UK economic activity begins to step up a gear

The first estimate of UK GDP for the third quarter of this year shows that the economy’s performance continues to improve. GDP expanded by 0.8%, which follows on from a 0.7% increase in the second quarter and a rise of 0.4% in quarter one.

This marks the first time since 2011 that the economy registered three straight quarters of growth.

The third-quarter GDP figure backs up what the monthly data and survey indicators have been telling us, namely that the pace of UK economic activity is gaining momentum. This comes after a very poor performance last year when the economy failed to grow at all.

Indeed, UK GDP would have contracted in 2012 but for the boost to activity from the Olympics.

The breakdown of third quarter GDP indicates a relatively broad-based expansion in activity. Output from all four of the main industry sectors increased in the quarter.

The largest contribution to growth came from services, which contributed 0.6 percentage points to the 0.8% increase in GDP.

A recovery in the housing market is also having a positive impact on the overall economy. House prices are rising quite strongly, while there has been a pick-up in transactions, mortgage demand and broader construction activity.

While the expenditure breakdown of third quarter GDP is not yet available, retail sales data over the period suggest a healthy performance from the consumer side of the economy.

In the third quarter, retail sales increased by 1.5% quarter on quarter, representing an acceleration in the pace of growth compared to the 1.1% increase in quarter two. The growth rate in quarter three also represents the best quarterly performance since the first quarter of 2008.

From a labour market perspective, the recent data suggest that the improvement in the wider economy is having a positive impact on the jobs market. The latest Labour Force Survey showed that, in the three months to August, the level of employment rose by 155,000, representing an improvement compared to the July number of 80,000.

The growth in employment has helped to edge the unemployment rate lower in recent months, although, it still remains stuck in the 7.7%-7.9% range in place since Aug 2013.

In terms of more timely labour market indicators, the claimant count fell in September by its largest amount since 1997, pointing to the potential for a decline in the unemployment rate in the coming months.

The UK 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 still high unemployment, and weak real income growth.

While the economy still faces these considerable headwinds, the recent trends in the PMI surveys and other data suggest that the recovery in activity can be sustained. Given the strength of the upturn this year, GDP growth of close to 2% may be in prospect for 2014, after growth of around 1.3% in 2013.

The Bank of England has been keen to stress in its forward guidance statements that the pick-up in growth will not trigger hikes in interest rates. Monetary Policy Council member David Miles said last week it would be a catastrophic strategy to increase interest rates as soon as we get a bit of growth.

The Bank of England’s own forecasts suggest it will be mid-2016 before it considers hiking interest rates. Output in the economy is still around 2.5% below the pre-crisis level. Unemployment also remains quite high. Thus, there is a lot of spare capacity in the economy, allowing the Bank of England to keep interest rates are their current record low levels.

*Oliver Mangan chief economist, AIB


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