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.
New GDP estimates confirm the 1 per cent rate of expansion in the third quarter of 2012, but this strong figure was boosted by the inclusion of Olympic and Paralympic ticket sales, as well as the weakness in the second quarter arising from the additional Diamond Jubilee bank holiday.
The underlying weakness of the economy is demonstrated by the absence of growth over the past four quarters. Taking the second and third quarters together (thereby eliminating distortions due to the Diamond Jubilee bank holiday), the economy has grown by just 0.6 per cent in six months. This figure is boosted by 0.2 percentage points by the inclusion of Olympic ticket sales, without which the average rate of growth over this period is just 0.2 per cent a quarter.
Domestic expenditure accelerated in the third quarter, also enhanced by households’ spending on Olympic ticket sales. This was accompanied by a stronger trade performance as exports rose while imports fell.
Latest figures continue to present a picture of somewhat greater momentum in the labour market, although the rise in employment in the latest quarter was slower than in previous periods.
Inflation picked up in October mainly as a result of higher undergraduate tuition fees. With headline consumer price inflation of 2.7 per cent in October, compared with recent growth of average earnings of less than 2 per cent, the squeeze on real income growth has intensified again following several months of easing.
The second estimate of gross domestic product (GDP) in the second quarter of 2012 confirms that the UK economy grew by 1 per cent. This strong growth is influenced by a number of special factors including the Diamond Jubilee bank holiday in the second quarter and the Olympics in the third quarter. Although it was the strongest quarterly growth since 2007, the resulting level of GDP remains 3 per cent lower than the pre-recession peak recorded at the beginning of 2008.
The broad picture of output growth is little changed from previous estimates, with growth in the construction and production sectors revised downwards by 0.1 and 0.2 percentage points respectively. Growth in the services sector contributed the full 1 percentage point to GDP growth in the quarter.
The second estimate of GDP includes new data for expenditure and income, presenting a more complete view of economic activity in the quarter. The domestic expenditure components of GDP portray a strengthening picture, with households’, businesses’ and government expenditure all rising following falls in the second quarter.
Households’ expenditure increased by 0.6 per cent, close to its pre-recession quarterly average, reflecting expenditure on tickets for the London 2012 Olympic and Paralympic Games, all of which is accrued to the third quarter regardless of the date of actual purchase.
However with quarterly growth of 0.5 per cent in the quarter, business investment remains subdued. Since the start of 2008, business investment has contracted by an average of 1.2 per cent a quarter compared to average quarterly growth of 1.1 per cent between 2000 and 2007.
Stronger growth in domestic expenditure was in part offset by a substantial negative contribution to growth from net trade of 0.7 percentage points.
The income measure of GDP paints a mixed picture. In the household sector, where there were 100,000 more people in employment over the quarter, compensation of employees increased by 1.4 per cent in the third quarter of 2012 compared with a modest increase of 0.2 per cent in the second. However this is mainly due to an increase in employer contributions.
The rise in employment and income explains the solid rate of household expenditure growth in the latest quarter. Although companies saw gross operating surpluses fall by 1.0 per cent, this is entirely explained by the alignment adjustment which is used to equilibrate quarterly movements in the three estimates of GDP.
Output of the production industries increased by 0.9 per cent in the third quarter of 2012 compared with the previous quarter. This follows a fall of 0.7 per cent between the first and second quarters.
Manufacturing output, which accounts for around two thirds of the total production sector output, increased by 0.9 per cent between the second and third quarters. Growth was boosted by comparison with the second quarter, which saw the loss of a working day because of the Queen’s Diamond Jubilee bank holiday.
The return to the normal pattern of working days in the third quarter may therefore have generated an additional increase in output. Manufacturing output has been on a broadly stable trend for much of 2012.
The mining & quarrying sector saw output increase by 2.9 per cent between the two latest quarters, although the trend remains firmly downward. The fall in output in September of more than 15 per cent was the biggest monthly fall since current records began in 1995, and was caused by falling output in the oil and gas sector, in part due to maintenance of North Sea installations.
Energy supply output decreased by 2.8 per cent in the third quarter reflecting the unseasonably cool and wet weather in the preceding period.
Output in the construction industry fell by 2.6 per cent in the third quarter of 2012 and has declined by more than 11 per cent over the past four quarters. In the third quarter, output of ‘other new private commercial work’ recorded the strongest fall, although there was some strength in infrastructure which rose by 9.9 per cent.
Total construction output is now 18.5 per cent below its level at the start of 2008. Much of this fall has come over the last year driven by a drop in new work and, more recently, weakness in repairs and maintenance.
The services sector grew by 1.3 per cent between the second and third quarters of 2012, reflecting increased economic activity in part due to the Olympic and Paralympic events. Compared to the same month a year ago, the sector grew by 1.1 per cent with ‘distribution, hotels and restaurants’ recording the strongest annual growth among the main categories.
Transport, storage and communication continues to record weak growth in contrast to the rest of the services sector. The output of the government & 'other services' sector (which includes sports activities) grew by 2.0 per cent in the 12 months to September.
The strength in services is mostly concentrated in sports activities, which includes Olympic and Paralympic ticket sales sales. Output of the arts, entertainment and recreation output, which includes sports activities, increased by 15.0 per cent in September compared to a year ago. Although this is significantly lower than the August annual growth rate (34.7 per cent), it remains higher than its historical average.
The UK’s deficit on trade in goods and services was £8.5 billion in the third quarter of 2012, down from £10.1 billion in the preceding quarter. The deficit on trade in goods fell from £28.1 billion to £25.4 billion as export volumes (excluding oil and erratic items) increased by more than 4 per cent while imports fell 0.3 per cent.
The monthly figures for September also showed a significant improvement on August, with export volumes (excluding oil and erratics) rising by 2.5 per cent in the month as imports fell 1 per cent.
In the case of both imports and exports, this reverses the changes between July and August and leaves trade volumes broadly unchanged from July levels. It continues a pattern of remarkable volatility in export volumes in particular, which have oscillated violently from month to month throughout 2012.
The balance of trade in oil improved slightly in September, but remains one of the largest monthly deficits on record, reflecting declining export volumes as North Sea oil and gas production continues its downward trend. The balance of trade in oil has turned round from a surplus of more than £6.5 billion in 2000 to a deficit of more than £14 billion over the latest 12-month period.
The UK’s trade deficit with its most significant trading partners deteriorated in the third quarter of 2012, reflecting large deficits with Germany (£5.8bn), China (£5.5bn) and Norway (£3.7bn) partly offset by surpluses with the USA (£2.8bn) and the Irish Republic (£1.3bn).
Retail sales volumes (the amount of goods bought) were 0.6 per cent higher in October 2012 than a year earlier, the slowest year-on-year increase since April. Sales values (the amount spent) increased 1.6 per cent over the past year. However both sales values and volumes decreased between September and October.
The volume of retail sales in October was over four per cent higher than its level four years earlier, while in value terms sales have risen by more than 10 per cent over the same period. Rising prices have increased shopping bills meaning that consumers are spending more money to purchase a similar amount of goods.
Non store retailing which makes up about 5 per cent of all retail sales volumes was the largest contributor to sales volumes in the twelve months to October. This sector (which includes online retailing) grew by 12.1 per cent in this period, compared with food stores where sales fell by 0.7 per cent. Non-food stores recorded growth of 1.3 per cent while sales in petrol stations contracted by 3.4 per cent.
The labour market continued its resilient performance in the third quarter of 2012. Between the second and third quarters, total employment rose by 100,000 (0.3 per cent) to a level of 29.58 million. The employment rate of 71.2 per cent represents an increase of 1 percentage point over the previous year.
However the rise of 0.2 points between the two latest three month periods is somewhat slower than during the first half of 2012. Part-time employment rose by 0.6 per cent in the latest quarter, ahead of the 0.2 per cent increase in the number of full-time workers.
The unemployment rate fell to 7.8 per cent in the latest quarter, the third successive quarterly fall from the rate of 8.4 per cent seen in the final three months of 2011. However the claimant count of those seeking jobseeker’s allowance rose by 10,100 between September and October, to a rate of 4.8 per cent which has not changed significantly over the past year.
Public sector employment decreased by 235,000 between March and June to 5.66 million, with employment in the private sector increasing from 471,000 to 23.9 million. However these figures are affected by the reclassification of further education corporations and sixth form college corporations from the public sector to the private sector during this period. Adjusting for this change, the fall in public sector employment during the latest three month period was only 39,000, with a corresponding increase of 275,000 in private sector employment.
Producer input and output prices both rose between September and October, the former by 0.4 per cent, faster than the 0.1 per cent rise in output prices. However the annual rate of input price inflation of 0.1 per cent remains below output price inflation of 2.5 per cent.
Upwards pressure on the annual rate of input price inflation came from food materials, with home food materials rising 11.7 per cent over the year, up from 10.4 per cent in the year to September, and imported food materials, up 4.0 per cent, the highest rate since May 2012 (4.7 per cent).
The annual rate of inflation, as measured by the consumer prices index (CPI), rose to 2.7 per cent in October from 2.2 per cent in September. This was the biggest monthly rise in annual inflation since September 2011. The price level on this basis rose by 0.5 per cent between September and October.
‘Core’ inflation (excluding energy, food, alcoholic beverages and tobacco) also rose sharply from 2.1 per cent in September to 2.6 per cent in October.
The largest upward contribution to the change in the 12-month rate of CPI inflation was from the education category, which saw inflation rise from 3.2 per cent in September to 19.7 per cent in October.
This change is due to the increases in undergraduate tuition fees with maximum annual tuition fees rising to £9,000 for new UK and EU students in England; it is estimated to have contributed 0.32 percentage points to the increase in annual inflation in October. For the same reason, services price inflation rose from 3.2 per cent to 4.1 per cent.
Even allowing for this factor, inflation rose in October because of upward contributions from food and non-alcoholic beverages prices (up 3.4 per cent in October compared to a year ago) and transport, where the price of second hand cars and air fares both fell by less than they did a year earlier.
The most significant downward pressure came from housing, water, electricity, gas and other fuels. Annual inflation in this category dropped from 2.2 to 1.7 per cent, as energy price increases in October 2011 dropped out of the annual calculation.
Public sector net borrowing excluding financial interventions was £8.6 billion in October 2012, £2.7 billion higher than in October 2011. For the period April to October 2012, borrowing on this basis was £45.3 billion, compared with £68.3 billion in same period of 2011.
However, excluding the one-off £28 billion capital payment recorded as part of the transfer to Government of the Royal Mail pension scheme assets, borrowing totalled £73.3 billion in the first seven months of the 2012/13 financial year, £5.0 billion more than in the same period of 2011/12.
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