UK Recovery Is Strong - IMF Staff Report

The IMF recently published a staff report showing that the UK economy is growing quickly and the growth is expected to continue. The recent growth has been stronger than expected and the predictions are that growth will continue to be above expectations at about 3% rather than the 1.5% predicted earlier. Growth at the start of the recovery was based on consumer spending and an increase in consumer confidence along with easer credit conditions. Growth is now also due to more business investment as the confidence has spread from consumers to businesses.

The recovery is expected to continue but there are always risks. Domestic risks include uncertainty about future productivity growth and worries about financial risks coming from the housing market. Externally, the unwinding of unconventional monetary policies in the US and weak growth in both emerging and advanced economies and geopolitical tensions are seen as the areas of most risk.

The UK housing market has seen house prices grow very quickly in London and the rest of the UK as well. Rapid house price inflation can lead to serious risks for buyers who borrow more than they can afford leaving them vulnerable to shocks to interest rates or incomes.The authorities have already taken some steps to contain the financial risks. The first line of defence was the 'macroprudential' measures including loan affordability and limits to the share of new mortgages that feature high ratios of loans to incomes. These measures may take some time before they begin to have an impact. The effects will have to be monitored and settings adjusted accordingly if required. Inadequate supply is the main driver of the increase in house prices. Unnecessary constraints on planning should be lifted to ensure the ax system encourages the most appropriate use of land and a consensus reached to relieve the supply problem.

Monetary policy should remain accommodative for now and should support the recovery at least until signs that inflation is rising appear or that costs are increasing above productivity growth.

2.4% Increase In Business Investment

The ONS recently released the latest figures on business investment in the UK. The release includes breakdowns of total gross fixed capital formation (GFCF), business investment being only one component. They show indicators of investment in assets such as dwellings, transport equipment, machinery, buildings and intangible assets. GFCF increased by £1.3bn, or 2.4%, to £56bn over the quarter, business investment was the largest component.

Business investment also increased by 2.4%, an estimated £0.8bn, compared with the last quarter. It is 8.5% higher than Q4 2012.

The data in this survey are concerned with net investment that is the value of capital expenditure minus the value received from disposals. Net investment was considered to have been relatively weak through 2012 and 2013 compared with other sectors of the economy because even though there was relatively strong growth in the acquisition of assets there was also the increasing disposal of assets which grew more strongly than acquisitions and still remains high.

The primary data source for the business investment statistics from the ONS is the Capex, or Quarterly Capital Expenditure Inquiry.

Business Investment Is Down In Europe

The business investment rate in Europe fell in the third quarter of 2012. The rate fell in both zones, in the euro area by 19.9% compared to 20.2% in the second quarter and in the EU27 by 19.6% compared with 19.9% in the second quarter. In the euro area investment decreased -0.7% but gross value added increased 0.4%. Stocks fell for the fourth consecutive quarter. The gross profit share was almost unchanged in both zones, 37.6% (37.7%) in the EU27 and 38% (38.1%) in the euro area.

Second Quarter Business Investment 20.1%

Business investment remained almost the same during the second quarter of 2012 according to data from Eurostat. The gross investment rate of non-financial corporations in Q2 was 20.1% in the EU27 compared with 19.9% in Q1 2012. In the euro area the investment rate was 20.3% in Q2 2012 compared with 20.2% in Q1. Investment increased at 0.8%, a greater rate than value added which increased at 0.4%. Stocks fell for the third quarter in a row. The gross profit share of non-financial corporations in the EU27 was 37.7% compared with 37.9% in Q1. Inthe euro area the rate remained stable at 38.1% because value added increased at 0.4% the same rate as pay.

Business Investment Up £0.6bn On The Quarter

Business investment increased by £0.6bn (seasonally adjusted) to £30.5bn in the first quarter 2012 when compared with the previous quarter and by £3.9bn when compared with Q1 2011.

Total manufacturing investment changed little on the quarter at £3.5bn and by £0.7bn compared with Q1 2011. Non-manufacturing investment increased by £0.6bn to £27bn when compared with the previous quarter and by £3.3bn on the previous year.

Business investment has been more or less flat for the last six quarters in line with GDP. Total business investment increased by 1.9% in Q1 2012 after contracting slightly in Q4 2011.

Investment Down On Quarter But Up On Year

Business investment fell by 3.3% or £1bn to £29.7bn on the previous quarter but increased by £0.5bn on the same quarter last year. Total manufacturing expenditure decreased by £0.1bn while total non-manufacturing decreased by £0.9bn when compared with the previous quarter.

Business investment growth has been positive for most of the last eighteen months after the severe falls during the recession but it has again contracted in Q4 2011. The reasons are not the same. Whereas during the recession and the related falls in output business investment was weak, this recent weakness seems due to a cautious stance by the corporate sector towards expansion and investment. It can be seen in the limited increases in employment. The ratio of business investment to private non-financial corporation gross trading profits has come down to fewer than 50% from over 60%. Current price data is subject to movements.

Fall In Business Investment

Business investment fell by 5.6% or £1.7bn to £28.7bn in Q4 2011 compared with the previous quarter. It also fell in the annual comparison by £0.6bn or 2%. Investment in manufacturing fell by £0.1bn to £3.5bn in monthly terms but the annual comparison shows that investment in manufacturing increased by £0.4bn or 11.3% while total non-manufacturing investment fell by 3.5% or £0.9bn.

Manufacturing Keeps Up Investment

Manufacturing investment increased by 15.7% over the quarter and by 31.7% over the year to Q3 2011 according to the latest business investment bulletin from the ONS.

Total business investment actually fell by 1.4% to £30.2bn over the previous quarter. Non-manufacturing investment fell by 3.4% over the quarter. Business investment rose over the quarter by 0.3%.

The increase in overall manufacturing was mainly due to an increase of 66.9% in metal goods, 61.8% in other manufacturing and 21.8% in engineering and vehicles in private sector manufacturing which increased by 15.7% to £3.7bn. The fall in investment was mainly due to the a in private sector non-manufacturing which fell 4.4% to £25.4bn.

Business Investment Down On Quarter Up On Year

Total business investment fell by 3.2% to £30bn in Q1 2011 compared with Q4 2010. Manufacturing investment fell by 4.4% to £2.8bn on the previous quarter but compared with the same quarter in the previous year increased by 14.8%. Non-manufacturing investment also fell, by 3.1% to £27.3bn but compared with Q1 2010 increased by 1.7%.

7.1% Fall In Business Investment

Business investment fell by 7.1% to £28.1bn in the first quarter of 2011 compared with the previous quarter and by 3.2% on the first quarter of 2010. Manufacturing investment also fell on the quarter by 1.2% to £2.8bn but increased 14.8% over the year. Non-manufacturing investment fell by 7.7% to £25.3bn over the quarter and 4.8% over the year. In the private sector, investment by services fell to £19.4bn from £21.6bn in Q4 2010.

UK Investment Down By 2.5% On 2009

The amount of capital expenditure made by UK firms fell by 2.5% to £29.6bn in the fourth quarter of 2010 compared with the same period of 2009. Manufacturing firms investment increased by 4.6% to £2.7bn and non-manufacturing investment decreased by 3.1% to £26.9bn.

Foreign Investment In UK Up To £12bn

Foreign companies invested £12bn in a total of 51 UK companies in Q3 compared with £2.7bn in 43 companies in Q2 2010. British companies invested £5bn in a total of 40 foreign companies in Q3 2010 compared with £2.4bn in 44 companies in Q2 2010. British companies invested £2.6bn in 52 UK companies in Q3 compared with £2.1bn in 91 British companies in Q2 2010.

Investment In Manufacturing Increases Index

Business investment rose by 0.7% to £29.2bn in the second quarter of 2010 compared with the first quarter. It was also 1.9% higher than the same quarter in 2009. Investment in manufacturing increased by 10.4% to £2.7bn but compared with Q2 2009 it has fallen by 4.9%.

Non-manufacturing investment in the private sector increased by 2.4% compared with the same quarter last year. Distribution services accounted for a significant amount of the change increasing by 13.5% on Q2 2009 to £4.1bn and construction which increased by 12.9% to £585m. Other services accounted for £16.6bn of investment but fell by 1.4%.

Investment in computer software was £1,418m down from £1,663m and hardware £1,348m down from £1,637m in Q1. Business investment in softwae and hardware equals 9.7% of all business investment with 5% on software and 4.8% on hardware.

Manufacturing Investment Down Almost 30% On Last Year

The ONS have released revised estimates of business investment levels for Q1 2010. The new estimates put investment at £29,136m, an increase of 7.8% from the previous quarter and 7.7% lower than Q1 2009. Manufacturing's share has fallen by 0.2% to £2,364m on the previous quarter and by 29.6% since Q1 2009.

The revised estimate of investment in services within private sector non-manufacturing suggests a rise of 11.1% to £20,734m, construction increased by 36.5% to £602m, while other production has fallen by 2.4% to £4,471m since the previous quarter. Non-manufacturing investment by public sector corporations increased by 0.3% on the last quarter to £966m but has fallen by 15.3% since Q1 2009.

Estimates for private sector investment in computer software and hardware collected by the ONS separately from other capital investment suggest that total computer software investment by businesses for Q1 2010 was £1,593m and hardware £1,647m. Investment in software was down in all categories except 'other services' which went from £1,028m in Q4 2009 to £1,093m in Q1 2010 a big enough increase to increase the total level of investment in software. In hardware, manufacturing was the only category to decrease its investment. These figures suggest that private sector investment in computer software and hardware was about 12% of total business investment and evenly distributed between software and hardware. In manufacturing it was around 9.5% total investment and 12.75% of total investment in services.

Investment Up On Quarter But Down On Year

Provisional estimates for business investment for the first quarter of 2010 from the ONS say that investment has risen by 6% to £28,974m. It is 11% lower than Q1 2009. Investment in manufacturing has fallen by 9% over the quarter to £2,388m and by 29.3% since Q1 2009.

Business Investment Down In Euro And EU27 Areas

The gross investment rate of non-financial corporations in the EU27 zone was 20.3% in Q4 2009 from 20.6% in Q3 according to Eurostat. In the eurozone the rate was 20.4% in Q4 from 20.7% in the previous quarter. The gross investment rate of non-financial corporations in the eurozone fell as gross fixed capital formation fell 0.9% and value added grew 0.6%. Eurozone stocks of materials, supplies and finished goods continued to decrease for the fourth quarter in a row.

The business profit share of non-financial corporations in EU27 was 37.1% in Q4 2009 from 36.9% in 2008. The eurozone profit share was 37.9% from 37.5% in Q3 2009. The eurozone profit share of non-financial corporations increased as value added grew 0.6%. Wage costs plus taxes minus subsidies on production was unchanged.

UK Order Books Looking Better

The manufacturing sector looks to be improving but profits are threatened by rising costs according to the latest Industrial Trends survey from the CBI. The first three months to April show that orders are rising for British made goods overseas but as order books are still recovering from 30 year lows, total order books are still below normal.

The growth in orders is expected to continue over the next few months and production is expected to increase along with it. It is reflected in business confidence which continues to improve. Average unit costs are rising and though domestic prices were stable prices may increase in the next three months. Most firms say they working below capacity.

Firms have continued to de-stock but levels of finished goods have fallen in the quarter and are expected to stabilise in the next as is work in progress as the decline in raw materials slows down. Credit and finance are expected to continue to limit output over the next three months and even constrain exports. A majority of firms have plans to invest in training and retraining and in innovation.

Business Investment 4.3% Down

Business investment is estimated to have fallen by 4.3% in the final quarter of 2009 from the previous quarter and by 23.5% on the same quarter last year. The total seasonally adjusted figure for investment is £27.3bn. The estimate for manufacturing by both private and public sector is a decrease of 5% on the quarter and 32.3% on the year with a figure of £2.4bn.

Services investment fell again in the fourth quarter and fell in every quarter of 2009. They are estimated to have fallen by 29.1% compared with Q4 2008. Construction fell by 21.8% after increases in Q2 and Q3, other production is estimated to have risen by 13.8%. Public corporations' revised estimate for non-manufacturing business investment is an increase of 0.6% on the quarter and 1.8% on the year. The Q4 figure is £944m.

Investment in computer software and hardware is continuing to attract the interest of statisticians and is of increasing importance as a category of investment. The ONS figures only respresent the private sector. Total investment in computer software in Q4 2009 is estimated to have been £1.5bn, compared with £1.4bn in the last quarter and £1.7bn last year. The total for computer hardware acquisitions less disposals at current prices is estimated to have been £1.4bn, compared with £1.38bn last quarter and £1.79bn last year. These estimates suggest that investments in computer software and hardware amounts to approximately 10% of all private sector business investment (5% software, 4.75% hardware). In manufacturing investment in computer hardware and software is about 9.5% of total investment and in services it amounts to about 11.75%.

Investment Down Nearly A Quarter On Last Year

Business investment for Q4 2009 is estimated to have fallen by 5.8% and by 24.1% over the year. The figure for Q4 was £27,121m. Investment by public and private sector manufacturing fell by 8.2% (CVM) on the previous quarter and 35.3% over the year. The figure for Q4 was £2,304m.

Investment in services fell by 8.3% in Q4 and compared with Q4 2008 have fallen by 30.6% to £18,376m. Other production increased their investment by 7.8% on the previous quarter and by 20.9% compared with Q4 2008 to £5,070m. Construction investment fell by 24.5% on Q3 2009 and by 22.3% on Q4 2008 to £435m.

Investment in both computer sofware and hardware by the private sector increased over the qaurter. Total private sector computer software investment for Q4 2009 was £1,486m up from £1,387m in Q3. Total private sector computer hardware investment in Q4 2009 was £1,396m up from £1,251m. These estimates seem to suggest that about 9.75% of private sector business investment was in Q4 2009 on computer software and hardware. This was divided 5% and 4.75% between software and hardware respectively. In manufacturing, investment in computer software and hardware was about 9.25% and in the service sector it was about 11.75%.

Increased Investment In Services

Business investment fell by 0.6% on the last quarter and by 19.9% on Q3 2008. Q3 2009 investment stood at £29,102m. Private sector investment in services increased by 0.1% to £20,430m. Manufacturing and other production accounted for £2,618m and £4,532m respectively. Construction increased by 9.2% and accounted for £569m and public corporations made £953m of business investment a fall of 1.8%.

Investment in computer software and hardware accounted for about 9.5% of all business investment in the private sector, equally divided between software and hardware. In manufacturing investment in computer software and hardware is about 7% and in services it is about 11%.