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.
The economy carried some momentum into the third quarter of 2013. Monthly output estimates suggest that the economy grew by 0.4% in July and that output is now 1.5% higher than at the beginning of 2013.
Changes to the timing of bonus payments caused a substantial rise in income from employment in the second quarter, but real households’ disposable income during Q2 2013 was still 0.7% lower than a year ago. This fall was partly due to a fall in the contribution of taxes & benefits to income growth - as a consequence of the lower uprating of benefits payments in 2013 compared with 2012.
Growth in the UK economy during the first half of 2013 has been spread across the Production, Construction and Services sectors. However, within Manufacturing, growth has been concentrated in the Transport Equipment subsector, which includes the motor industry. Manufacturing output excluding Transport Equipment was no higher in July 2013 than in the trough of the economic downturn in 2009.
Average UK house prices were just 0.3% below their pre-downturn peak in July 2013, but there are sharp regional differences. House prices in London were 17.3% above the pre-downturn peak in July, while house prices in the North East and North West remain 11.7% and 9.6% below their respective peak levels in 2008.
New information in the quarterly national accounts reaffirmed the estimate of 0.7% real GDP growth between the first and second quarters of 2013, and provided further details on the behaviour of expenditure and incomes which underpin this growth. Households’ final consumption expenditure (HHFCE) rose by 0.3% during the quarter in volume terms: the seventh consecutive quarter of expansion at an average rate of 0.4% a quarter. This relatively smooth expansion contrasts sharply with the erratic path of real households’ disposable income (RHDI), which has grown by 1.8% since the third quarter of 2011 - less than the 3.0% rise in spending over the same period (see Figure 1). This is reflected in a small fall in the saving ratio as households maintained their spending, despite only modest growth in disposable incomes, by running down their savings.
The path of RHDI has been especially volatile in the first half of 2013. Compensation of Employees – which includes income from employment in the forms of both Wages & Salaries and Employers’ contributions to pensions and social benefits on behalf of employees – rose by 2.9% in the second quarter of 2013, the fastest growth rate since Q4 1989. This in part reflects timing factors, especially the deferral of some bonus payments from their normal date in March because of the reduction in the rate of income tax on high earners from April. Taking the first two quarters of 2013 together, Compensation of Employees was 2.3% higher than a year earlier.
The jump in the households’ saving ratio from 4.4% to 5.9% between the first and second quarters largely reflects this timing effect of bonus payments, as households’ smoothed their consumption relative to the erratic path of incomes. Over the first half of 2013, the average households’ saving ratio of 5.2% was lower than the ratio of 6.8% in 2012, reflecting households’ desire to maintain their spending in the face of slower income growth.
Despite the surge in income from employment in Q2, RHDI grew by only 1.5% in the quarter, and real incomes were still 0.7% lower than in the same quarter of 2012. Figure 2 shows contributions to the growth of RHDI since the beginning of 2012. The most recent fall reflects the impact of changes in taxes and benefits in particular. Growth in disposable incomes during 2012 was supported by the substantial uprating of benefit payments in April 2012, which was determined by the September 2011 rate of CPI inflation of 5.2%. By contrast, in April 2013 benefits were uprated on the lower rate of inflation of 2.2% in September 2012.
Tax payments made by households also increased strongly in the second quarter of 2013, to a level 6.6% higher than a year earlier, reflecting higher taxes on earnings arising because of strong bonus payments.
The level of general government consumption expenditure has also been revised down since Q1 2012. Previously published estimates showed that general government expenditure grew by 4.9% between Q3 2011 and Q2 2013, while the latest estimates show this has been reduced to 2.3%. The changes can in part be attributed to improved information on critical care beds.
The quarterly national accounts also provided information about the levels of investment in the UK economy. Expenditure on gross fixed capital formation remains roughly 25% lower than its pre-downturn peak in Q3 2007. Within the total, there was further weakness in business investment, which declined by 2.7% in the second quarter of 2013 to a level 8.5% lower in volume terms than a year earlier. This was partly offset by a rebound in dwellings investment of nearly 10% in the quarter.
While the quarterly national accounts indicated that the economy grew strongly during the second quarter, several recently published series have suggested that the economy carried some of this momentum into the start of Q3 2013. Output in the Construction and Services sectors grew by 2.2% and 0.2% respectively during July, and while Production output was flat, Manufacturing output grew by 0.2% (See Reference Table 1). Similarly, the Labour market strengthened during the three months to July (see Reference Table 2), as the unemployment rate fell relative to the previous quarter and the Claimant Count recorded a fall in the number of individuals claiming the Job Seeker’s Allowance.
However, several more timely indicators have cast doubt on whether the recent return to growth is ‘broadly based’. Exports fell by 4.6% during July, raising the trade deficit on goods and services to £3.1bn and unwinding some of the recent strength in net trade. Similarly, retail sales fell during August, reversing the strong growth experienced during July.
Figure 3 shows monthly estimates of output between January 2010 and July 2013 – including the first month of the third quarter. These monthly output estimates are calculated by weighting the seasonally adjusted volume series from the Index of Production, the Index of Services and the Monthly Survey of Construction by each sector’s share in total output. As monthly series tend to be more volatile than the quarterly aggregates, the resulting monthly output series should be used with care, but does provide an indication of the economy’s direction of travel.
Figure 3 suggests that the economy continued to expand at the start of the third quarter, consistent with information from a wide range of other activity indicators. July was the fifth consecutive month of output growth, completing the longest sustained run of monthly expansion since 2010. July’s figure shows aggregate output growth of 0.4% on the month, the majority of which was due to expanding output in the services sector. On this, more volatile measure, output during July was 1.4% higher than the same month a year ago (although comparisons with this period of 2012 may be distorted by the Diamond Jubilee bank holiday and the London 2012 Olympics and Paralympics), and 1.5% higher than at the start of 2013.
The strengthening of growth during the first half of 2013 has had a substantial impact on expectations of economic growth among independent forecasters. Figure 4 shows the average, range and spread of external forecasts for GDP growth in 2013, made between July 2012 and September 2013. It shows that expectations for full-year GDP growth in 2013 fell between July 2012 and May 2013, from around 1.4% to around 0.9%, as forecasters responded to negative data during the second half of 2012. However, forecasts made during the three most recent months have risen and the spread of forecasts – which had narrowed as more data became available – has widened again in September.
There is little evidence that a higher level of activity has triggered an increase in inflation. The headline Consumer Prices Index (CPI) inflation rate fell to 2.7% on an annual basis in August, down from 2.8% in July, partly as a consequence of the falling costs of transport. Figure 5 shows the annual rate of headline CPI inflation, Services inflation and Services inflation excluding Education between January 1989 and August 2013. Throughout the majority of this time period, Services inflation has been above the headline inflation rate, reflecting faster price increases for Services than for Goods. During the recent economic downturn, Services and headline inflation have been much closer, reflecting changes in global commodity prices, domestic price pressures and the impact of higher import prices following the depreciation of Sterling in 2007.
Figure 5 also shows that Services price inflation – which has been supported in recent months by increases in undergraduate tuition fees – is among the lowest recorded levels since the late 1980s. Removing Education from the Services CPI series suggests that non-Education services inflation has only once been as low as its present value, following the onset of the economic downturn in 2009.
While the recent increase in output growth has been widely noted, it is not clear how broadly based the recovery has been, with some parts of the economy growing more strongly than others. This section explores some of the characteristics of the economic recovery from this perspective.
Firstly, while the growth over the most recent few quarters has been spread across the main sectors of the economy, both the Manufacturing and Production sectors remain well below their pre-2008 levels of output. Much of the recent strength in Manufacturing, in particular, has also been concentrated in relatively few sectors. Figure 6 shows the path of Manufacturing output since the beginning of 2007, both in total and excluding the Transport Equipment sector, which is mainly accounted for by motor vehicle production. It indicates that while Manufacturing output as a whole has been broadly stable since mid-2010, the Transport Equipment sector has played an important role in sustaining output over this period.
While the output of Manufacturing as a whole has grown 5.2% since the trough of the downturn in 2009, output growth in the Transport Equipment sector accounts for almost all of this increase: Manufacturing output excluding Transport Equipment was unchanged in July compared with the trough in Q3 2009. More broadly, only three of the thirteen manufacturing sub-sectors have re-attained their 2008 peak level of output, and only six sub-sectors have grown since the 2009 trough of the economic downturn. These patterns have increased the size of the Transport Equipment, Electrical Equipment and Machinery & Equipment sectors relative to activity in Pharmaceuticals, Textiles & Leather and Chemicals & Chemical Products. While growth in some manufacturing sectors helps to make the case for a balanced recovery, it remains heavily concentrated in relatively few sectors, and Transport Equipment in particular.
Secondly, recent growth has been concentrated in household expenditure rather than in investment. Figure 7 shows the proportions of Gross Final Expenditure accounted for by gross fixed capital formation and household expenditure since 2007 in real terms. It shows that the proportion of total expenditure accounted for by spending on investment has fallen from an average of 13.5% in 2007, to an average of 10.9% during 2012 and to 10.4% in Q2 2013: the lowest level recorded since the 1950s. This compares with 14.1% in France, 16.7% in the United States and 17.9% in Canada. Across the G7, investment accounts for an average of 14.6% of Gross Final Expenditure.
By contrast, the proportion of expenditure accounted for by households’ spending has been on a rising path over the past two years, increasing from an average of 46.2% of total expenditure in 2011, to 46.9% in Q1 2013.
Data from the Bank of England suggests that some of this latest increase in expenditure has arisen as a result of higher household borrowing. Figure 8 shows changes in net unsecured lending to households accounted for by credit cards and other forms of unsecured credit. It suggests that while consumers continued to use their credit cards throughout the economic downturn – and have continued to do so in the most recent few months – there has been an increase in the quantity of credit derived from other forms of unsecured lending. As reflected in the jump in the saving ratio, households deleveraged between 2008 and 2011, reducing their exposure to non-credit card unsecured debt. However, from mid-2012 onwards this trend has reversed. During the year to July, households increased their unsecured borrowing by almost £5.4bn.
The cause of this switch is unclear, but one factor is likely to be recent falls in the interest rates on personal loans. While the rates for personal loans of up to £10,000 have been on a broadly downward trend since late 2009, the rate for smaller loans fell quite sharply at the end of 2012. These may be indicative of the effects of the Funding for Lending Scheme which was announced in July 2012, although it is difficult to identify the impact of this scheme and that of a more general easing of credit conditions.
The change in household behaviour over the past year may be associated with the performance of the housing market. House prices have been rising since 2011, and this may in turn have influenced household confidence and expenditure. Figure 9 shows that average mix-adjusted UK house prices were just 0.3% below their pre-downturn peak in July 2013, having increased 3.5% since the end of 2012.
However, Figure 9 also indicates that recent movements in the UK average have been heavily influenced by the housing markets of London and the South East. In these regions, property prices have been rising sharply, with prices in London in particular accelerating during 2013. Prices in the South East and London were 0.7% and 17.3% above their pre-downturn peak in July, while prices in the North East and North West remain 11.7% and 9.6% below their respective peak levels. In Northern Ireland, average house prices in July were more than 40% below their level at the beginning of 2008.
However, while average UK house prices have been rising strongly, data from the Bank of England suggest that there has been little feed-through into net lending for loans secured on dwellings. Figure 10 shows the change in net lending to households secured on dwellings. It suggests that from a peak of around £9bn per month prior to the economic downturn, net mortgage lending fell sharply during the first half of 2008, and has remained subdued over the following five years. Even in the most recent data there is little evidence of a sustained increase in net lending.
The lower values of net mortgage lending come despite the substantial fall in average mortgage rates – both fixed and floating – which have taken place since 2008. The average floating rate taken up during July 2013 was below 3% – amongst the lowest on record. The premium charged on fixed rate mortgages has also declined since the economic downturn began, with a particularly pronounced narrowing occurring since the middle of 2012. This suggests that despite a recovery in house prices, there is no evidence of a return to the levels of lending experienced prior to 2008.
|Change on previous period, volume series|
|Index of Services|
|Business Services & Finance1||KI7L||1.9||0.4||0.1||0.6||0.4||0.4||0.3|
|Government & Other1||KI7T||1.2||-0.7||0.5||0.0||-0.4||-0.2||0.2|
|Distribution, Hotels & Rest. 1||S2MV||0.8||-0.6||1.3||1.8||1.0||-0.1||0.5|
|Transport, Stor. & Comms. 1||KI7B||0.1||0.4||1.7||0.2||0.1||-0.5||-0.1|
|Index of Production|
|Mining & Quarrying1||K224||-9.6||-10.4||3.2||1.4||3.8||0.8||-0.5|
|Retail Sales Index|
|All Retailing, excl.Fuel1||J467||1.4||-0.3||0.5||1.0||2.0||0.2||1.3||-1.0|
|Predom. Food Stores1||EAPT||0.0||-1.1||0.3||-0.5||2.6||0.2||2.7||-2.7|
|Predom. Non-Food Stores1||EAPV||1.7||-0.4||-0.4||2.0||1.0||0.2||-0.3||0.4|
|Balance 2, 3||IKBJ||-34.6||-8.5||-6.3||-5.5||-1.8||-1.3||-3.1|
|Public Sector Finances|
|PNSB-ex, ex RM & APF 6,8||L65P||-3.4||-12.8||24.3||-18.6||-6.1||1.8||11.1||-12.5|
|PNSD-ex as a % GDP8||HF6X||74.8||74.8||74.2||74.8||74.1||74.8||74.5||74.6|
Levels, seasonally adjusted, current prices
|Employment Rate1, 2||LF24||71.1||71.6||71.4||71.5||71.4||71.5||71.6|
|Unemployment Rate1, 3||MGSX||7.9||7.8||7.8||7.8||7.8||7.8||7.7|
|Inactivity Rate1, 4||LF2S||22.6||22.3||22.4||22.3||22.5||22.3||22.3|
|Claimant Count Rate7||BCJE||4.7||4.7||4.6||4.5||4.5||4.4||4.3||4.2|
|Total Weekly Earnings6||KAB9||£469||£471||£468||£479||£477||£475||£474|
|Recreation & Culture5||D7C4||0.2||0.9||1.2||1.5||1.5||1.3||0.7||0.9|
|Food & Non-alcoh. Bev. 5||D7BU||3.3||3.7||3.8||4.2||4.3||3.8||3.8||4.1|
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