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 growth in 2011 is now estimated at 0.7 per cent, lower than the previously published figure of 0.8 per cent, in part due to a slightly bigger fall of 0.3 per cent in the final quarter. By any standards, the level of economic activity has been weak during 2011 with real GDP in the final quarter of 2011 broadly unchanged from its level five quarters earlier (in the third quarter of 2010).
Any assessment of the state of the UK economy should bear in mind the part played by diminishing production of North Sea oil and gas which led to a 15 per cent drop in the output of the mining and quarrying sector in 2011. Non-oil gross value added (GVA) therefore rose considerably faster than total GVA, by 1.6 per cent in 2011 instead of 0.6 per cent.
Preliminary indicators for the start of 2012 show that trade performance remained solid in January but retail sales weakened in February. Consumer price inflation continued to edge down slowly in February.
Real GDP (chain volume measure) contracted by 0.3 per cent between the third and fourth quarters of 2011, a slightly bigger fall than the previously published estimate of 0.2 per cent. Together with some modest revisions to earlier quarters, this has taken down the figure for GDP growth in 2011 as a whole from 0.8 per cent to 0.7 per cent.
The greater than expected weakness in the final quarter of 2011 was broadly based across many of the major output components – production, construction and services sectors – but in all cases the change is relatively small in magnitude. Growth was either flat or negative in all the major industrial sectors with the exception of water supply and sewerage, real estate, professional scientific admin support, education and health – sectors comprising in total around a third of total output in the whole economy.
In terms of contributions to growth in the final quarter, the production sector reduced growth by 0.2 percentage points, primarily due to weakness in manufacturing. The contribution from the services sector as a whole was broadly flat, but there was weakness in the distribution sector, in transport, storage and communications, and in financial services.
Among the expenditure components of GDP, growth in the last three months of 2011 was led by household spending and net trade, with a smaller contribution from general government consumption. In all three cases, there have been downward revisions to growth compared with the previously published estimates.
Household spending growth has been revised down slightly from 0.5 per cent to 0.4 per cent. This follows four consecutive quarters of negative growth. The improvement in household consumption was driven by services, but there was also stronger growth in consumption of durables and semi-durables.
The contribution to growth from net exports has been revised down from 0.6 percentage points to 0.2 percentage points, due to a stronger estimate of imported goods and services together with lower exports. The positive contribution from net exports continues to be due to a better performance of exports, notably to non-EU trading partners, while import volumes fell slightly in the quarter.
Business investment has been revised up but still fell by 3.3 per cent in the final quarter. The drag from inventories remains strong, but the extent to which this may be involuntary is unclear.
In 2011 as a whole, the improvement in the net overseas trade position more than accounted for the whole of the increase in real GDP, as export volumes rose by 4.6 per cent, much faster than the 1.2 per cent growth in imports. Domestic demand fell in real terms in 2011 by 0.8 per cent, mainly due to a 1.2 per cent fall in household final consumption.
In the income measure, there was a significant improvement in the contribution to growth from compensation of employees (CoE), due to the use of new workforce jobs estimates showing a stronger employment position in the fourth quarter of 2011. Growth of CoE has been revised up from -0.3 per cent to +0.9 per cent, adding 0.7 percentage points to the income estimate of growth, which is measured in current prices. Offsetting this improvement was a sharp deterioration in the gross operating surplus of corporations.
Private non-financial corporations’ (PNFCs) gross operating surpluses rose by 2 per cent during the fourth quarter. The aggregate level remains weak following the sharp drop in the second quarter of 2011 and has still not returned to that seen in the second half of 2010. Financial corporations suffered a substantial 15 per cent decline in profits during the fourth quarter of 2011, primarily relating to a reduction in security dealers’ commissions.
Although growth has been erratic from quarter to quarter, it is evident that the level of economic activity has been weak during 2011. Real GDP in the final quarter of 2011 is no higher than it was five quarters earlier - in the third quarter of 2010.
However in assessing the state of the UK economy, the part played by diminishing production of North Sea oil and gas should be borne in mind. This phenomenon led to a 15 per cent drop in the output of the mining and quarrying sector in 2011.
The chart below shows how GVA growth, excluding oil and gas extraction, has been stronger than headline GVA growth. In the fourth quarter, GVA excluding oil and gas, contracted by 0.2 percent, rather than 0.3 per cent for the whole economy. In 2011 as a whole, non-oil gross value added (GVA) rose considerably faster than total GVA, by 1.6 per cent instead of 0.6 per cent.
Business investment has grown slowly since the first quarter of 2011 when it was reduced by the advancing of aircraft imports in anticipation of tax changes in January 2011. However business investment fell by 3.3 per cent between the third and fourth quarters of 2011, and remains 17.5 per cent below its peak in the final quarter of 2007.
Business investment rose slightly – by 1.2 per cent – between 2010 and 2011, but is still 13.5 per cent lower than in 2007 and 2008. The failure of business investment to pick up as private non-financial companies’ profits have improved after the recession suggests that firms continue to be cautious in their view of future economic prospects.
Real household disposable income (RHDI) growth has eased from more than 5 per cent in 2001 to 1.2 per cent in 2007 and 0.3 per cent in 2008. This trend was broken when real incomes were raised somewhat by the low rate of price inflation in 2009, which boosted households’ purchasing power in terms of the quantity of goods and services that they were able to purchase. But this was quickly reversed by rising inflation in 2010 and 2011. As a result, real household disposable income fell in both years, the first time this has happened since 1982. The fall of 1.2 per cent in 2011 was the largest since 1977, and follows a more modest fall of 0.2 per cent in 2010.
In the fourth quarter of 2011, the household saving ratio fell slightly to 7.7 per cent from 7.9 per cent in the third quarter, as disposable incomes rose faster than consumer spending. As a result of upward revisions to estimates of households’ disposable income and downward revisions to their expenditure, the saving ratio is now about 1-1.5 points higher in each of the first three quarters of 2011 than in previously published figures. There was a slight rise in the saving ratio from 7.2 per cent in 2010 to 7.4 per cent in 2011, and it remains close to the elevated levels seen since the recession as households responded to falling real disposable incomes.
The net lending and borrowing tables of the sector accounts shows the extent to which the non-government side of the economy has been repairing balance sheets, and how this is counteracting the significant borrowing levels of the government. Households, the non-financial and financial corporate sectors and the rest of the world are all net lenders in 2011, and in the fourth quarter of 2011. This means broadly that income exceeds expenditure in these sectors, and that they have no net requirement to raise capital by borrowing. While the corporate sector has been a net lender for some years, for households the shift to a net lending position occurred as a response to the recession, and represents a break from the pattern of household behaviour in preceding years.
Growth in the service sector was revised down from flat to -0.1 per cent growth for the fourth quarter, between the second and third estimate of GDP. Service sector growth was last weaker in the fourth quarter of 2010, when heavy snow affected economic activity, and prior to that the last time service sector output contracted was in 2009 Q2.
The monthly estimate of service sector growth will be published on Thursday the 29th March, so this commentary focuses on the quarterly profile of service sector performance, illustrated in the GDP release.
The downward revision to service sector growth in the fourth quarter of 2011 was due to downward revisions to transport services and communications, financial services, scientific administration and support and education. This was partially offset by upward revisions to growth of the real estate sector, health and hotels and catering. Due to the weights, the sectors that drove the downward revision were transport and communication services and financial services. The now negative growth in the service sector for the fourth quarter is echoed across the other major industrial sectors, with negative growth in the production, manufacturing and construction sectors. So the downward pressure on GVA growth was fairly widespread across the output sectors.
During the course of 2010 and 2011, the professional scientific admin and support sector has been growing reasonably well, and due to its 12 percent weight in the GVA total, it has been making a fairly solid contribution to GDP growth. However, in the fourth quarter, this sector's growth weakened to 0.2 percent, and so it's contribution to GDP growth was weaker than it has been in recent quarters. Other sectors that frequently support service sector growth are health and real estate, whilst financial services frequently detracts from service sector growth. It is often the case that these few sectors shape the performance of the service sector as a whole, partly because of their weight but also because of the continuity in their performance, in one direction of the other
The production sector contracted in January, mainly due to a sharp fall in output in the mining and quarrying sector, reinforced by relatively strong declines in the electricity, gas and air conditioning sector. This was only partially offset by some improvement in the manufacturing sector, as the sharp rise in output in December was consolidated with a further modest rise in January.
The strength in the manufacturing sector in January orientated around the chemicals sub-sector, though there was also growth in basic metals and wood and paper products and printing. Overall growth in the manufacturing sector was therefore fairly narrowly based.
Although the manufacturing sector grew quite strongly during 2010 and continued on an upward path during the first half of 2011, between June and November 2011, output declined. Manufacturing output remains only 0.3 per cent higher than in January 2011. Manufacturing output growth may be hindered by the recent weakening in EU demand and industrial production as well as the prolonged weakness in UK domestic demand.
The mining and quarrying sector, in particular oil and gas extraction in the North Sea, has been a significant factor holding back production sector growth, with month on month growth averaging -1.3 per cent during 2011. This weakness worsened quite sharply in January 2012, to -3.0 per cent month on month and -5.4 per cent three month average on previous three months. Production was 21 per cent lower in January 2012 than in January 2011.
Construction sector output weakened sharply in January 2012, declining by 2.3 per cent compared to the level in January 2011. This weakness was predominantly in 'new work', but repair and maintenance work also contracted. Particular areas of weakness in the 'new work' bracket were infrastructure and private commercial construction (non-infrastructure).
The employment rate for those aged from 16 to 64 stabilised in the three months to January at 70.3 per cent of the working age population. However the unemployment rate edged up by 0.1 percentage points to 8.4 per cent, while the inactivity rate decreased by a similar magnitude to 23.1 per cent, suggesting that there was a mild shift from inactivity to unemployment.
The main categories in the 27,000 drop in the number of inactive people of working age were those previously in long term sick (fell by 67,000) and retired (59,000). Counteracting these movements was 'other reasons' with an increase of 72,000 people.
However compared with the December 2010 to January 2011 period, there was a 144,000 increase in the number of unemployed, together with a 6,000 drop in employment. The chart 'Shifts in the status of the working age population' shows how a period of year-on-year increases in employment in the second half of 2010 and the first half of 2011 has given way since last summer to a period of modest increases in unemployment. In the latest figures this has been accompanied by falling inactivity levels with little change in employment.
Long term unemployment (those unemployed for more than 12 months) fell by 12,000 between the two latest three month periods, while the number unemployed for more than two years dropped by 25,000.
The share of long term unemployed within total unemployment typically starts to rise after a year or so of a deteriorating labour market during a recession. This continues even as the labour market recovers because the longest unemployed are the most difficult to re-employ. The proportion of the unemployed who have been so for more than a year has now fallen from 34.1 per cent in February-April 2011 to 32.1 per cent in the latest three months. This is much lower than the corresponding peak following the previous recession, which saw the share of long term unemployed rise to 44 per cent of the total.
The downward trend in the number of public sector jobs has continued with a fall of 37,000 in the final quarter of 2011. This was offset by a 45,000 increase in the number of private sector jobs in the same period.
Average earnings increased by 1.4 per cent in the latest three months, a slowing from the growth of previous months. The private sector saw weekly earnings increase by 1.7 per cent whereas the corresponding figure for the public sector (excluding financial services) was only 0.7 per cent. The divergence was more pronounced when looking at regular pay, with figures of 1.9 per cent and 0.7 per cent respectively, reflecting the increasing impact of the public sector pay squeeze.
The UK’s deficit on trade in goods and services was £1.8 billion in January - £0.6 billion higher than in December when the £1.2 billion deficit was the smallest since April 2003. Prior to December, the latest two months’ figures are lower than the average trade deficit seen during 2010 and 2011. The worsening in the balance of trade was due to an increase in the deficit on the trade in goods and a decrease in the surplus on trade in services. Exports of goods increased by £0.5 billion (2.0 per cent) in January, but this was more than offset by a £0.8 billion (2.6 per cent) increase goods imports - resulting in a trade in goods deficit of just over £7.5 billion. This change was mainly driven by an increase in the import of intermediate goods and chemicals. Exports of services fell by £0.4 billion (2.7 per cent) and imports of services fell by £0.3 billion (2.7 per cent) - resulting in a trade in services surplus of £5.8 billion. The deficit of goods traded with the EU and non-EU countries both increased in January.
The volume of retail sales fell between January and February by 0.8 per cent, following growth in four of the last five months. The change was driven by a large decline in the predominantly food stores sector, which fell by 1.5 per cent in February following growth of 1.3 per cent in January. Predominantly non-food stores, non-store retailing and predominantly automotive fuels also made negative contributions to the overall decline but to a lesser extent. The value of retail sales fell by 0.4 per cent – this smaller fall compared to volume suggests that price pressures still remain within the retail sector despite the reduction in consumer price inflation in recent months. The value of retail sales increased by 3.2 per cent compared to February 2011, while the volume increased by 1.0 per cent.
In the financial year to date (April 2011 - February 2012) public sector net borrowing was £110.0 billion, £8.9 billion lower than in the same period of 2010/11, when there was a deficit of £118.9 billion. Despite a slowdown in borrowing, public sector net debt has grown from £877.3 billion (58.8 per cent of GDP) at the end of February 2011 to £995.0 billion (63.1 per cent of GDP) at the end of February 2012 - an increase of just over £117.1 billion throughout the last year.
After five months of declining rates of manufacturers’ output price inflation, February saw an increase of 0.1 percentage points to 4.1 per cent. Food products, beverages and tobacco, including duty, saw a fall in the rate of inflation of 0.4 percentage points to 5.6 per cent while all other manufacturing products saw a rise of 0.6 percentage points to 3 per cent.
Between October 2009 and December 2011, yearly growth in input prices of materials has been growing faster than growth in input prices of fuel. In January 2012, the relationship reversed and in February the differential increased. Inflation in input prices of materials has fallen from 19 per cent in September 2011 to 6.3 per cent in January although there has been a slight increase to 6.9 per cent in February. The main driver of inflation in materials purchased is the level of crude oil prices. The prices of electricity production and distribution, and gas distribution, have been on an increasing trend since the end of 2010.
The largest growth in input prices came from the manufacture of coke and refined petroleum products industry, a yearly growth rate of 15.2 per cent, up from 13.3 per cent on the previous month. The next largest growth by industry was an 8.2 per cent growth in the prices of inputs to the manufacture of other non-metallic mineral products.
In aggregate, the annual growth rate in input prices increased by 0.7 percentage points between January and February to 7.3 per cent. Over the last few months the gap between the rate of increase in output prices and input prices has decreased - improving producer profit margins. However the gap widened again in February.
The annual rate of consumer price inflation decreased from 3.6 per cent in January to 3.4 per cent, continuing the declining trend since September. Retail price inflation likewise fell from 3.9 per cent in January to 3.7 per cent in February.
The largest price rises occurred in the alcoholic beverages and tobacco, and the housing, water, electricity and gas divisions where annual inflation rates in February were 8.3 per cent and 6.8 per cent respectively. The housing, water, electricity and gas sector and the Transport sector are the biggest drivers behind the rate of consumer price inflation in February, contributing 0.87 and 0.59 percentage points respectively to the overall 3.4 per cent increase.
Excluding the impact of indirect taxes (including VAT), the rate of consumer price inflation (as measured by CPIY) edged down from 3.6 to 3.5 per cent in February, and is only marginally lower than the recent 3.7 per cent peak seen in September 2011.
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