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.
The economy rebounded strongly in the third quarter of 2012, growing by 1 per cent from the second quarter level which was affected by the Diamond Jubilee bank holiday. Although this was the strongest quarterly growth since 2007, the underlying pattern is one of subdued economic expansion. The economy is no larger than it was a year earlier, even with the benefit of Olympic and Paralympic ticket sales which added 0.2 per cent to the level of GDP in the third quarter of 2012.
Other indicators of economic activity paint a mixed picture. The labour market continues to perform strongly. Employment levels reached a record high of 29.6 million in the 3 months to August, although at 71.3 per cent of the working age population it remains well below the peak rate of 73.1 per cent recorded in 2005. Retail sales volumes also rose in September. But exports and industrial production both recorded falls in the latest month’s figures.
Consumer price inflation fell to 2.2 per cent, but the squeeze on real earnings growth persists, albeit at a much reduced rate.
Latest public finance statistics suggest that the overall level of public sector borrowing in the first half of the 2012-13 financial year was only slightly higher than for the same period in 2011-12.
The economy rebounded strongly in the third quarter of 2012 from a depressed level in the second quarter partly as a result of the Diamond Jubilee bank holiday. Growth was also boosted by the effects of ticket sales for the Olympic and Paralympic Games. The preliminary estimate of GDP shows that the UK economy grew by 1 per cent between the second and third quarters of 2012, following three successive quarters of contraction.
In the third quarter of 2012, the economy was unchanged in size compared with a year earlier, even with the benefit of Olympic and Paralympic ticket sales which added 0.2 per cent to the level of GDP in the third quarter of 2012. Excluding the ticket sales impact, the economy has grown by 0.4 per cent in total over the last two quarters, an average rate of 0.2 per cent a quarter.
The growth in output was concentrated in the services sector which grew by 1.3 per cent, the strongest quarterly growth for five years. Production industries grew by 1.1 per cent, contributing 0.2 percentage points to GDP growth in the latest quarter. However construction output fell again, albeit by 2.5 per cent which was less than in the previous two quarters. Chart 2 shows the contributions to growth in the last two quarters, highlighting the relative contributions of the various economic sectors to GDP growth.
The services sector accounted for the entire 1 per cent growth in GDP in the third quarter of 2012. The 0.2 point positive contribution of the production industries to growth was exactly offset by the identical negative contribution from construction.
The recent weakness in construction related activities may be attributable to several factors, such as lower public sector capital spending, a weak housing market and the end of the major Olympic construction projects. Chart 3 compares the relative performance of the main industrial sectors of the economy, looking at growth of each sector since the pre-recession peak period (2008 Q1). It shows that among the main industrial sectors, construction has recorded the largest contraction since the pre-recession peak, contracting by over 17 per cent.
The Olympic and Paralympic Games are likely to have had an impact on GDP growth in the third quarter of 2012. The largest contribution to services sector growth was in sports activities. This includes the impact of ticket sales for the Olympics and Paralympics, all of which is credited to the quarter in which they were actually used, rather than the period in which the tickets were purchased, in accordance with international reporting guidelines. These added 0.2 percentage points to GDP growth in the third quarter.
The employment activities sub-sector (including employment agencies) also grew strongly in the third quarter, perhaps reflecting the take-up of temporary Olympics jobs, as well as greater buoyancy of the labour market. Further discussion on how special factors such as the Olympics affect GDP growth and measurement can be found in a separate ONS article (229 Kb Pdf) on the subject.
Output of the production industries fell by 0.1 per cent when comparing the three months to August with the previous three month period (March-May 2012). The manufacturing sector, which makes up around 67 per cent of output in the production sector, saw a 0.7 per cent fall in output over the same period. This may in part reflect the loss of a working day because of the Diamond Jubilee bank holiday in June.
Energy supply and water & waste management also saw decreases during this period, while mining and quarrying output rose sharply, up by more than 5 per cent.
Construction output (constant 2005 prices, non-seasonally adjusted) in August 2012 is estimated to be 11.6 per cent lower than the same month a year ago. Over the same period output fell in seven of the nine sectors, five of those being in new work.
In the three months to August, construction output was 11.9 per cent lower than in same three months a year ago. New work had the biggest downward pull, falling 15.6 per cent. The two main negative falls came from public new housing and public other new work, each of which fell by over 20 per cent over the past year. Infrastructure and private new housing were also adversely affected, down 18.4 and 12.1 per cent respectively.
The services sector is likely to have been a beneficiary of the Olympic and Paralympic events held over the summer. The sector grew by 1.7 per cent in August compared to the same month a year ago with ‘government and other services’ recording the strongest annual growth among the main categories (3.2 per cent). Most of the strength in services is concentrated in sports activities, which as discussed above includes spending on Olympic ticket sales. Output of the arts, entertainment and recreation sector (which includes sports activities) was more than 15 per cent higher in the three months to August, compared with the previous three months. Total services grew by 0.2 per cent in the same period.
Retail sales volumes (the amount of goods bought) increased by 1.0 per cent in Q3 2012 compared with Q2 2012. Over the same period, sales values (the amount spent on retail goods) increased by 1.4 per cent.
Automotive fuel was the largest contributor to both sales values (0.6 percentage points) and sales volumes (0.4 percentage points). The food sector also contributed strongly to retail sales in the latest quarter, although there was a larger contribution to sales values (0.5 percentage points) than to sales volumes (0.2 percentage points).
The course of retail sales values and volumes, and the price of retail goods, has followed two distinct paths over the last decade. Up until 2008 the amount of goods bought by consumers was increasing. The amount consumers were spending on retail goods was also increasing over this period, although this was driven by the increase in the amount of goods bought rather than the prices of these goods (this is evidenced in chart 7 that shows the prices of goods sold was broadly flat in the period up until 2008).
However, since 2008 growth in the amount of goods bought by consumers (sales volumes) has been relatively flat (increasing by 2.6 per cent between January 2008 and September 2012), while the amount spent by consumers (sales values) has increased by 13.8 per cent over the same period. In other words, consumers have had to spend more money to be able to consume the same amount of goods. This is corroborated by household final consumption expenditure data (HHFCE) which shows that the volume of household spending has stagnated in recent years while in current price terms (i.e. nominal prices) spending has continued to rise.
The UK’s deficit on trade in goods and services widened sharply to £4.2 billion in August, compared with a deficit of £1.7 billion in July. This was due to a larger deficit of £9.8 billion on goods, up from £7.3 billion in July. This was partly offset by an estimated surplus of £5.7 billion on services, slightly down from £5.6 billion in July.
The UK’s surplus on trade in services has waned somewhat over the past year; the trade balance was £5.7 billion in August, below the average monthly surplus of £6.4 billion recorded in 2011. Imports of services have been rising slowly in year-on-year terms, while exports for most of 2012 have been lower than a year earlier.
The monthly pattern of trade in goods has been highly volatile for most of 2012, with exports fluctuating considerably from month to month, while imports have been steadier.
The increase in the deficit on traded goods in August was the result of both a decrease in exports (£1.0 billion) and an increase in imports (£1.5 billion). Geographically the weakening in trade in goods in August was primarily due to a poorer trade performance with non-EU countries. Exports of goods to non-EU countries decreased by £1.0 billion, with oil (-£209m) and consumer goods other than cars (-£230m) making substantial negative contributions. Conversely, imports increased by £1.1 billion, again largely due to oil (+£747m), although there was a conspicuous fall in imports of chemicals (-£345m).
Over the longer term however, the picture remains one of stronger growth in exports to non-EU than to EU countries. Even after the fall in August, the volume of exports of goods (excluding oil and erratic items) to non-EU countries is a third higher than the average level in 2009, compared with just a 5 per cent increase in export volumes to EU countries over the same period.
The most recent labour market figures for June to August 2012 show continued strength compared with the previous three month period. The level of employment reached a record high of 29.6 million in the 3 months to August, exceeding the pre-recession peak in employment in the three months to May 2008 for the first time. However the latest employment rate - of 71.3 per cent of the population aged between 16 and 64 - is still well below the rate of 73 per cent in March-May 2008.
The employment rate increased from 70.8 per cent to 71.3 per cent between the two latest three month periods, while there was a decrease in the unemployment rate from 8.1 per cent to 7.9 per cent. A comparison of the latest labour market and GDP figures can be found in a dedicated article.
Youth unemployment, aged 16 to 24, fell by 62 thousand between the two latest three-month periods to 957 thousand, dropping below one million for the first time since the same months in 2011. Although there was an increase in the unemployment rate of young people unemployed for over 12 months between the two latest periods, this was offset by larger falls in young people who have been unemployed for less than 12 months.
The number of inactive people decreased in the most recent period, a fall of 138 thousand on the quarter and 314 thousand on the year. The fall between the two latest three month periods was mainly due to a fall in the number of long term sick and retired, down by 103 thousand and 35 thousand respectively.
Producer input prices fell by 1.2 per cent in the year to September, compared with a rise of 1.1 per cent in the year to August. Downward pressures behind the 12-month rate came from falls in imported materials such as metals, chemicals and parts & equipment which together contributed minus 2.3 percentage points to the annual change in prices. These decreases were partly offset by rising prices of components including fuel and food materials.
The relative strength of the pound sterling against the US dollar and the euro over the past year partly explains why the price of imported materials has fallen in recent months. However this has not been sufficient to lower the cost of imported food materials which has seen strong price inflation in the last two months due to poor global harvests and demand pressures.
Annual output price inflation in the manufacturing sector rose in September to 2.5 per cent from 2.3 per cent in August. Tobacco & alcohol exhibited the largest price increase in the 12-month rate rising by 8.7 per cent in the year to September, while the price of petroleum products increased by 3.4 per cent. The observed strength in output prices is exaggerated by recent price increases in food, beverages, and tobacco and petroleum products. Excluding these products, the output price index for manufactured products rose 1.2 per cent in the twelve months to September, the lowest rate since December 2005.
Annual consumer price (CPI) inflation fell to 2.2 per cent in September, from 2.5 per cent in August, and has more than halved from the 5.2 per cent rate seen in September 2011. The September inflation rate is used to up-rate a range of benefit payments, taking effect from April 2013.
‘Core’ CPI inflation (excluding energy, food, alcoholic beverages and tobacco) was unchanged from August at 2.1 per cent in September.
CPI inflation is now at its lowest since November 2009, although the squeeze on real pay rises is not yet ended as it remains slightly above the rate of average weekly earnings growth of 1.7 per cent in August.
Downward pressures behind the change in the 12-month rate came from a range of categories including furniture, household equipment and maintenance at 1.7 per cent in the year to September from 2.3 per cent in August, and education at 3.2 per cent from 5.1 per cent. However, the biggest change came in the housing, water, electricity, gas and other fuels category, where inflation fell from 5.6 per cent in August to 2.2 per cent in September. This mainly came about as a result of gas and electricity price increases in September 2011, which were not repeated in September 2012.
Transport price inflation rose to 2.5 per cent in the year to September 2012, from 1.7 per cent in August with the majority of the upward pressure arising from increased motor fuel charges, rising by 2.8 per cent in the year to September from -0.1 per cent in August.
Excluding financial interventions, public sector net borrowing in September 2012 amounted to £12.8 billion, a little lower than the £13.5 billion figure in September 2011. Public sector net debt rose to £1,065.4 billion at the end of September, which equates to 67.9 per cent of annual GDP.
The public sector finances figures are affected by the Olympic and Paralympic Games. The income generated from the Games is accrued to the London Organising Committee of the Olympic and Paralympic Games (LOCOG) according to the period in which the Games took place. Taking account of LOCOG’s expenditure, it is estimated to have reduced public corporations’ net borrowing by £0.5 billion for the period July to September, reversing the £0.5 billion addition to net borrowing for the period April to June that was associated with expenditure on the Games.
Public sector net borrowing for the period April-August 2012 has been revised downwards by a total of around £6.7 billion. Cumulative public sector net borrowing for the financial year to date (April-September) therefore stands at £37.1 billion; this is significantly lower than £62.4 billion recorded for September 2011. However the one-off £28 billion transfer to Government of the Royal Mail pension scheme assets largely explains this difference. If this transfer is excluded, total borrowing of £65.1 billion in April-September 2012 is only slightly higher than the £62.4 billion figure for the same period last year.
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