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.
GDP fell by 0.2 per cent between the third and fourth quarters of 2011, the first quarterly contraction since the final quarter of 2010 when economic activity was disrupted by heavy snowfalls. In the full year 2011, the economy grew by 0.9 per cent, less than half the 2.1 per cent growth seen in 2010. Mining and quarrying, utilities, manufacturing, construction, and some parts of the services sector contracted in the fourth quarter.
Of the major economic releases during January, covering data for November or December, there has been further evidence of the weakness of the economy, including a further subdued set of labour market statistics. However retail sales growth increased in December, while the main measures of annual price inflation eased significantly.
GDP fell by 0.2 per cent between the third and fourth quarters of 2011, the first quarterly contraction since the final quarter of 2010 when economic activity was disrupted by heavy snowfalls. In the full year 2011, the economy grew by 0.9 per cent, less than half the 2.1 per cent growth seen in 2010. The economy has recovered about 45 per cent of the lost output during the recession over the course of the past ten quarters. Comparing this recovery to those of the previous three recessions suggests that this recovery has been more gradual.
The public sector strike in November is thought to have had only a small effect on the level of GDP in the fourth quarter.
The decline of North Sea oil production and the ageing of the oil extraction infrastructure has resulted in a sustained decline in output of the mining and quarrying sector. This has resulted in lower GDP growth in some quarters, and a cumulative reduction in GDP of 0.6 per cent by the fourth quarter of 2011 compared with 2008.
As in previous periods, there was a fall in the output of the mining and quarrying sector in the final quarter of 2011. Non-oil output, as measured by GVA excluding oil and gas, also fell by 0.2 per cent in the quarter. However compared with a year earlier, non-oil GVA increased by 1.1 per cent, compared with a rise of 0.8 per cent in whole economy output.
Weakness in the production sector drove the contraction in GDP with construction output also falling. Output in the services sector was unchanged in the fourth quarter. Within the services sector, two sub-sectors - distribution, hotels and catering, and transport, storage and communication - both contracted. Business services and finance output was flat, while government and other services grew by 0.4 per cent.
Output in the production industries declined again in November, both compared to the previous month as well as compared to the same month a year ago. This decline was driven by continued weakness in the mining and quarrying sector, particularly the oil and gas sector, but manufacturing output was also negative compared to the same month a year ago and the previous month. November was the first month since January 2010 that year-on-year growth in manufacturing output has been negative. The weakness of manufacturing output in recent months has added downward pressure to the index of production, in addition to the continuing drag from the mining and quarrying sector.
Of the main industrial groupings, aside from energy, it is production of intermediate goods that has been pulling down growth of the production industries since April and particularly since August (month on month a year ago). Negative growth of consumer non-durables has also made a small contribution to the negative production growth story in October and November. However, the production of capital goods has held up much better than the other main industrial output groups, though growth in this group has also declined quite markedly since the early part of 2011, with growth averaging 6.5 per cent in 2011 compared to an average of 9.4 per cent during 2010.
In terms of manufactured outputs, the main upward contributions were from transport equipment, other manufactured products and food, beverages and tobacco products. But this was more than offset by negative contributions from pharmaceuticals, basic metals and metal products, wood and paper products and printing and electrical equipment.
Output in the construction industry declined by 1.6 per cent in November 2011 compared to November 2010. This is the largest fall in construction output during 2011 on this basis. Both new work and repair and maintenance declined in November, continuing the trend seen through latter half of 2011. For new work, November was the fourth consecutive month of declining output and the largest decline since August; repair and maintenance followed a similar trend, with November’s output being the third consecutive month of decline.
The monthly construction data is not yet seasonally adjusted because there is not a sufficiently long run of data to estimate seasonal adjustment factors. Nevertheless, output picked up slightly in November compared to October, on a non-seasonally adjusted basis (0.2 per cent) and this followed a fall in output during October.
Services sector output for the fourth quarter is estimated to have been unchanged. This incorporates modest growth figures for October and November on a three month on three month basis. However, year-on-year growth of 1.6 per cent in November was the strongest since May. The same applies to the month on month growth of 0.6 per cent. November’s growth compares favourably with the average for 2011 to October, of 1.4 per cent and 0.2 per cent respectively.
The main components of the services sector that contributed to November’s growth were publishing and broadcasting, other professional services, administration and support services and computer services, which together contributed 0.6 percentage points to the month on month growth. The main sources of weakness in November’s estimates were air transport and wholesale trade, which deducted 0.2 percentage points from the month on month growth of 0.6 per cent. The contribution from predominantly public sector services – public administration, defence, education and health services – was negligible.
The chart below illustrates that the relative strength of the service sector during the course of the recovery has been led by government and other services, but supported by business services and finance as a result of its higher weight amongst the four categories of the service sector.
December saw the fourth consecutive month of year-on-year growth in the volume of retail sales, and at the fastest rate since January 2011. Even so, sales volumes were only 2.6 per cent higher than in December 2010. And more than 60 per cent of this growth was due to increases of 10 per cent or more in fuel and non-store (mainly online) sales.
In nominal terms, retail sales were 6.2 per cent higher in December than a year earlier, reflecting the continuing high rate of inflation in the retail sector.
The trade balance deteriorated in November 2011, though to some extent this is a reflection of a relatively strong trade performance in October. The widening of the trade deficit was driven by a weaker trade balance for goods, which in turn was due to weaker exports and stronger imports. The services balance improved slightly, but not sufficiently to affect the overall trade position.
The deficit on the balance of trade in goods and services increased from £1.9 billion in October to £2.6 billion in November. However the October deficit was well below the average level in recent months, and the November figure therefore returned to close to recent levels.
The deficit on trade in goods in November of £8.6 billion is in line with figures seen during the previous twelve months. Within this however, there have been offsetting movements in the deficit in trade in oil – which has continued to deteriorate as North Sea oil production has weakened – and erratic items, in small surplus for much of this year compared with the deficits seen in 2010.
The deficit on trade in petroleum and petroleum products of £4.5 billion in the three months September to November is almost three times the £1.4 billion deficit in the same period of 2010. An important factor behind this fall has been a 16 per cent drop in crude oil export tonnage as a result of falling North Sea output. The volume of crude oil exports has now fallen by about 20 per cent from 2009 levels, and has more than halved since 2001. The corresponding volume of imports has increased by nearly 40 per cent since 2001, and by more than 11 per cent over the past year.
Note: 2011 is based on the sum of the eleven months to date plus a twelfth month which is based on the average of the previous eleven months.
Excluding oil and erratic items, the average level of the volume of exports in goods in October and November was 5.6 per cent higher than the average monthly level in the third quarter of 2011. The corresponding figure for the growth in imports was only 0.5 per cent, suggesting a positive contribution to overall economic growth in the latest two months.
Looking over a longer time frame, the volume of exports of goods (excluding oil and erratics) in October and November was more than 10 per cent above than the average level in 2007, prior to the recession and to sterling’s sharp depreciation in 2008, compared with little change in the corresponding measure of imports.
The employment rate, measured as the proportion of the total population (16-64 years) who are in employment, fell very slightly in the three months to November, by 0.1 points compared to the previous three month period to 70.3 per cent. In recent months, the employment rate has been around the low point seen following the recession in early 2010. However the level of employment appears to have stabilised over the past few months, and actually increased slightly, by 18,000, between the two latest three month periods to reach 29.1 million. Within this total, the number of employees fell but this was broadly offset by a rise in self-employment.
However unemployment has continued to rise steadily. After remaining steady in the 7.7-8.0 per cent range throughout the two years between mid-2009 to mid-2011, the unemployment rate has since moved up to 8.4 per cent in the three months to November. This resulted from an increase of 118,000 in the number of unemployed people between the two latest three month periods to a level of 2.68 million.
As a result of the weakness in employment, which during much of 2011 was weaker than the level of economic activity, productivity in the whole economy has started to recover some of the ground lost during the recession. Measured in terms of output per worker, whole economy productivity has risen in the third quarter of 2011, to reach a level 0.9 per cent higher than a year earlier, while output per hour was 1.3 per cent higher.
Whole economy output per worker fell by nearly 6 per cent between the end of 2004 and the start of 2009. The subsequent recovery in productivity, as employment reacts with a lag to the fall in output during the recession, has been modest. However output per worker is now only 2.4 per cent below its pre-recession peak, and output per hour is just over 1 per cent lower.
In the manufacturing sector, continuing falls in employment and hours mean that productivity on an output per hour basis has risen by 4.7 per cent over the past year and is now at record levels. Productivity in the government services sector has also been rising strongly in reflection of the sharp reduction in the number of public sector jobs.
Average weekly earnings (AWE) growth has been slowing in recent months and now stands at 1.9 per cent in the three months to November for the whole economy, down from 2.8 per cent growth in the three months to July. This marked drop in earnings growth may reflect a number of pressures in the labour market: the desire by firms to reduce their costs in the face of weak demand; weak wage bargaining power of employees as a result of high unemployment and low employment levels; falling inflation which will ease the decline in real wage growth and so reduce the pressure on employers to maintain wage growth; and falling demand and output.
Annual public sector earnings growth, excluding financial services, was 1.4 per cent for the three months to November, the lowest since the series began in 2001. This demonstrates the impact of the sustained public sector pay freeze. Private sector earnings growth was 2.0 per cent in the three months to November. Both public sector and private sector wage growth are well below CPI inflation and so the sustained decline of real wage growth has continued.
CPI inflation moderated to 4.2 per cent in December, in line with expectations. Inflation in September 2011 reached 5.2 per cent. The sharp decline in CPI inflation, as well as RPI inflation, during the autumn reflects some abating of the factors that were pushing up inflation earlier in 2011. For example, energy prices came down towards the end of 2011 in good part due to some easing in the growth of emerging economies as well as concerns about the impact of the euro area crisis on global and regional growth.
The fall in the annual rate of consumer price inflation from 4.8 per cent in November to 4.2 per cent in December is largely due to fuels and lubricants (the price of petrol fell in December 2011 compared with a substantial rise in December 2010), and unchanged gas and electricity prices (which both rose sharply between November and December 2010). Clothing and footwear prices also fell more in December than a year earlier.
The rate of inflation measured by consumer prices excluding energy, food, alcoholic beverages and tobacco has therefore fallen much more slowly than the overall CPI, from 3.4 per cent in October to 3.2 per cent in November and 3.0 per cent in December.
Producer price (PPI) inflation has moderated, but was still positive in December compared to a year ago. The decline in PPI inflation is consistent with business survey indicators which also indicate falling input and output prices for manufactured products. The decline in input price growth has been attributed to the decline in commodity prices; the fall in output price growth in December may be partly due to firms reducing prices in order to maintain market share, or to stimulate demand.
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