Acquisitions rise in first quarter at briskest pace, while Easter festivities push up rate of inflation in April, reports Team IFM.
London, May 28: Business investments in the first quarter this year, driven by consumer spending, was the highest in the UK since the 2008 July-September period before global recession set in, while Easter holidays and accompanying higher transport costs pushed up the rate of inflation in April for the first time in 10 months, recent official data shows.
Last week, UK’s Office for National Statistics (ONS) said total gross fixed capital formation (GFCF), which measures the value of acquisitions of fixed assets by the business sector, governments and households, was estimated to have increased by 0.6 percent or £0.3 billion ($0.5 billion) to £56.2 billion, compared with the previous quarter.
“On a sector basis, the largest increase came from business investment,” ONS said in a statement. “In terms of assets, the largest increases came from other machinery and equipment and dwellings,” it added.
GFCF is a component of the expenditure on gross domestic product (GDP), and thus shows something about how much of the new value added in the economy is invested rather than consumed.
ONS also said that between January and March this year, the GDP expanded 0.8 percent compared to the last three months of 2013 as estimated.
The annual rate of inflation also rose in April, with the consumer price index curving upwards beyond expectations to 1.8 percent from 1.6 percent in March. The spike was the first since June last year.
Economists, however, said the housing bubble continued to worry, with higher levels of construction output being recorded for 12 months running in April.
Recent independent data showed residential construction as the best performing broad area of activity, with the rate of expansion one of the fastest seen over the past 10 years.
The ONS statement was in line with the sentiments of the National Institute of Economic and Social Research (NIESR), an independent research body, which had earlier this month predicted a pre-2008 scenario from June.
“Subject to data revisions and the uncertainties surrounding any out-of-sample predictions, it can reasonably be expected that the peak will be regained within the next month or so,” NIESR, Britain’s longest established independent economic research institute, had said.
The Wall Street Journal, however, quoted a senior analyst with the British Chambers of Commerce as saying that the central bank needed to do more to ensure business confidence and stoke appetite to invest further.
“We are concerned that the Monetary Policy Committee isn’t providing enough clarity to allow businesses to plan ahead and invest,” The Journal quoted BCC chief economist David Kern as saying.
GROWTH TRACK
The data, as predicted by the NIESR, reflect the rapid recovery that the UK is making, with growth getting on a more sustainable footing, a prerequisite for the central bank to raise interest rates, from the record low of 0.5 percent.
While first quarter GDP increased 0.8 percent from the October-December 2013 period, the growth was 3.1 percent on an annualised basis; this was the fastest expansion since the fourth quarter of 2007 and unaltered from the preliminary ONS estimate.
The Bank of England believes growth will reach 3.4 percent this year, the briskest pace since 2007, or before the onset of the global meltdown triggered in September 2008.
Similarly, the ONS data showed, business investment recorded the fastest rate of growth since the first quarter of 2013, adding 0.2 percent to GDP.
First quarter business investment rose 2.7 percent or by an estimated £0.9 billion to £32.8 billion, compared with the previous quarter. ONS said this was 8.7 percent higher compared with the first quarter data of 2013.
“GFCF and business investment have both shown quarter on quarter increases in each of the last five quarters,” ONS said. “This was the first time five or more consecutive periods of growth were reported since 1998.”
Moreover, it added, “business investment was at its highest level since Q3 2008”.
ONS data showed inflation rate rising to 1.8 percent, topping a Reuters economists’ poll prediction of 1.7 percent. Interestingly, while the index was at its lowest level in more than four years in March, the upswing in April was the first in 10 months since June 2013.
According to ONS, this was primarily due to the Easter, which fell in April this year as against March in 2013, with festivities pushing up both prices and transport costs like airfares.
The core consumer price index, which does not factor in food costs and other items but includes transport costs, rose 2 percent. The upswing was at its strongest rate of increase since September 2013.
As compared to rise in costs of transport and non-food items, ONS data showed food price growth was the lowest in eight years thanks to a mild spring that kept vegetable prices down. Alongside, factory gate inflation was weaker than predictions, and economists saw little to be concerned about the change in price pressures.
“Easter effects aside, the latest release provides little evidence of significant or broad-based price pressures,” Reuters quoted Victoria Clarke, an economist with bank Investec, as saying.
An industry body had earlier said the critical construction sector had also registered a slight upswing in April, and last week’s ONS data showed housing prices climb 8 percent year-on-year year in March, slowing from a 9.2 percent rise in February.
RECOVERY FORECAST
Meanwhile, NIESR said in its report earlier this month that growth accelerated rapidly after showing a sedate pace in 2013 and is now running at around 3 percent year-on-year.
“We forecast GDP growth of 2.9 per cent this year, an upward revision of 0.4 percentage points on our forecast published just three months ago,” it said.
“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.”
NIESR also lifted GDP growth forecasts for 2015 through to 2017 to about 2.4 percent. Similarly, it said while real wages were expected to grow this year, they were currently about 6 percent below their 2009 level.
“We do not expect them to make up that lost ground until 2018 or so,” it said.