Modest signs of recovery in British economy

There is growing optimism in Britain that a modest economic recovery may have commenced in the first half of 2013 after a couple years of stagnation in the aftermath of the very deep recession in 2008-09.

UK GDP expanded unexpectedly by 0.3% in the first quarter, reversing the 0.3% fall in the final three months of last year. This left GDP up by 0.6% year on year.

The rise in first quarter GDP meant that the economy avoided the ignominy of a “triple dip” recession. Nonetheless, the expenditure breakdown of the data showed that the 0.3% increase was all due to an increase in inventories.

Consumer spending recorded a rise of 0.1%, its weakest quarterly performance since mid-2011. Total investment contracted for a third straight quarter, falling by 0.8%. Overall, economic activity remained quite subdued. In terms of more timely data on the UK economy, though, recent releases indicate signs that the pick up in activity is gaining momentum. The services PMI index rose for the fifth month in a row in May to hit 54.9, its highest level in over a year. The new business component of the index reached its highest level since February 2010.

Meanwhile, the manufacturing PMI rose for the fourth month in a row to 51.3 in May, also the highest level in over a year. The construction PMI rose from 47.2 in March to 49.4 in April and 50.8 in May. It would seem, then, that both the manufacturing and construction sectors are expanding again.

Indeed, the latest official data showed industrial output rose for a third consecutive month in April and was up by 0.8% in the three months to April compared with the three months to January.

There are encouraging signs emanating from the housing market too, with a modest pick up in transactions, mortgage approvals and house prices in recent months, albeit from low levels. The Halifax index showed prices up by 0.4% in May, 2.6% higher compared with a year earlier.

New car registrations have also been very strong, and were up by 11% in May on a year ago. It was the highest level of car registrations in May for six years. Meantime, the BRC survey showed a pick-up in retail sales in May, with total retail sales rising by 3.4% on a year ago.

On the labour market front, 2012 represented a year of improvement despite a weak economic environment, with the jobless rate declining to below 8% from 8.4% at end 2011. The UK also saw strong employment growth of 2% last year, adding over 550,000 jobs.

The latest data show the unemployment rate remaining stable at 7.8% in the three months to April, with employment continuing to rise. Meanwhile, the claimant count fell again in May for a seventh consecutive month.

The key question now is whether or not the improvement in the UK economy during the first half of this year will prove sustained. The economy is still facing many of the same headwinds that have weighed on the recovery to date, including household deleveraging, restrictive credit conditions and fiscal tightening, as well as fragile consumer confidence and weak real income growth. Meanwhile, the sluggish global economy poses challenges for the export sector.

Official forecasts are for UK GDP to grow by around 0.5% in 2013 but, given the better than expected performance by the economy year to date, growth could be around 1%. GDP growth could pick up to around 1.5% in 2014.

This improvement in the UK economy has seen sterling recover after a shaky start to the year. It has jumped to $1.57 against the dollar from lows of below $1.50 in the spring, while it has risen back to around the 85p level against the euro.