UK economic recovery more broadly based

The UK economy has been performing well again this year.

The latest GDP data shows that the economy grew by a strong 0.9% in the second quarter, an improvement on the healthy 0.7% increase in quarter one.

Growth also accelerated on a year-on-year basis, rising from 2.9% to 3.2%. This is its fastest pace of expansion since mid-2006. The GDP figures also show that the UK economy is now 2.7% above its pre-recessionary peak reached back in early 2008.

The recovery in the domestic economy is also becoming more broadly based. Business investment rose strongly in the opening half of this year, while household spending continues to show solid growth. Exports, though, remain under pressure, a reflection of the weakness of the eurozone economy, as well as the appreciation of sterling during the past couple of years.

There has been a strong rise in UK employment in the past couple of years, with a marked decline in the jobless rate.

However, there have been signs recently that the pace of job growth has begun to slow. The economy added just 74,000 jobs in the three months to July. This compares to the 345,000 jobs added in the previous three- month period. This still translated into year-on-year employment growth of 2.6% in July.

Meantime, the UK unemployment rate fell to 6.2% in July, its lowest level since November 2008. The claimant count continued to decline (down by 37,200) in August, indicating that the potential exists for further falls in unemployment in the coming months. Meanwhile, although the economy is enjoying robust growth, inflation is relatively muted.

The CPI rate stood at 1.5% in August, below the Bank of England’s 2% target. Furthermore, wage growth has been remarkably weak. Earnings increased by just 0.6% year-on-year in July, continuing the subdued trend in wage growth seen this year.

Survey indicators on the UK economy during the third quarter have been mixed. The UK composite PMI, an important leading indicator of economic performance, averaged 58.4, largely unchanged from 58.6 in quarter two. This suggests that the UK economy maintained its strong momentum in the third quarter.

However, the UK economic sentiment index has been edging down in recent months. It averaged 116.4 in the third quarter compared to 119.6 in the previous quarter, indicating a slowdown in the pace of economic growth.

In terms of hard data, there was solid growth in retail sales in the first two months of the quarter with sales in the period 0.6% higher than in the previous quarter. However, this is below the 1.5% increase seen in quarter two. Thus, growth in household spending may have moderated in the third quarter.

Meantime, industrial production growth has slowed recently.

There are also some indications of a slowdown in growth in the construction sector. Overall, then, growth in the UK economy may have slowed somewhat in the third quarter, while still remaining quite solid.

The broadening base of the recovery, strong leading indicators, improving labour market trends, and declining inflation all suggest that the UK economy can continue to perform well next year, with the BoE indicating that any rate hikes will be modest and gradual.

However, there are some headwinds, including high household debt levels, fiscal tightening, weak income growth, and sluggish demand in the UK’s main trading partners, which is being reinforced by sterling’s appreciation.

However, despite these challenges, the consensus view is for UK GDP growth to average close to 3% next year.


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