Positive signs that UK recovery will continue
The breakdown of the third quarter GDP data also showed signs of a broadening base to the economic recovery.
While consumer spending continued to be a key driver of growth, increasing by 0.8% on the quarter, there were positive signs from the performance of business investment which .saw growth of 2%, having contracted by 2.3% in the previous quarter.
A continued improvement in business investment is likely to be an important condition for the recovery to continue on its current strong trajectory.
The Bank of England emphasised this point in its December minutes, noting that “for the recovery to be sustained, a pick up in business spending would be necessary”. The main disappointment came from exports, which fell 3%.
PMI surveys suggest that the economy managed to sustain its momentum in the fourth quarter. The services PMI in October reached its highest level since May 1997, with a reading of 62.5, and it averaged 60.4 in quarter four as a whole.
The manufacturing PMI has been very strong since mid-year and it hit a three year high of 58.1 in November, before easing slightly to 57.3 last month. CBI factory orders hit an 18-year high in December.
The construction PMI is now over 60, its highest level since mid-2007. Elsewhere, there are encouraging signs emanating from the housing market, with a marked pick-up in transactions, mortgage approvals and house prices.
From a labour market perspective the most recent data have been quite strong. In the three months to October employment rose by 250,000, translating into a gain of 1.6% year-on-year. This robust growth in employment has helped to put further downward pressure on the unemployment rate.
The jobless rate fell to 7.4% in the three months to October, its lowest level since Apr 2009. Another large fall in the claimant count in November indicates the potential for further declines in the unemployment rate in the coming months. Inflation fell to 2.1% in November, its lowest level in four years.
Overall, the broadening base of the recovery, continued strong rise in leading indicators, improving labour market trends, easing inflationary pressures, as well as an expected pick-up in activity in its key trading partners, all suggest that the UK recovery will prove sustained and quite robust.
The economy still faces some headwinds, including household deleveraging, restrictive credit conditions, fiscal tightening, as well as still high unemployment and sluggish income growth. However, the latest forecasts are for UK GDP to rise by close to 2.5% in 2014, after growth of 1.8% in 2013.
The minutes of the December Monetary Policy Council meeting show that the Bank of England is taking encouragement from the incoming macro news. The council, though, has been keen to point out that its focus is on the level of activity and not the actual growth rate, given that the economy is still below its pre-crisis level of output. GDP in the third quarter of 2013 was still 2% below its peak level reached in early 2008.
The unemployment rate also remains quite high. Meanwhile, the inflation outlook has also improved.
Overall, the Monetary Policy Council appears committed to, and, content with its forward policy guidance that it can keep UK interest rates at their current historically low level for some time. Thus, while markets have started to price in a hike in UK rates for later this year, we think it will be 2015 before they are increased.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
