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.
GDP growth was revised up to 0.7% in the second quarter of 2013. Growth in the period was broadly based, with all main sectors of the economy showing expansion.
Strength in labour incomes in the second quarter in part reflects the timing of bonus payments which may be a result of changes to tax rates. Adjusting for timing changes, bonuses as a share of regular pay have risen only slightly compared with previous years.
The fall in residential construction during the recent recession is similar in scale to previous economic downturns, although the path since 2010 has been more erratic. Despite this real house prices (relative to average earnings) have weakened more rapidly than in past downturns. Real house prices have been broadly flat since 2009.
The UK has lost export market share during the period since 2008, but has closed some of the gap in the last two years. Trade with the BRIC economies has expanded significantly since 1998, but a slowdown in imports from China since 2010 has seen the UK trade deficit with the BRICs falling slightly.
The second estimate of gross domestic product (GDP) indicated that the economy grew by an upwardly revised 0.7% during Q2 2013. This was the same rate as Germany and compared favourably with France (0.5%) and the USA (0.4%). Comparing the first half of 2013 with the first half of 2012, the UK economy has grown by 0.9%, surpassing the Office for Budget Responsibility’s forecast of 0.6% for the whole of 2013, which was released in March’s Economic and Fiscal Outlook.
According to the second estimate, the upwards revision of 0.1 percentage points was attributable to revised estimates of output growth in several industries. The manufacturing and construction industries grew stronger than previously estimated, and suggested that growth has been accelerating since the last quarter of 2012. The composition of growth in the second quarter remains largely unchanged, with broad-based growth generated by the services sector, along with small positive contributions from production and construction, as can be seen in Figure 1. Within the services sector, total retail sales volumes increased at a rate of 1.8% in the three months to July, the highest rate recorded since March 2004.
Information on the expenditure measure of GDP, available for the first time, indicated that the volume of household expenditure grew by 0.4% in the second quarter, the seventh successive quarter of steady growth. Despite this trend, the volume of household expenditure remains 3.0% below its pre-downturn peak in Q4 2007. In the second quarter, there were also notable positive contributions to expenditure growth from general government final consumption expenditure and gross fixed capital formation, which grew by 0.9% and 1.7% respectively. Net trade made a positive contribution to GDP growth during the second quarter; export and import volumes grew by 3.6% and 2.5% respectively. Net trade – the difference between the volume of exports and imports – contributed 0.6 percentage points to GDP growth during the first quarter, and a further 0.3 percentage points during the three months to June.
The second estimate also contained information on the income measure of GDP, and captured a substantial increase in the pay and benefits accruing to labour during the second quarter of 2013. Compensation of employees – which includes wages, salaries and pension contributions – increased by 2.4% in the quarter, the fastest rate of increase since 2000.
A large proportion of this increase was due to a substantial rise in the level of bonus payments made during April, as can be seen in Figure 2. It indicates that total monthly pay had been broadly flat from April 2012 until March 2013 and then increased by 4.1% during April, before moderating in May and June. The increase in April 2013 can mainly be attributed to higher bonus payments.
Bonus payments – which make up the difference between total and regular pay – can be highly seasonal in nature. In nominal terms, the average bonus in April 2013 was approximately 60% larger than the same period a year ago – and almost doubled between March and April 2013. Some bonus payments may have been deferred to April in response to the reduction of the rate of tax from 50% to 45% on taxable income above £150,000.
Figure 3a plots the ratio of bonus pay to regular pay in April over the last three years and the average during each April since 2003. Taking the ratio of bonus pay to regular pay highlights the extent to which employers choose to compensate their employees through bonuses. Figure 3a shows that bonus payments were more than 10% of regular pay in April 2013, compared with on average 6.8% in previous years. Figure 3b shows that when comparing bonus payments over a longer period (January – June) with previous years, the level of bonuses were only slightly higher than in 2012 and broadly comparable to 2011. While the timing of bonus payments has altered there is little evidence of a significant increase in bonuses so far this year compared with the last.
Figure 3a also shows a broad sectoral breakdown of the ratio. Bonus payments during April 2013 were particularly high in proportion to regular pay in the services sector. The biggest effect was in the financial & business services sector, where bonuses in April were almost double the share of regular pay compared with the previous year.
As a result of the surge in bonuses in April, annual wage growth including bonuses of 3.9% exceeded that of the increase in consumer prices for the first time since January 2011. However, earnings growth moderated in May and June. Prices, as measured by the Consumer Prices Index, increased at an annual rate of 2.8% during July, down from 2.9% during June, as a result of lower rates of price increase in clothing & footwear and recreation & culture (see Table 1).
Food & non-alcoholic beverages and utilities continued to see above average rates of inflation, as did some parts of the services sector, including education due to the rise in university tuition fees.
Despite the noticeable squeeze in real household disposable income during and following the economic downturn, activity in the housing market has increased during the last two years. Over this period there have been a number of policies designed to boost activity, including the recent Help-to-Buy Scheme and the Bank of England Funding for Lending Scheme.
Figure 4 and Figure 5 show monthly ONS figures for mix-adjusted house prices, for a range of different property and buyer types, between 2007 and 2013, indexed to their average value during 2007. Following the onset of the economic downturn in 2008, average house prices fell by around 14%, but the price of homes purchased by first time buyers fell more rapidly than average, as demand fell in the face of growing economic uncertainty (Figure 4). Prices appear to have accelerated a little over the past year.
The price of new dwellings also fell more rapidly than average (Figure 5). However, both series recovered some of the lost ground during 2009 and early 2010. The price of new dwellings in particular has been volatile, but has grown more strongly than the average house price since the trough in 2009, and is now above the pre-downturn peak.
Large price movements are likely to have an impact on supply, as house-builders may vary the amount of construction activity in response to the level of demand. The volume of house-building started to decline before the peak of house prices and before the onset of the economic downturn. The response of house-building was also relatively large compared with the fall in new house prices. While the price of new homes fell by 16.6% between the peak and trough, the volume of house building fell by almost half. During late 2009 and 2010, there was a recovery in both series, and house prices re-attained their pre-downturn peak at the start of 2011. However, in 2011 and 2012, while prices have continued to climb, the volume of house-building has fallen back, only starting to rise again in the first half of 2013.
Figure 6 shows the path of real house prices and residential construction in the three construction downturns since the 1970s, indexed to the peak in house-building prior to the slowdown.
In each instance, real house prices continued to rise for some quarters after the peak in house building. While in the 1978 and 1988 downturns, it took six to seven quarters before the peak in house prices, the lag was only two quarters in the latest downturn. The slower response of house prices in the late 1970s and 1980s may reflect the stronger momentum in house prices at a time of high rates of consumer price inflation more generally.
The magnitude of the recent decline in residential construction in 2008, while substantial, was comparable to that sustained during the two previous construction downturns. In each case, the volume of residential construction fell for 10 to 14 quarters between the peak of house-building and the trough, declining by around 45% in both the 2007 and late 1970s downturn, and by 55% in the 1988 downturn. However, the scale of the downturn between 1978 and 1981 was swollen by cutbacks in public sector residential construction, which contracted by around two-thirds during this period.
There was an initial bounce in house-building during 2010, in contrast to more subdued recoveries in the two previous downturns, but this could not be sustained and the level of house-building remained 25 to 30% below its pre-downturn peak during 2011 and 2012.
The contribution of net trade to GDP growth, shown as red markers on Figure 7, has been positive for three of the last four quarters. However this has not been the result of a consistent increase in exports, nor a consistent decrease in imports. Rather, this has been due to the volatile quarterly movements of each series, which characterise recent trade data. While exports remained flat in the first quarter of 2013, imports decreased, and therefore net trade contributed positively to GDP. In the second quarter, net trade again made a positive contribution to GDP, though for different reasons. Growth in exports was strong, by itself contributing 1.2 percentage points to GDP. However this was partly offset by an increase in imports, which counts as a negative contribution, reducing GDP by 0.8 percentage points. The net trade effect in the second quarter was therefore a positive contribution of 0.3 percentage points.
Though these recent movements do not represent a clear trend, they follow a weaker than expected run of trade data. The UK’s trade performance since the onset of the economic downturn in 2008 has been an interesting aspect of the UK economy. Despite a substantial depreciation in the value of sterling between 2007 and 2009, which in theory should have enhanced the UK’s competitiveness, the performance of UK trade has been modest. The relatively limited response in trade in both goods and services may be attributed to a number of factors, discussed further in Hardie et al. (2013).
Figure 8 shows the growth of the volume of UK exports compared with estimated growth in the size of UK export markets, indexed to the first quarter of 2008. Growth in UK export markets is calculated as the change in 33 countries’ imports of goods and services in volume terms weighted by each country’s share of UK exports. One of the striking features of the graph is the decrease in both measures following the 2008/09 economic downturn. The size of UK export markets fell by 40% between Q1 2008 and Q4 2009, while the fall in the volume of UK exports was more modest, decreasing by 30% over the same period.
Following this contraction, UK exports responded slowly, increasing by 54% between Q4 2009 and Q4 2011. This fell short of the growth in UK export markets which increased by more than 88% over the same period. However since the end of 2011, the trends have been more favourable with UK exports outpacing the growth of export markets, by 6% to 5% respectively.
UK exports to the BRIC economies – Brazil, Russia, India and China – have grown rapidly, especially since 2006. Figure 9 shows that the combined GDP of BRIC countries had doubled from 7% of global GDP in 1990 to 14% by 2011.
Figure 10 plots the exports of UK goods to each of the BRIC economies as a percentage of total UK exports. Perhaps unsurprisingly, UK exports to China have grown the fastest, and appear to have barely slowed during 2008 and 2009. Exports to Brazil also withstood the impact of the recent global economic downturn. The proportion of UK exports to Russia and to India, on the other hand, dipped noticeably at the time of the downturn and have not yet recovered to the same level.
At an aggregate level, UK exports to the BRIC countries as a percentage of total UK exports have increased from 2.6% to 9.1% over the last 15 years, 6.0 percentage points of this rise having occurred since 2006.
The evolution of UK trade with BRIC countries has also been considerable in terms of imports, as Figure 11 shows. China again features as the main BRIC trading partner among the four countries, growing as a proportion of total UK imports by 6.3 percentage points between Q1 1998 and Q2 2013. However most of this rise occurred prior to 2010, with China’s share of UK imports falling slightly since then. By comparison, Brazil, India and Russia have had a much smaller proportional impact, collectively increasing by 2 percentage points over the whole period.
Overall, the BRIC countries’ share of total UK imports has increased from 3.3% to 11.6% over the last 15 years, 1.8 percentage points more than the equivalent measure for UK exports. There has therefore been a consistent decrease in the balance of trade with BRIC countries, although there has been a slight improvement in 2012 and 2013, as shown in Figure 12. As the proportion of UK imports from China has flattened since 2010, so the UK’s trade deficit with the BRICs has increased a little. In Q2 2013 the trade deficit to the BRIC countries was £4.9 billion, smaller than the trade deficit with the other G7 countries – Japan, Germany, France, Italy, Canada and the US - for the first time since Q3 2008 (although the BRICs account for only about 10% of UK trade, against 35% for the G7 excluding UK).
|Change on previous period, volume series|
|Index of Services|
|Business Services & Finance1||KI7L||1.8||0.4||-0.1||0.6||0.1||0.5||0.2|
|Government & Other1||KI7T||1.6||-0.6||0.4||0.0||0.0||-0.4||0.1|
|Distribution, Hotels & Rest. 1||S2MV||0.9||-0.5||1.2||1.7||0.5||1.0||-0.1|
|Transport, Stor. & Comms. 1||KI7B||0.1||0.6||1.4||0.6||1.3||-0.2||-0.7|
|Index of Production|
|Mining & Quarrying1||K224||-9.6||-10.4||3.2||1.5||1.4||4.0||0.7|
|Retail Sales Index|
|All Retailing, excl.Fuel1||J467||1.4||-0.3||0.5||1.0||-0.7||2.0||0.2||1.1|
|Predom. Food Stores1||EAPT||0.0||-1.0||0.2||-0.4||-3.6||2.7||0.1||2.5|
|Predom. Non-Food Stores1||EAPV||1.7||-0.4||-0.3||2.0||2.3||1.1||0.3||-0.3|
|Balance 2, 3||IKBJ||-33.9||-1.0||2.1||0.2||0.5||-0.8||1.0|
|Public Sector Finances|
|PNSB-ex, ex RM & APF 6,8||L65P||2.0||-2.1||4.5||-0.3||-0.6||0.9||-0.6||-1.3|
|PNSD-ex as a % GDP8||HF6X||74.2||74.7||74.2||74.9||73.9||74.2||74.9||74.5|
|Employment Rate2, 3||LF24||71.1||71.6||71.4||71.5||71.5||71.4||71.5|
|Unemployment Rate2, 4||MGSX||7.9||7.8||7.8||7.8||7.8||7.8||7.8|
|Unemployment Rate 18-242||YBVQ||19.2||18.6||18.6||19.2||18.6||18.7||19.2|
|Inactivity Rate2, 5||LF2S||22.6||22.3||22.4||22.3||22.4||22.5||22.3|
|Claimant Count Rate6, 8||BCJE||4.7||4.7||4.6||4.5||4.5||4.5||4.4||4.3|
|Total Weekly Earnings7||KAB9||£469||£471||£468||£478||£485||£477||£473|
|Recreation & Culture6||D7C4||0.2||0.9||1.2||1.5||1.4||1.5||1.3||0.7|
|Food & Non-alcoh. Bev. 6||D7BU||3.3||3.7||3.8||4.2||4.6||4.3||3.8||3.8|
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