Today gives us an opportunity to draw a line under 2014 for the UK economy in terms of economic growth. It was the best year that the UK has managed in the credit crunch era and saw us move decisively ahead of past output levels. Whilst we should broadly welcome such a development there was also an undercut. In essence the growth in total output compared to the pre credit crunch peak was because there are more of us in the UK as at the individual level we found ourselves still struggling to rescale the previous heights. Also we discovered at the end of the third quarter of 2014 that the previous year had been good but sadly not quite as good as we previously had thought.
Between Q3 2013 and Q3 2014, GDP in volume terms increased by 2.6%, revised downwards by 0.4 percentage points from the previously published estimate.
UK labour productivity problems
The other ongoing issue in these terms was the weakness of productivity growth which has been a troubling issue for the UK throughout the credit crunch period. The ONS (Office for National Statistics) January Economic Review summed it up thus.
However the level of output per hour remained 1.8% below that experienced in Q1 2008, and remains significantly lower than the level of productivity that would have been experienced had 1997-2007 average rates of growth been obtained.
This is how the Bank of England estimated a UK “productivity gap” which at one point reached 18% if I recall correctly. This has now been revised down to more like 12% by allowing for methodological improvements such as ESA 10 and the like but if you project the past forwards we remain a long way behind where we would otherwise have been. Of course I am sure that many of you are thinking that this may be the “new normal” and that rather than behaving like HAL 9000 from the Film 2001 A Space Odyssey we need to refine our benchmarks and analysis to adjust for the changes.
On the other side of the coin there were some flickerings of hope for better times in the third quarter of 2014.
the most recent labour productivity data published by ONS (Labour Productivity – Q3 2014) has shown clear improvement, with output per hour rising by 0.6% in Q3 2014 compared with the previous quarter. This was the strongest rise seen since Q2 2011 (when productivity rose by 1.3%) and was broad-based across the headline production and services industries.
Whilst the economic growth seen by the UK has been welcome it has come with a familiar issue if not friend.
Latest figures show the current account deficit widening to 6.0% of nominal GDP, representing the joint largest deficit since ONS records began in 1955.
The income accounts have deteriorating for a while and are now adding to our trade in goods deficit. Whilst the UK services sector continues to perform strongly it is being swamped by larger deficits in the goods and income sectors.
These came with a tinge of disappointment although some perspective can be gained by looking at the Euro area which would love to see such a sustained period of growth.
GDP is estimated to have increased by 0.5% in Q4 2014 compared with growth of 0.7% in Q3 2014.
GDP was 2.7% higher in Q4 2014 compared with the same quarter a year ago. GDP in 2014 as a whole was up 2.6% on 2013.
It is hard not to have a wry smile at the fact that just as various bodies have been raising economic growth forecasts for the UK the actual numbers have been slowing. Still we are continuing to move further ahead of our past peak.
In Q4 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008. From the peak in Q1 2008 to the trough in Q2 2009, the economy shrank by 6.0%.
What about rebalancing?
Regular readers will certainly recall that former Bank of England Governor Mervyn King was very keen on this concept and publicised it in quite a few speeches. For example he regularly tried to talk down the value of the UK Pound on the grounds that we would rebalance and welcomed the 2007/08 depreciation. How is that going?
The largest contribution to Q4 2014 GDP growth came from services; these industries increased by 0.8%, contributing 0.62 percentage points to the increase in GDP.
So the services sector continues to power ahead and as we are grateful for pretty much any economic growth we should welcome it but production?
There was a downward contribution (0.02 percentage points) from the production industries; these industries fell by 0.1%.
So if anything we are seeing a rebalancing away from production to services in spite of the fact that UK manufacturing if looked at on its own edged forwards.
and a rise of 0.1% in manufacturing following an increase of 0.3% in Q3 2014.
However you may note that the growth in UK manufacturing was slowing whereas services continue to power ahead. If we look back for some perspective we see this.
In Q4 2014 output from services was 7.9% above its pre-economic downturn peak in Q1 2008.
Perhaps there was a misprint in Mervyn King’s first speech which somehow got copied over to the others and he meant to say rebalancing towards services rather than away!
Services are the only sector of the UK economy to regain their past peak and as you can see above they have surged past it. If we look into the detail of the recent surge we do get hints of housing based growth although caution is needed as the categories are broad.
The index for business services & finance increased by 0.9% in Q4 2014, following an increase of 1.0% in the previous quarter. Architectural & engineering activities made the largest positive contribution to the increase. Between Q4 2013 and Q4 2014, business services & finance output increased by 4.0%.
What about the UK housing market?
We have seen more data released by the British Bankers Association today and as an organisation with a clear vested interest one would expect the report to be as upbeat as possible.
The mortgage market has been softening since the spring,
Okay and business lending?
Outstanding business lending has been falling as larger firms have used the bond market rather than borrowing from banks. Despite this, outside real estate businesses are generally expanding their lending.
So if we exclude what’s falling then business lending is rising?! Still there is one sector which appears to be booming.
Annual growth in unsecured borrowing is currently 3.8%, the highest rate since late 2008.
What could go wrong?
First let me be clear that the UK has had in international and absolute terms a much better and indeed good couple of years on the economic growth front. It is easy to forget now that there were genuine fears of a “triple-dip” recession back then. Not only did it not happen but the UK economy pushed forwards and 2014’s level of GDP growth of 2.6% is very welcome. Even now whilst growth has been slowing we have just seen quarterly growth of 0.5% which is much better than we will see in Europe overall. As 2015 progresses we will see the benefit of the oil price fall feed into UK economic growth giving us a boost.
Whilst all this has been welcome the truth is that many familiar problems have emerged. In many respects this has been a traditional UK boom based on the housing market. The Bank of England pushed the start button with its Funding for (Mortgage) Lending Scheme or FLS in the summer of 2012 and the UK housing market and then the UK economy responded. What would we expect to see in response to that? That would be inflation and problems with the balance of payments. We certainly have the latter as the chilling ” joint largest deficit since ONS records began in 1955.” phrase echoes. As to the former we have seen that in the housing market as shown below.
UK house prices increased by 10.0% in the year to November 2014.
We do not see it in the consumer inflation numbers for two reasons. Firstly the UK establishment at around the same time as it set out to pump up the housing market decided to abandon its past methodology of aligning with Europe and to exclude house prices from its measure of housing inflation. How very Sir Humphrey! Secondly the oil price fall has masked the UK’s tendency towards administered inflation for now anyway.
So in summary Winston Churchill’s words echo somewhat here.
It is a riddle wrapped in a mystery inside an enigma;but perhaps there is a key.
The key is the housing boom.
Before I end this piece of analysis I have two reminders. Firstly that today’s initial GDP estimate is based on only 44% of the data and the last month (December in this case) is pretty much all guesswork. Secondly that as I have written many times before there are a litany of issues with relying on Gross Domestic Product as your measure of economic health and well-being.