UK sees recovery become more broad based
The preliminary data showed that the economy grew by 0.8% in the quarter, compared to 0.7% in the last quarter of 2013. On a year-on-year basis, growth increased to 3.1%, from 2.7%, its fastest since the last quarter of 2007.
The breakdown of the GDP data, which is based on the output approach, showed that the services sector was the primary driver behind growth in the quarter. It grew by 0.9%, contributing 0.7 percentage points (pp) to quarterly growth.
Meantime, industrial production rose 0.8%, contributing 0.1pp.
While the expenditure breakdown is not yet available, the retail sales data indicate that consumer spending remained a key driver of growth. In the first quarter, retail sales increased by 1.0% quarter-on-quarter, representing an acceleration in the pace of growth compared to the 0.4% increase in the preceding quarter.
Data which shows average earnings have started to outpace the rate of inflation, indicating that growth in real incomes has turned positive for the first time in nearly six years, should help to provide a tailwind to the recovery on the consumer side of the economy.
Survey data for April suggest that the economy is maintaining its momentum. The manufacturing PMI for April increased to 57.3 from 55.8 and is above its first quarter average of 56.3.
Meanwhile, the EC’s economic sentiment index for the UK has been very upbeat in the opening months of 2014, hitting a 25-year high of 119.5 in April.
The economy added 239,000 jobs in the three months to February. On a year-on-year basis, the pace of jobs growth picked up to 2.3% from 1.5% in January.
The continued gains in employment have helped to push the unemployment rate lower. The jobless rate stood at 6.9% in the three months to February, down from 7.9% in the same period of 2013. Another healthy fall in the March claimant count suggests the potential for further declines in the unemployment rate over the coming months.
Indeed, this week’s meeting of the Bank of England’s Monetary Policy Committee marks the first meeting under its ‘new phase’ of forward guidance, which came into effect after the unemployment rate dropped below 7%. The ‘new phase’ of forward guidance is focused on the spare capacity in the economy being absorbed before raising interest rates.
The bank is taking comfort from evidence that the UK recovery is showing signs of rebalancing from household to business spending. Inflationary pressures have also abated. However, it is becoming increasingly concerned about possible over-heating in the housing market and the risk this could pose to the economic recovery.
No change to monetary policy is envisaged at this week’s meeting and we await the publication of the May Inflation Report next week to see if there are any major amendments to the committee’s view on the economic outlook and/or changes to its expectations of when policy may be tightened.
In the meantime, the market is becoming increasingly convinced that rates will rise over 2015 and 2016 given the improved trajectory of the UK economy. Futures contracts are now discounting that UK rates will rise to 2.25% by end 2016, up from 0.5% at present.
The broadening base of the recovery, improving labour market trends, easing inflationary pressures, as well as an expected pick-up in growth in its key trading partners, all suggest that the UK recovery will prove sustained and quite robust. GDP growth this year is likely to average close to 3%, and 2.5% or above in 2015.
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