Official data showing upswing in manufacturing and construction sectors has buoyed growth, reports Team IFM
London, July 3rd: The UK grew at an encouraging clip both on an annualised and quarterly basis in the January-March period in 2014 but still remained below projections, recent official data shows. A leading investment bank predicted that this level of growth would continue over the course of the year.
Data released by the UK’s Office for National Statistics (ONS) last week said the economy, which has been on the recovery mode for several months now, grew 3 percent from that logged in the first three months of 2014 period to the corresponding period last year.
The figure was arrived at after a one percentage point downward revision, ONS said. A revision of growth estimates over a broader period also showed the economy to have swelled 1.7 percent in 2013 as compared to 2012, the ONS data showed.
Similarly, quarter on quarter growth nosed up 0.8 percent in the period under review, ONS said. This figure was below the 0.9 percent increase that independent analysts predicted, but according to economists, it is still encouraging.
The reading was comparable to the projections of the National Institute of Economic and Social Research (NIESR) – the country’s longest established independent economic research institute – which released its quarterly forecast earlier this month. It said that the economy would grow by 2.9 percent in 2014 and 2.4 percent in 2015.
Economists at US bank Goldman Sachs estimate that Britain’s GDP will expand at an even perkier 3.4 percent rate this year, and stabilize to the current level of increase of 3 percent in 2015. It attributed the robust growth to a continuing recovery in the banking sector and diminishing uncertainty.
“As growth has picked up, clearly that has begun to erode the slack in the British economy,” said Huw Pill, chief European economist of Global Investment Research at Goldman Sachs in a video interview on the company’s website.
However, the ONS data had some gray linings, saying the households’ saving ratio is estimated to be 4.9 percent in the first quarter this year. “Real households’ disposable income fell by 0.2 percent between fourth quarter 2013 and first quarter 2014,” it said in a statement.
A sharp upward swing in the fortunes of the manufacturing and construction sectors seems to have propelled the British economy on its current course, ONS sectoral data for April showed, which was in line with data from economy tracker Markit.
While ONS data showed seasonally adjusted estimate of construction output in April rose by 1.2 percent, Markit’s headline index was 60.8 in April and 60 in May, above the 50.0 no-change level for the 13th successive month.
“Output growth hit a seven-month low in May, but the UK construction sector is enjoying its strongest overall phase of expansion since the summer of 2007,” said Tim Moore, senior economist at Markit.
“Residential building remains a key engine of growth, with survey respondents citing another surge in new house building starts during May,” Moore said in a statement earlier in June.
CONSTRUCTION UP
According to ONS, construction output in April rose by £113 million when compared with March 2014. There was a slight rise of 0.9 percent (valued at £55 million) in new work and a larger increase of 1.6 percent (£57 million) in repair and maintenance, it said.
“The year-on-year picture is also one of growth,” ONS said. Compared with April 2013, construction output increased by 4.6 percent, with all new work going up by 4.9 percent “due to strong increases in new housing and private industrial work”.
ONS said its second estimate of GDP for the first quarter, which was published on May 22, included an estimate of construction growth of 0.6 percent. “This has been revised to 1.5 percent,” it said, and cited “late” survey data, particularly for March, as the cause of this revision.
This revision of 0.9 percent results in an increased contribution to GDP growth of 0.09 percentage points compared with the previously published contribution of 0.01 percentage points, meaning that if all other components are unchanged GDP could be potentially be revised by 0.1 percentage points.
Construction new orders in Q1 2014 were estimated to be 6.3% lower than Q4. There was a fall in orders for public new housing (45.7 percent), infrastructure (16.5 percent), private industrial (14.6 percent) and private commercial work (1.9 percent).
Public other new work and private housing new orders increased by 6.8 percent and 2.8 percent, respectively.
“The fall in public housing was the largest fall since the series began in 1964,” ONS said. However, it added, the volume of new orders of public housing was not as low as in the fourth quarter of 1990.
“A possible reason for the fall in public housing new orders is that investment in housing associations is coming from private investment rather than a public source,” ONS said.
The Chartered Institute of Purchasing and Supplies (CIPS), which tracks the UK’s construction sector, felt likewise, saying construction activity has shown signs of moderation in May from the steep growth seen at the start of the year.
“Sub-contractor capacity fell to the strongest rate since August 1997 and delivery times continued to lengthen, as suppliers struggle to make up the gap in output,” said CIPS chief executive David Noble. “Consequently, with supply constraints still persisting, there are some concerns about how this prolonged period of growth can be sustained over the course of 2014.”
PRE-MELTDOWN MARK
The latest statement of ONS is in tune with the findings of an earlier assessment of the economy by NIESR. “Our monthly estimates of GDP suggest that output grew by 0.9 percent in the three months ending in May after growth of 1.1 percent in the three months ending in April 2014,” it said.
“By this estimate, the level of UK GDP has surpassed its pre-recession peak, and is approximately 0.2 percent above where it was in January 2008,” it added in a forecast for the UK economy, published in the May issue of the National Institute Economic Review.
After growing only very marginally in 2012, growth accelerated rapidly and is now running at around 3 percent year-on-year, NIESR said, forecasting a GDP growth of 2.9 percent this year, an upward revision of 0.4 percentage points on its forecast published three months ago.
“This means that GDP will exceed its previous peak in 2008 in the next few months, although per capita GDP still remains well below its previous peak, and will not exceed it before 2017,” it added. “We have also lifted our GDP growth forecasts for 2015 through to 2017 to about 2.4 percent.”
Similarly, NIESR said it expects real wages, which are currently about 6 percent below their 2009 level, to grow this year. “We do not expect them to make up that lost ground until 2018 or so,” it added.
The research institution noted that unemployment rate had fallen by 1 percentage point in the past year, and that it expected it to drop to close to 6 percent from 2015.
“The corollary of robust growth in employment over the past few years, combined with economic weakness, has been a sharp fall in productivity growth. Indeed, since 2008 UK productivity performance has closely tracked that of Italy,” NIESR said.
On the basis of current government plans, the think tank said it expects a continued slow decline in net public sector borrowing this year, accelerating in subsequent years, and reaching an absolute surplus in 2018. Its forecast: the net debt to GDP ratio will peak in 2015–16.
NIESR also dubbed the UK’s trade performance as “disappointing” with the current account deficit running at about 4 percent of the GDP over 2012-14. The numbers would, however, improve subsequently as global economy continues to strengthen, it predicted.