Leading the way - Economics weekly

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Leading the way - Economics weekly

The run of good news continues for the UK economy. Firstly, Q2 GDP growth was revised up from 0.6%q/q to 0.7%, and growth appears to be on a firmer footing with most areas of the economy making a contribution.

Economic Analysis

27 August 2013


UK storms ahead on higher GDP

The second estimate of Q2 GDP growth came in at 0.7% on the quarter, up from an already pretty strong 0.6%. But there was more encouragement from the breakdown of growth as well. Not only was growth broad based across the major sectors of the UK economy (services, production, construction) but the sources of that growth looked more sustainable as well.

Household consumption was up 0.4%q/q, investment grew 1.7% and exports helped out as well. Employee wages grew 2.4%q/q – the fastest pace since 2000. This, in particular, gives some confidence that the UK recovery could be sustainable, although bonus payment deferred from Q1 to reduce tax liabilities could have caused a wrinkle in those numbers.

Markets buy the UK recovery story

Growth has been strong in the first half of this year and business surveys show that momentum is continuing into Q3. Markets appear convinced that the recovery is secure and are currently expecting interest rate rises in Q1 2015. That's a lot sooner than the late 2016 date implied by the Bank of England (BoE).

In July, the Monetary Policy Committee warned that the rise in market interest rates (against which the cost of borrowing is determined) was not warranted with the UK recovery not fully established. But market interest rates are higher now than they were then. The BoE may be pressed into more action to push back against this development.

A GDP gift is on the way

From next year, the UK GDP number-crunchers will start taking account of ‘intangibles’ – things like research & development and investment in software, which are increasingly important in the modern economy. The US recently moved to such a system and found a whopping $560bn of additional GDP. This means the US economy is around 3.5% bigger than was previously reckoned – the equivalent of the economies of Hong Kong and Singapore. If the UK uplift is similar in magnitude it would add approximately £50bn to economic output, roughly equal to the economy of Wales.

The UK fiscal deficit remains stubbornly high

The government recorded a deficit of almost £500m in July, compared with a surplus of £800m in July last year. Although these figures are very volatile, in broad terms little progress is currently being made in bringing down the deficit. Indeed, one third of the way through the fiscal year it looks like the deficit will end up very similar to last year’s £121bn.

But there are some positive signs. Tax receipts from April to July are 4.9% higher than the same period last year. With the economy showing signs of improvement, there will hopefully continue to be a stronger flow of tax receipts, which would help to eat into the deficit.

US central bank remains on the tapering track

Minutes of the Fed's July meeting confirmed that it will start reducing its quantitative easing programme later this year as long as the job market continues to improve. Unemployment has been on a downward trend but other indicators – such as the number of people stopping looking for work and those working part-time because they can’t find full-time jobs – paint a less rosy picture.

These point to possible ambiguities with a falling unemployment rate: is it down for ‘good’ reasons – more jobs – or ‘bad’ reasons – more people exiting the labour market? It’s a debate that the BoE’s MPC might have, given its intention to keep rates on hold until unemployment falls to 7%.

Some summer sun for the eurozone economy

The composite eurozone PMI (purchasing managers’ index) – a survey of private sector activity – rose to its highest level in over two years in August. Germany led the charge, but signs of stabilisation also emerged in peripheral economies. It's still early days for the recovering eurozone but after expanding in Q2, it appears set for another quarter of growth.

China shows signs of stabilisation

The encouraging news from the Old Continent followed those from China. The manufacturing PMIs inched into expansionary territory with a reading of 50.1, up from an 11-month low of 47.7. After an unexpected improvement in industrial production in July, the PMI adds to evidence of a stabilising Chinese economy.


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The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.


But that wasn’t all. The 0.7% figure was higher than the US, the eurozone and Japan managed in Q2. It may prove to be temporary, but for now the UK economy is leading the way.

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