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UK economic recovery: how well are we doing?
Follow our 13-point guide on the strength of the UK economic recovery.
by Chris Marshall on Sep 05, 2013 at 10:02
GROWTH! It’s been a long time coming, but finally the UK economy is gathering strength.
New reports showing improvements in house prices, construction or the crucial services industry are published almost daily.
Here’s a run-down of the state of the UK economic recovery.
Out of recession
GDP (gross domestic product), the main reading of the strength of economies, has finally started growing. In the first quarter of this year, GDP rose by 0.3% – enough to end the official recession. Then in the second quarter the economy grew by 0.7% (that compares to 0.3% in the eurozone).
Economists increasingly predict that the next quarter could be even stronger, while the OECD (a club of rich countries) on Tuesday raised its forecast for UK 2013 growth to 1.5% from its previous expectation of 0.8%.
The UK’s most important industry sector is services – the massive mish-mash of hotels, transport, finance and so on – accounting for over three quarters of our total output.
In August the UK services PMI (purchasing managers index, drawn from a range of industries) reached its highest level since December 2006, a report showed on Wednesday. Economists hadn’t seen that coming after strong growth in July.
In fact the sector never really suffered as much as other parts of the economy.
Manufacturing ‘booming again’
More records. This time, showing the economy ‘is enjoying its strongest growth spurt for over 15 years’ according to Markit, the data company behind the PMI surveys.
That record is based on a composite reading of growth in services, manufacturing and construction.
Manufacturers reported the largest monthly increase in output for 19 years in August, according to the report.
Markit economist Rob Dobson reckons the UK’s factories are ‘booming again’, helped by demand both from domestic consumers and overseas customers.
The construction industry had been hit particularly hard during the economic downturn.
But, alas, the construction PMI hit a near six-year high in August in its fourth successive month of expansion.
House building is crucial to this, but also expansion in civil engineering.
Even the banks are parting with some of their (your) cash. Data released by the Bank of England earlier this week showed that 60,624 new mortgages were approved in July, up from 58,238 in June and 30% more than the number of new mortgages approved in July 2012.
Consumer credit also grew by £0.6 billion in July, though that was only marginally higher than previous months. That’s things like credit cards and consumer loans.
Some of that translates into spending in the shops and the British Retail Consortium (BRC) retail sales monitor showed total retail sales values rose by 3.6% year-on-year in August.
It’s not surprising then that consumer confidence is growing. The GfK consumer confidence index showed its fourth successive monthly rise in August to its highest level since October 2009. Other surveys show similar trends.
Part of this is likely a result of rising house prices (more on that later).
Fill your boots with UK shares
More consumer spending, a rising housing market (see next slide) and greater confidence means many British companies are set to prosper.
While many of Britain’s biggest companies are more impacted by events overseas, many smaller outfits make their money domestically. Investors are pouring their money into both.
Surveys of both professional and private investors show high confidence in the UK stock market and growing allocation to shares here.
It’s a trend that looks likely to continue even as valuations become more stretched after an 18-month bull run: 40% of independent financial advisers (IFAs) plan to increase their clients’ exposure to UK securities over the next six months, compared to only 2.5% who intend to reduce it, according to a survey by SPDR ETFs.
Here’s the rub. A lot of these improvements clearly emanate from a resurgent housing market. Rising home prices generate consumption, encourage construction and embolden lenders to offer more credit.
Government initiatives (particularly the Help to Buy scheme), coupled with low interest rates, have helped to re-inflate house prices. The latest data from Nationwide, for example, shows that in August 2013 the average house price was 3.5% higher than in August last year.
The majority of economists now predict a ‘bubble’, according to a survey by Reuters. Some though, say a property-led recovery is better than nothing. Others point out that although house prices are stretched, the level of transactions remains well below its long-term trend, undermining the notion that the market is over heated.
There are a pair of clear winners here: there has been a sharp rise in voter’s faith in chancellor George Osborne and prime minister David Cameron, with the latest ICM survey for the Guardian showing 40% of those polled had faith in the pair, up from 28% in June.
Other important stuff put on hold
If we don't face a housing bubble then it’s at least ‘a halt [to] the deleveraging [debt reduction] of the household sector that must eventually occur’, in the words of Societe Generale economist Brian Hilliard.
A recovery based on the housing market puts long-term reforms on hold.
It comes at the cost of rebalancing the economy towards exporting more, which was the government’s get-out-of-trouble plan.
In fact, in the words of the Office for National Statistics, ‘despite a substantial depreciation in the value of sterling between 2007 and 2009, which in theory should have enhanced the UK’s competitiveness, the performance of UK trade has been modest.’
The UK has lost export market share during the period since 2008, but has closed some of the gap in the last two years.
What about jobs and wages?
Here’s another problem. Inflation (2.8% on the consumer prices measure) is outpacing wage growth.
The latest official figures show earnings rose just 1.1% excluding wages.
That means, unless descriptions of the UK as an ‘Alice in Wongaland’ economy are really true and we're all relying on payday loans to hit the high street, then consumer spending will be limited. Government control over spending could also inhibit the recovery.
Practically non-existent wage rises could help explain why the labour market has been relatively strong throughout the past few years given how badly the economy has fared.
Unemployment remains at 7.8%, although the rate for people aged 18-24 has continued growing, up to 19.2% at last count.
Carney’s voice of reason
The jobs figures have suddenly become much more important for the wider fate of the UK economy.
The unemployment rate is now tied to the fate of UK interest rates, much to the chagrin of savers who will have to endure record low rates – and potentially higher inflation – at least until the unemployment rate falls to 7%.
This ‘forward guidance’ policy was introduced by new Bank of England governor Mark Carney, alongside more recent efforts to get banks to lend more.
His is a nagging voice of caution, at odds with the growing enthusiasm about the improving economy, and therefore generating much scepticism that the Bank of England will not raise interest rates before mid-2016 as its forward guidance currently indicates.
Global economic recovery
As well as the constraints provided by tight control over government spending at home, Carney has one eye on still relatively weak external demand.
BUT, things are getting better elsewhere too.
‘Global growth is sluggish and risks remain’, the OECD concluded in this week’s report, but the pace of recovery in major advanced economies improved in the second quarter and ‘activity is expanding at encouraging rates in North America, Japan and the United Kingdom’.
What’s more, recent data out of China suggests a ‘hard landing’ may have at least been averted, while even the eurozone is growing a little bit.
The global economy is slowly recovering.
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