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 0.3 per cent in the first quarter of 2012, following a similar fall in the last quarter of 2011. GDP has been broadly unchanged since the third quarter of 2010. This reflects the weak economic situation in the EU, and internationally to a lesser extent, as well as weak demand domestically.
In keeping with weak growth and demand, price pressures have been easing in recent months. Headline inflation has come down markedly over the last nine months and the GDP deflator, which excludes imported price pressures, has been declining over the last two years and is now 2 per cent. Similarly, earnings growth has been slowing and total pay growth for February to April 2012 compared with the same period a year ago stood at 1.4 per cent - half the annual CPI inflation rate of 2.8 per cent in May 2012.
While the headline labour market figures show some sign of resilience, there is an array of labour market indicators which reflect the subdued economic environment – unemployment is at a high level, particularly for the long-term and youth unemployed; employment for more flexible and part-time workers has shown strong growth, although there was a rise in the number of full-time workers in the latest figures; wage growth remains weak and bonuses had been falling in recent months, although the latest figures show a slight increase.
The quarterly national accounts dataset consistent with Blue Book 2012 contains a number of revisions to annual and quarterly GDP data since 1987. These are attributable to three main causes:
an important methodological change in the way insurance services are treated in the national accounts,
change in the deflation methods pre-1997,
in 2009 and 2010, the revisions also reflect the new HM Revenue & Customs (HMRC) earnings data and other updated data including the ONS Annual Business Survey (ABS),
chained volume estimates for all years are affected to a minor degree by the annual updating of the base and reference year, from 2008 to 2009, and the regular annual supply and use balancing process has been applied to 2010 for the first time.
As a result the annual and quarterly GDP growth rates have been revised.
GDP growth for the first quarter of 2012 remained at -0.3 per cent in the third estimate. Much of the weakness, in chained volume measured growth, was driven by the construction and mining and quarrying sectors, and also by de-stocking and a fall in net exports. In current price terms, the main source of weakness was in financial corporations’ gross operating surplus (profits of firms)and other income which includes mixed income from self-employment and gross operating surplus of the non-corporate sector. However, strength in compensation of employees (earnings of employees) offset some of this weakness. The contraction in GDP in the first quarter appears to be concentrated in specific components and sectors, rather than across the breadth of components in each of the measures.
The third estimate of GDP has brought with it some revisions to the expenditure measure, as the chart below illustrates. In particular, household consumption growth is now estimated to be negative rather than positive, and the drag from net exports is now stronger than previously estimated. Conversely, gross fixed capital formation has been revised up, driven by an improvement in business investment between the two GDP releases.
Note: HHFCE = household final consumption expenditure; GFCF = Gross fixed capital formation, and includes business investment; AA = alignment adjustment
In the income measure of GDP (in current price terms) there has been a significant upward revision to compensation of employees (remuneration) which relates to more up to date employment and jobs data. There is also a strong upward revision to the alignment adjustment, indicating that the income measure needs to be brought up to be in line with the output measure when adjusted to current prices. So the income measure of activity is falling below what is the principal measure of GDP at this stage – the output measure. The chart also shows that although the contribution to growth from total gross operating surplus (profitability) has not been revised (to one decimal point), if the alignment adjustment is removed then total gross operating surplus has been revised down from a positive contribution to a negative contribution. In the third estimate of GDP, the alignment adjustment is attributed to private non-financial corporation (PNFC) gross operating surplus in the published tables, within total gross operating surplus. PNFC gross operating surplus grew by 2.2 per cent including the alignment adjustment, but -0.2 per cent excluding the alignment adjustment. So PNFC gross operating surplus actually fell between the fourth and first quarter, but the strong alignment adjustment raises this growth rate to 2.2 per cent.
Note: CoE = compensation of employees; PNFCs = private non-financial corporations; FinCos = financial corporations; GOS = gross operating surplus, which is a close approximation for profits; AA = alignment adjustment; T-S = taxes less subsidies. There are no bars for CoE and taxes less subsidies for the second estimate because their contributions rounded to zero, but for PNFCs and FinCos, gross operating surplus is not published in the second estimate – only total gross operating surplus.
Taking a longer perspective, the economy recovered by 3.5 per cent between the end of the recession in mid 2009 and the third quarter of 2010, but has since been broadly flat. Output has fallen by 0.2 per cent over the last six quarters, but as the chart below shows, the profile of the level of GDP has been broadly flat over this period.
The on-going decline in output from North Sea oil fields has served to pull down GDP over the last four years, particularly since the third quarter of 2010. So aside from some specific areas of weakness in each quarter, the decline of the oil and gas industry in the UK has provided a degree of underlying drag to UK output.
The GDP deflator, which excludes the impact of imported price pressures, has been trending down since mid 2010 and was 2 per cent in the first quarter of 2012. This contrasts with CPI inflation during the first quarter of 3.5 per cent. The chart below shows the divergence between headline CPI inflation and the GDP deflator, and serves to illustrate that underlying domestic price pressures are more subdued than headline consumer price pressures, which include the impact of the price pressures stemming from imported goods and services, and so much more of the impact of the weak pound and commodity price pressures. The GDP deflator includes inflation for the other expenditure components (investment, trade, government consumption and so on) besides household consumption, and these tend to be lower than that for household consumption, which pulls the GDP deflator below consumer orientated price series such as the household consumption deflator and CPI inflation.
The net lending positions of the various sectors of the economy have not changed significantly for the most part with the Blue Book 2012 revisions (insurance methodology, new data and moving the base year forward). The picture of central government becoming a larger borrower (a higher level of debt) from 2009 onwards and households switching from being net borrowers to net lenders in 2009 still holds, reflecting the pressures of the recession on the balance sheets of the respective sectors. Households have become more risk averse and so have made efforts to reduce their liabilities, despite the negative growth of real earnings. Equally, central government liabilities tend to increase during recessions or periods of weak growth as revenues tend to fall and spending, particularly on benefits, tends to rise. The central government position was compounded in this recession because of the financial crisis and the need to provide capital injections to some banks. The level of financial corporation net lending still declines between 2008 and 2011 from £67 billion to £26 billion but it has generally been revised up slightly with the Blue Book revisions, notably the way insurance services are measured and accounted for in the national accounts. Private non-financial corporations’ net lending has increased over the last four years as they have also sought to reduce their liabilities and, therefore, exposure to financial market volatility and the costs of borrowing.
Real household disposable income growth (chained volume terms) has been revised up slightly for 2011, from a fall of 1.2 per cent to a fall of 1 per cent, and growth in 2010 has been revised up from a fall 0f 0.2 per cent to a rise of 0.5 per cent. On a quarterly basis, there have been revisions both up and down for recent quarters, and growth itself fluctuates from quarter to quarter. Nevertheless, real household disposable income growth was revised down for the fourth quarter of 2011 to a fall of 0.9 per cent, and it remained at this rate of growth in the first quarter of 2012. This is relatively weak growth compared to quarters of the last four years, since the start of the recession; real household disposable income growth has only been weaker in four other quarters during the last four years, since the start of the recession, and the average quarterly growth rate over that period was zero.
Although real earnings growth (wage growth less inflation) has been negative for much of the last four years, there are other factors contributing to households’ real disposable income that have moderated the weakness of real earnings growth. For example higher benefits payments consistent with weak growth, lower mortgage payments for some borrowers in line with lower interest rates and low inflation during 2009 have all tended to offset negative real earnings growth and support households’ real disposable income, for some quarters and years.
The saving ratio, which reflects households’ nominal income and spending, has come down further in the first quarter of 2012, to 6.4 per cent. This is from a high of 7.6 per cent in the third quarter of 2011. During the recession itself, the saving ratio rose as high as 8.2 per cent, but it then fell back during 2010 and was down to 5 per cent by early 2011. However, during 2011, as the economy has weakened again, so households have raised their saving ratio, although it has decreased over the last two quarters as explained above.
In line with GDP, which has been broadly flat over the last six quarters, gross fixed capital formation has fallen by 0.7 per cent over the same period, driven by a considerable falls in general government investment (21 per cent) and public corporation dwelling investment (30 per cent). However, business investment has risen by 6 per cent over the same period, and because of its weight in gross fixed capital formation (56 per cent in 2012 Q1), the growth of business investment over this period went quite a way to offsetting the falls in public sector investment.
Business investment increased by 1.9 per cent in the first quarter of 2012, having contracted slightly in the last quarter of 2011. For gross fixed capital formation as a whole, private sector dwellings and business investment provided similar contributions to growth, of around 1 percentage point, whilst public sector dwellings contracted slightly.
Gross fixed capital formation has now recovered around a quarter of the investment-related output lost during the recession (21 per cent).
Output in the production sector has been pulled down by declines in North Sea oil production for most of the last two years. Oil and gas extraction has reduced growth in the production sector by an average of 0.2 percentage points since mid 2008, on a month on month basis, although this drag has been as high as 1.5 percentage points in February 2011 and was 0.9 percentage points in April 2012. The chart below illustrates the adverse impact of the declines in oil and gas extraction on total production output. It also illustrates that, because of its weight, manufacturing is another significant influence on total production performance. Despite its relatively strong recovery following the recession, manufacturing output has been gradually declining since May 2011, and has fallen by 1.9 per cent. However, in the first quarter of 2012, manufacturing output was flat and this remains the same as it was in the second GDP estimate.
Although mining and quarrying and manufacturing output both declined in April, the utilities sector showed very strong growth. This reflects the unusually cold and wet weather in April, which will have pushed up consumption of energy, and this relative to the unusually warm and dry weather in March has exaggerated the rise in April from a relatively low level in March.
Construction sector output was broadly flat in the second half of 2011, but then fell by 4.9 per cent in the first quarter of 2012. Both of the latest two quarters have been revised down by 0.1 percentage points.
Construction output in April 2012 is estimated to have been 8.5 per cent lower than in April 2011. The total output volume for the three months from February 2012 to April 2012 decreased by 6.7 per cent compared with a year earlier.
When comparing the latest three months (Feb 2012 – April 2012) to the same three months a year ago, the major contributors to the 6.7 per cent fall were infrastructure and public other new work, and this was reinforced by a fall in public new housing. This would appear to reflect the cuts in publicly funded construction and infrastructure projects. More broadly, the weakness in construction sector output may also reflect the very wet weather in April – the wettest on record - though conversely April 2011 had an additional bank holiday so all else being equal, output during April 2012 would be expected to be higher than April 2011. The only category which gave a positive contribution was the non-housing repairs and maintenance sector, as private new housing was broadly flat.
The monthly service sector data for April is not published until the 29 June, a day after this article is published, so this section focuses on the quarterly profile of the service sector which is published in the national accounts. Growth in the service sector in the first quarter has been revised up slightly, from 0.1 per cent to 0.2 per cent between the previous and this latest release of GDP.
The main positive contributions to growth were from distribution, transport, storage and communications, health and social work and other services. Together, these four sectors contributed 0.2 percentage points. The main negative contribution was from financial and insurance services, which pulled down GDP growth by 0.1 percentage point.
As a result of moving forward the base year, from 2008 to 2009, the weights of the industrial sectors have changed slightly between the second and third estimate of GDP. This has affected the contributions to growth, so that although there were changes to growth rates there were generally only small changes to contributions to growth by sector, if any.
Retail sales fell by 2.4 per cent between March and April, in volume terms, driven by a decline in predominantly food stores and predominantly automotive fuel, but grew by 1.4 per cent between April and May. Between February (before the fuel crisis) and May, retail sales have increased by 1.1 per cent so, despite some volatility in recent months, retail sales are broadly increasing. However after the record fall in predominantly automotive fuel in April, of 13.4 per cent, sales remain below both the February level and on the year. This translates to a contribution of -0.3 percentage points to the 2.4 per cent growth in total retail sales (month on the same month a year ago). The chart below indicates that, aside from the erratic path of predominantly fuel sales in March and April, the path of fuel sales has been downward between December 2011 and May 2012. All other sectors recorded positive contributions to growth, with the strongest contribution stemming from predominantly non-food stores (1.5 percentage points).
In the first quarter of 2012 the negative contribution from net exports to GDP growth has been increased between the second and third estimates. This was primarily driven by the sharp fall in exports of services, corresponding to a 0.6 percentage point reduction in GDP growth. Slightly offsetting this drag was a reduction in the imports of services, which added 0.14 percentage points to GDP growth.
In April, the trade deficit widened quite sharply, due to a deterioration in the trade in goods deficit. The balance of trade in services was fairly steady compared to the previous few months, and the deficit on trade in oil improved slightly. So the deterioration in the overall balance was largely due to weaker exports of non-oil goods, in particular semi-manufactures. In volume terms, there was also quite a sharp drop in exports of semi-manufactures and manufactures, but imports of most commodity groups also fell, limiting the deterioration in the trade position to some extent.
This pattern of falling exports is also reflected in the three month on three month series, though export growth of semi-manufactures was positive over the three month period of February to April. Import growth was also generally negative, although imports of semi-manufactures and finished manufactures grew in the last three month period compared to the previous period, in contrast to the month on month growth picture.
Exports and imports of goods, excluding oil and erratics and in volume terms, both fell in April, but the fall in exports of goods was particularly sharp, at 7.1 per cent compared to March. Imports of goods excluding oil and erratics fell by 3 per cent. This fall in exports reverses the gains made in the second half of 2011 and early 2012 and returns exports of goods to a level comparable with mid 2011. Although imports fell in April too, the level drop is not as marked as for exports and leaves import levels at a comparable level to those of the last year. Compared to a year ago, exports of goods excluding oil and erratic increased by 0.4 per cent, whilst imports rose by 3.6 per cent.
The general weakness in exports and imports of goods reflects the weak economic situation in the EU as well as in the UK, both depressing demand for exports and imports respectively. This corresponds with weaker export growth to the EU than to the non-EU trading partners, in terms of the three month on three month growth. Over the last few months, exports to the non-EU partners have tended to perform better than those to the EU, in part because of the improved economic position, and so demand, in the US.
The labour market indicators showed more widespread improvement in the three months to April, compared to other recent three month periods. Employment, workforce jobs and hours worked have all increased, unemployment has fallen and there has been an improvement in wage growth. These movements have reversed the weakness experienced in the first half of 2011.
In terms of employment, the three months to April compared with the previous three months showed an increase of 166,000. This equates to an employment rate of 70.6 per cent. Although this was an improvement of 0.3 percentage points on the quarter, there has been no improvement on the year.
Recent rises in employment have been the result of increases in part-time workers, however the increase in the 3 months to April compared with the previous three months were split evenly between part time and full time increases. In tandem with the lack of movement in the employment rate over the year, there has also been little change in the proportion of full time to part time workers, with a change on the year in full time workers of 30,000 compared to 12,000 part-timers. However the number of full-time workers is still 619,000 less than four years ago, and part-time workers are 463,000 higher, suggesting that since the start of the recession, underlying economic weakness and labour demand has meant many full time workers have had to move to part time work. Indeed, the number of part time workers looking for full time work is close to the highest since comparable records began, with the highest being in the January to March period.
Unemployment continued to fall, following recent three month on previous three month falls, but compared to a year ago, unemployment is now higher. This corresponds to an increase in the unemployment rate of 0.5 percentage points. The number of people unemployed for over six months increased by 151,000 compared to the same three months a year ago. The rise in long term unemployment and youth unemployment presents important economic and human capital challenges for the future because both of these factors tend to contribute to more periods of unemployment during the course of a working life and lower overall earnings.
Total weekly hours increased in the last three months compared with the previous three months, a reflection of the increase in employment as average hours remained broadly unchanged for both full time and part time workers. On the year there has been a 1.9 per cent change, which is due to increased average actual weekly hours worked by both full time and part time workers and a broadly flat employment rate.
Total pay increased by 1.4 per cent year on year for the 3 month average to April, up from 0.9 per cent for January to March. This is due to a low growth figure for January being replaced by the larger growth figure for April. The increase in growth rates may reflect the passing of a weaker than normal “bonus season”. Now that the bonus season is over, total pay growth tends to be driven by regular pay rather than bonus levels. Although this is a step in the right direction, wage growth remains below inflation so real earnings continues to fall, as it has done for the last four years.
The private sector saw an increase of 1.3 per cent in total pay whereas the public sector excluding financial services saw an increase of 0.8 per cent on the year.
Vacancies have remained broadly flat in the three months to May compared with the previous 3 months recording an increase of 1,000 vacancies and 7,000 on the year. However redundancies fell by 10.3 per cent in the three months to April but remain 33.8 per cent up on the year.
Headline CPI inflation fell again in May to 2.8 per cent. This is from a peak in September 2011 of 5.2 per cent. The decline reflects four key developments:
The rise in VAT to 20 per cent in January 2011 has come out of the annual inflation calculations since early 2012;
An easing in oil prices has fed through to lower energy and transport costs;
Declines in some commodity prices and an increasingly competitive retail environment have resulted in periodic declines in inflation for some foodstuffs as well as clothing and footwear;
Squeezed household financial positions and weak confidence might be reflected in the price falls (negative price growth) of goods and services that households consider non-essential, such as some recreational goods and services.
More specifically, the decline in May was due to food and non-alcoholic beverages, miscellaneous goods and services (appliances and products for personal care and house content insurance) and recreation and culture.
Inflation is easing-off in light of the domestic and international economic circumstances, but the headline rate is still above the Bank of England’s target of 2 per cent. However, underlying domestic inflation pressures seem to be easing at a quicker rate given the decline in the GDP deflator to 2 per cent.
Annual output price inflation in the manufacturing sector continued to slow in May, recording growth of 2.8 per cent, the lowest since November 2009. Input price inflation continued its rapid descent recording growth of 0.1 per cent, down from 1 per cent in April and 5.4 per cent in March. The direct result of these falls is that for the second consecutive month input price inflation is lower than output inflation, a development that hasn’t arisen since October 2009. Although this phenomenon has occurred in recent months, input prices have still seen much higher growth since January 2010 (21.6 per cent) than output prices (11 per cent).
Even though growth in input prices was relatively flat on the year – there were substantial movements within the product groups. The 1 percentage point contribution of fuel (including the climate change levy) was more than offset by a contribution of -1.2 percentage points from imported metals.
The growth in output prices was a result of positive contributions from every group, with the largest increases coming from food products, tobacco & alcohol and other manufactured products.
In May 2012, the UK current budget deficit was £16.9 billion (excluding the temporary effects of the financial interventions) – this was 18.9 per cent larger than May 2011.
Net borrowing during the month was in deficit by £17.9 billion. As a result of the transfer of the assets and liabilities of the Royal Mail pension plan in April, which amounted to a £28 billion boost to public sector finances, the accumulation during the first two months of the current financial year is £24.1 billion lower than last year at £24.5 billion. Net borrowing for the full financial year is forecast by the OBR to be £91.9 billion (excluding the Royal Mail transfer) which is £35.7 billion less than the 2011-2012 outturn.
The biggest increases compared to May 2011 in current receipts came from taxes on production (£0.5bn), other taxes (£0.4bn) and compulsory social contributions (£0.3bn). Counteracting these improvements in revenues was a decrease in receipts from taxes on income and wealth, of which income tax & capital gains tax (accrued) accounted for £0.8bn. All current expenditure categories increased, with the biggest increases in other current expenditure (£2.2 billion) and Net social benefits (£1.7 billion).
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