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 UK economy has stagnated during 2012. The level of output in the first three quarters of the year was little changed from the same period in 2011, although there have been considerable fluctuations from quarter to quarter, in part due to the influence of factors such as the additional Diamond Jubilee bank holiday and the London 2012 Olympic and Paralympic Games.
Domestically generated expenditure was somewhat stronger in 2012, with households’ and government consumption providing the mainstay of a 0.7 per cent rise in total domestic spending in the first nine months of 2012 compared with the same period of 2011. Despite a rise in business investment of more than 5 per cent over this period, total investment fell slightly due to a sharp drop in private sector housing investment.
The weakness of the economy in 2012 stemmed principally from a disappointing foreign trade performance. During the first three quarters of 2012, export volumes rose only 0.2 per cent compared with a year earlier, against a 2.5 per cent rise in imports. This in part reflects the weakness in the UK’s main export markets, especially in Europe. Exports of services were particularly weak, falling by over 2 per cent over the period.
Between the second and third quarters of the year, output expanded by 0.9 per cent, slightly lower than the previous estimate of 1.0 per cent. This follows three consecutive quarters of negative growth, but is boosted by comparison with a weak second quarter because of the additional bank holiday for the Queen’s Diamond Jubilee. There may also have been an effect on economic activity from hosting the Olympics, for instance in the positive contribution of 0.2 percentage points to GDP growth in the third quarter from the accruing of ticket sales.
Figure 1 shows the volatility of expenditure patterns during 2012. In contrast to the first half of the year, net trade provided the biggest contribution to GDP growth in the quarter, but this merely serves to emphasise the high variability of monthly export performance during the year. Household spending and exports of services may have been boosted in the quarter by Olympics-related spending (including ticket sales) by both UK and overseas residents.
The recent period of stagnation contrasts with the sustained resilience of the labour market. In the three months to October 2012, total employment increased by 1.7 per cent compared to the same three months a year ago. This is well ahead of the annual average rate of employment growth of 1 per cent seen between 1997 and 2007, when UK economic growth averaged more than 3 per cent a year.
In the early stages of the recession, there was a fall in average hours worked, suggesting that many workers took cuts in hours – for instance by working part time – instead of losing their jobs. However total weekly hours worked have recently been growing even faster than employment, by 2.6 per cent in the 3 months to October compared to the same three months a year ago.
The so-called productivity conundrum – the extreme weakness of productivity growth since 2008 compared with previous UK economic downturns – therefore persists. Even with the surge in economic growth reported in the third quarter, productivity measured on the basis of output per hour worked fell slightly, although there was an increase in the amount of output produced per worker.
Both households and businesses have opted to run financial surpluses during the past few years – see Figure 2. In the case of households, this followed a sharp cutback in their spending in 2008 in response to the debts that they had built up during the previous decade. For non-financial businesses, the running of continued surpluses is unusual, and their cautious approach may be indicative of their uncertainty about the future course of both the UK and global economies.
Households experienced a sharp squeeze on their real incomes during 2010 and 2011 as a result of the slow pace of earnings growth at a time of above target inflation. Regular pay growth (excluding bonuses) has been steady at around 2 per cent a year for the past two years, while at the same time annual consumer price inflation has averaged more than 3.5 per cent. The latter has fallen for most of 2012, reaching a low of 2.2 per cent in September before factors such as higher university tuition fees pushed it back up to 2.7 per cent in each of October and November.
The reduced intensity of the squeeze on real earnings, together with strong growth in employment, has enabled real household disposable incomes to grow by almost 2 per cent in the first three quarters of 2012 compared with a year earlier. However households remain cautious about their prospects and have chosen not to spend in line with the growth in incomes. So household spending has risen only modestly during 2012, with the household saving ratio consequently edging up to 7.7 per cent in the third quarter.
The debt position of households has therefore continued to improve during 2012, with total financial liabilities falling to 100 per cent of GDP at the end of September 2012, down from a peak of more than 110 per cent in June 2009, but still much higher than the average of 70 per cent during the 1990s.
The UK deficit on trade in goods and services widened to £3.6 billion in October, up from £2.5 billion in September. A £9.5 billion deficit on trade in goods was partly offset by a surplus on services of £5.9 billion. Trade in goods, which improved significantly between August and September, was the main source of the deterioration in October, with total exports falling in value by 1.0 per cent and imports rising by 2.5 per cent.
The trade deficit has varied considerably throughout 2012, breaching the £4 billion mark for the first time in April and fluctuating between £1 billion and £4 billion a month thereafter. Most of the volatility has come from trade in goods, particularly exports.
In the first ten months of 2012, the average monthly trade deficit was £2.9 billion, an increase of almost £1 billion a month on the same period in 2011. The change is equally split between goods and services. The goods deficit has risen from an average of £8.3 billion a month in January-October 2011 to £8.9 billion in the corresponding months of 2012. Over the same timeframe, the monthly average surplus on trade in services fell from £6.4 billion to £5.9 billion, bringing to an end a sustained period of rising surpluses.
In part the deterioration in trade performance can be put down to a slowdown in world trade, especially in Europe. Since 2008, UK exports to the European Union (EU) have been much weaker than exports to other countries. Excluding oil and volatile items such as aircraft and precious stones, the volume of exports of goods to non-EU countries has risen by around 35 per cent since 2009, compared with growth of only 6 per cent in exports to the EU. In contrast imports to the two areas have risen by similar amounts – by nearly 19 per cent and 17 per cent respectively.
In its December Economic and Fiscal Outlook, the Office for Budget Responsibility (OBR) alluded to ‘weaker expected growth in UK export markets’ as a reason for the UK’s poor overseas trade performance in 2012. This is especially true of Europe. Real GDP fell by 0.4 per cent between the third quarters of 2011 and 2012, with an even bigger contraction of 0.6 per cent in the euro currency area.
Over the past year, the ability of UK businesses to export successfully to Europe has been further hampered by the appreciation of the sterling against the euro, primarily reflecting the economic uncertainty surrounding the single currency area. UK exports have as a result become more expensive compared with our main trading partners and have weakened. The EU as a whole accounts for around half of UK trade in goods. Conversely, imports from these countries have become comparatively cheaper and have increased in volume.
Over the course of 2012, there has been a slowdown in world trade and this is particularly pronounced in the Euro area where economic growth has been weak. Conversely, emerging economies, particularly Asian countries, have seen a marked growth in imports of traded goods as their economies have grown.
This trend is reflected in the recent trade statistics that show that for the first time non-EU countries overtook Europe as the largest proportion of the UK’s exports.
In recent months, UK exporters have appeared to focus on different markets in lieu of the Euro area. Global trade data1 indicate that over the past decade emerging economies located in Asia and the Middle East have recorded the fastest growth in traded imports, now accounting for almost half of global imports.
The rise in non-EU countries as a trading partner with the UK has been driven by specific countries: since January, exports to Norway and Switzerland have increased by 25 per cent and 33 per cent respectively. Over the longer term, however, UK exports to China and South Korea have been most prolific, more than trebling since the start of 2007. Over the same period, exports to other Asian countries have also grown strongly, notably to India (up 76 per cent) and Singapore (up 109 per cent).
The rapid rise of incomes in the new Chinese middle class has contributed to a greater demand for British luxury goods such as fashion apparels and cars. UK exports have been buoyed by the dozens of new cities emerging, clustered, as in the Shandong and Jiangsu provinces, and connected by high speed rail and national air hubs.
Moreover, this is a trend being seen elsewhere in Asia. UK Trade and Investment has reported the growing opportunities for exports of capital goods to India as well as more sophisticated services exports, centred on expertise in infrastructures.
Overall, the long-term change in the geographical composition of UK trade would suggest that the Eurozone may be losing ground to other economies.
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