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 grew by 0.3% in the first quarter of 2013. With four out of the preceding five quarters seeing negative quarterly growth rates, over the period since the third quarter of 2011 the economy has expanded by a meagre 0.4%. Excluding the oil and gas sector, total growth has been 0.6%.
Although there has been much talk of a 'double dip' recession, economic growth is most realistically described as being broadly flat, or at best rising very slowly, during the past two and a half years. The annual average growth rate since mid-2010 is only 0.5%, compared with annual growth of 3% a year in the decade before the 2008 recession.
The period since the end of the 2008-2009 economic downturn is characterised by steady growth in the output of the services sector, while construction output and industrial production have fallen. Within the latter, mining and quarrying output has fallen sharply.
The upward momentum of the labour market during 2012 faltered in the latest period, while the squeeze on real earnings growth intensified further.
Compared with previous recessions, growth in real GDP per capita has been weaker than that in aggregate GDP. The usual driver of growth in the early stages of the recovery – households’ spending – has been more muted during the latest period than following previous recessions. The contribution of net overseas trade to GDP growth has been no stronger than in previous recessions despite the benefit of sterling’s depreciation during 2007 and 2008.
The UK economy grew by 0.3% between the final quarter of 2012 and the first quarter of 2013, following a period when four out of the five previous quarters had seen falls in output. Growth in the latest period was led by the services sector, while there was also a small positive contribution from the production sector as mining and quarrying output rebounded following the big fall in the final three months of 2012. Growth in these sectors was partly offset by the steepest fall in construction output since the first quarter of 2012.
The service sector grew by 0.6% during the first quarter and contributed 0.5 percentage points to GDP growth. Services sector output jumped sharply in February across all the main sub-sectors, with distribution, hotels & restaurants and transport, storage & communication growing the fastest in the quarter, up by 1.2% and 1.4% respectively.
Notably, these are the sectors that lost output at the fastest rate during the recession, stagnating in the interim. Recent strength in these sub-sectors indicates a bounce back, though the output of both remains some way below pre-recession levels. More generally, growth in the service sector since the recession has been underpinned by government & other services which has grown by 6% since the first quarter of 2008.
Output of the production sector grew 0.2% from the previous quarter, following the the largest quarterly contraction in the last four years. Growth in the latest quarter was mostly attributable to 3.2% growth in mining and quarrying, only partly offsetting the 10.7% fall in the previous quarter which was due to extended maintenance at the UK’s largest North Sea oil field.
The extraction of North Sea oil has been declining since the late 1990s with the rate of decline increasing markedly since 2008. Despite mining and quarrying (which predominantly consists of oil and gas extraction) accounting for just 2.4% of the economy, the severity of its decline has impacted GDP. Excluding oil and gas from gross value added throughout the recession alters the overall picture slightly: though there is still a pronounced fall in output followed by a lacklustre recovery the recovery becomes slightly more assured.
The construction sector has also generally acted as a drag on economic growth since the 2008 downturn. In the first quarter of 2013 output dropped to its lowest level since the recession, down by 18.9% when compared with the first quarter of 2008. Public new work (including infrastructure) increased every quarter between 2008 Q4 and 2010 Q3. Contrasting this, new work in the private sector (including infrastructure) has fallen by 26.8% when compared to its pre-recession peak.
There has been much talk of a double dip recession, based on the fact that, following the deep recession in 2008 and 2009, output fell again in the final quarter of 2011 and in each of the first two quarters of 2012. This meets the convention that a recession is defined by two consecutive quarters of falling output.
However there is no universally agreed definition of recession. Determining when an economy is in recession necessarily involves an element of judgement, taking into account relevant factors such as the scale of the fall in output, the normal margins of error around the statistics, and the presence of special factors which might have influenced the figures.
The falls in output from 2011 Q4 to 2012 Q2 are all modest. In total the economy contracted by 0.5 per cent. The decline in output in the first two of these quarters is particularly small. When growth is very weak, the difference between, say, estimated growth of 0.1% and -0.1% in a quarter is actually within the statistical margin of error.
The contraction in the economy in the following quarter, the April-June period of 2012, is explained by the additional bank holiday which was called in June as part of the Queen’s diamond jubilee celebrations. The impact of such special factors should not perhaps contribute towards a recession.
Rather than relying on small changes in quarterly growth rates to justify calling a recession, we should consider the growth rate of the economy over a longer period. Figure 4 below suggests that the economy has seen three distinct phases since 2008. During the recession itself, the economy contracted by 6.3% in total between the first quarter of 2008 and the second quarter of 2009. This was followed by five quarters of steady recovery up to the third quarter of 2010, with cumulative growth of 2.7% - an annual average rate of 2.2%. Since then the recovery has faltered, and the annual growth rate has averaged only 0.5%. The trend during this latest period is therefore best described as one that is flat or at best gently rising.
The labour market hesitated in the three months to February following consistent growth in employment over the past 18 months. Employment decreased by 2,000 and unemployment increased by 70,000, producing a fall in the employment rate from 71.5% to 71.4% and a rise in the unemployment rate from 7.7% to 7.9%. Falling inactivity over the same period suggests that an increase in unemployment may be a consequence of people entering the labour market as well as a fall in the number of available jobs. The reduction in inactivity was driven by a reduction in the numbers looking after a family and those classifying themselves as retired.
Growth in average weekly earnings (excluding bonus payments) fell to 1% when comparing the three months to February with the same period a year earlier – the lowest rate since records began in 2001.This compares with the annual rate of consumer price inflation of 2.8% in March 2013, indicating a renewed squeeze on households’ real purchasing power.
Five years after the start of the 2008-2009 economic downturn, the UK economy remains 2.6% smaller than at the pre-recession peak. By this measure of economic output the recovery from recession has been weaker than any seen in the twentieth century.
Real GDP measures the total size of the economy. GDP can also be expressed on a per capita basis – ie per head of population – as an indicator of individual living standards as measured by average income per person. The drop in GDP per capita has been more pronounced than that of GDP, having fallen by 7% during the recession itself (compared with 6.3% for the corresponding fall in GDP), and it is now 6.3% lower than at the pre-recession peak.
In terms of GDP, the present recovery is 7.5 percentage points lower than at the same stage of the 1970s recession, while the corresponding difference in GDP per capita is 12 points. The current weakness in GDP disguises the fact that the population size has been growing more during the past 5 years than during previous recessionary episodes, and average incomes have therefore been weaker still. Since the 2008 recession, the UK population has increased by 3.8% (2.3 million people). Over an equivalent time period, population following the 1980s and 1990s recessions increased by 0.3% and 1.4% respectively.
In each of the two previous recessions, household spending has played an important role in leading the economy out of recession. At the corresponding stage of the two previous UK recessions, in the early 1980s and the early 1990s, the volume of household consumption had risen by more than 10% from its post-recession trough. In the current episode, the corresponding increase has been less than 3%.
In part this is due to the rise in the rate of inflation since 2009. Figure 9 shows price inflation (as measured by the retail prices index excluding mortgage interest payments1) was much lower at the start of the recession than in either of the previous two recessions, reflecting the success of inflation control mechanisms during the previous 15 years (1992-2007). However a combination of factors – the devaluation of sterling in 2007-2008, strong global oil and other commodity prices, and successive increases in the rate of VAT – pushed inflation up again during 2010 and 2011. Having started off at a very low level, by this point inflation was back to the levels seen at the corresponding stage of the previous two UK recessions.
This squeezed real household income growth, already weakened by the slow growth in earnings, and intensified the pressures to reduce debts through expenditure restraint.
Figure 10 shows the growth of real wages in different recessions. The last four years have seen earnings growth consistently falling behind the rate of price inflation. By contrast the corresponding period following the recessions of the early 1980s and 1990s saw rising real wages. This may be a factor behind the weakness of labour productivity during the recent period, as firms have adjusted by reducing wage growth as well as by cutting employment.
Overseas trade is also an important contributor to economic growth. Since 2008, the UK has continued to run a substantial trade deficit – imports of goods and services have exceeded exports. Figure 11 indicates the nominal trade balance in goods and services remains in deficit. This is largely the result of a deficit in traded goods - £27.1 billion in the last quarter of 2012 – only being partly offset by a surplus in traded services - £17.9 billion over the same period. The weak trade balance has persisted despite the 19% depreciation of sterling’s effective exchange rate2 (ERI) during 2007 and 2008. This might have been expected to boost the UK’s trade performance in real terms as UK goods and services become relatively cheaper compared with those produced abroad.
However, exports of goods have not responded strongly to the fall in sterling, rising by just 4.9% since the first quarter of 2008 in volume terms. In part this may reflect the timing of the depreciation, which occurred at the start of a global recession, meaning that the demand for UK exports has remained depressed. Exports to the EU – the UK’s main export market – have suffered as a result of the problems facing the euro area economies and the resulting weakness of economic growth there.
When observing the actual price of exports relative to the price of imports, otherwise known as the terms of trade, there has been little movement since 2008. This effect can be divided into two distinct periods:
Comparing 2008 Q1 with 2011 Q1, the price of exports and imports both rose by around 20%, such that the terms of trade were broadly unchanged. A possible explanation for this behaviour is that following the initial depreciation of sterling in 2008, firms increased their sterling prices in order to keep prices constant in foreign markets, thus raising profit margins. This could apply particularly for UK exports with a low price elasticity of demand.
Since 2011, price growth of both imports and exports has been relatively flat, increasing by 1.6% and 0.4% respectively, while exports of goods fell by 0.2% in volume terms.
This type of price inflation has a long time series and can be used to compare recessions.
Defined as the exchange value of the pound against a weighted basket of other currencies.
Income per head
The annual per head data is calculated using mid-year population estimates. The quarterly per head series will not sum to the annual total as the quarterly series uses constructed population numbers estimated using successive annual mid-year population figures.
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