and earnings growth. There has been a substantial shift towards part time or temporary working in recent years. Further, the relatively weak wage growth over the last four years may reflect another way in which the labour market has adjusted to the weak economic conditions.
Despite the greater flexibility in the labour market, the unemployment rate has increased by 0.5 percentage points to 8.2 per cent over the past year. This may reflect the impact of public sector job losses as well as firms’ reluctance to hire new workers. This is also seen in a rise in the number of redundancies, which have picked up moderately over the past year. However they remain well below levels seen during the recession in 2008 and 2009.
The claimant count has also increased in the year to April by 106,600. The percentage of those claiming benefit for more than 12 months has steadily increased to 24.2 per cent of all claimants in April 2012, having risen from less than 15 per cent in April 2011. As individuals remain on the claimant count for a longer period, their skills may atrophy, making it more difficult for them to meet the skill requirements of vacancies.
Annual output price inflation in the manufacturing sector slowed to 3.3 per cent in April, the lowest since December 2009. Input price inflation was 1.2 per cent in the same month, the lowest since October 2009. This is the first time in two and a half years (since October 2009) that input price inflation has fallen below output price inflation.
The decline in input price inflation was driven mainly by lower crude oil prices, while metal prices fell too. These weaker trends may reflect downgrades in expectations of global economic growth by many forecasters.
The change in excise duty, introduced in the Budget, is thought to have added around 0.3 percentage points to the output price index in March.
Annual consumer price inflation fell to 3.0 per cent in April from 3.5 per cent in March. Inflation has fallen markedly since the high of 5.2 per cent in September, and April’s fall is the most pronounced yet. The decrease was mainly driven by a fall in transport costs (particularly air fares) which contributed almost half of the 0.5 percentage point fall experienced by the measure. This component of the CPI includes prices for a range of long haul, European and domestic flights, and domestic and international sea transport. These were lower in 2012 than 2011 due to the timing of the Easter holiday period when average fares are typically higher than in adjacent periods. In 2012, many Easter holiday trips missed the price collection dates, while in 2011 the price recording dates covered the holiday period.
Other notable downward pressures came from alcohol & tobacco and clothing & footwear, whilst there was some slight upward pressure from restaurants & hotels and recreation & culture.
In April 2012, the UK experienced a current budget deficit of £12.4 billion (excluding the temporary effects of financial interventions) – a record deficit for April. Despite this, net borrowing during the month was in surplus by £16.5 billion due to the transfer of assets and liabilities from the Royal Mail Pension Plan (RMPP) to a new government run unfunded public sector pension scheme. The assets transferred were valued at £28 billion and the liabilities at £38 billion. Pension liabilities of an unfunded pension plan are treated as a contingent liability and are therefore not recorded in Public Sector Finances so the resulting one off boost of £28 billion to Public Sector finances for April turned a £12.4 billion current budget deficit into a £16.5 billion net borrowing surplus. Consequently, net debt, excluding the temporary effects of financial interventions, was £1006.3 billion, equivalent to 64.8 per cent of GDP.
Monthly data can be volatile and therefore it is more appropriate to analyse data over a longer period. So, despite a record April current budget deficit, when looking at the data over a longer period, the amount the government has borrowed each year since the recession has decreased each financial year. The public sector current account was in deficit by £97.3 billion in 2011/12, £1.4 billion lower than the £98.7 billion deficit in 2010/11, and £10.3 billion lower than the 2009/10 deficit of £107.6 billion. This decrease can be mainly attributed to the recovery of government receipts which fell throughout the recession whilst government expenditure continued to grow in current price terms. This recovery of government receipts has allowed a narrowing of the gap between government income and expenditure.
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