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.

Composite Leading Indicators Suggest Stable Growth In The OECD

The OECD Composite Leading Indicators (CLIs) continue to suggest stable growth momentum in the OECD. CLIs are designed to anticipate turning points in economic activity relative to trend.

The US, Canada and the UK CLIs show stable growth momentum and in the UK growth is stabilising at rates above the trend. The CLI for Japan shows an interruption in the growth momentum although it is probably only a temporary effect. The CLIs for the euro area as a whole and for Italy in particular indicate a positive change in momentum. Germany may be losing some of its momentum but it is at a high level.

In the BRICS emerging economies, Brazil's CLI points to below trend growth, China and Russia are growing around the trend and India may be returning to faster growth with a CLI suggesting a positive turning point.

GDP Up And No Double Dip Recession After All

The earlier estimate of GDP from the ONS that raised fears of a double dip recession in 2011-12 seems to have been revised and a double dip recession has been avoided according to a statistical bulletin from the ONS.

The earlier estimate of a fall in GDP growth between Q4 2011 and Q1 2012 of 0.1% has been revised to 'flat' and the worries about two consecutive quarters of negative growth have now gone.

In volume terms UK GDP increased by 0.3% between Q4 2012 and Q1 2013. The figure remains unrevised from the earlier estimation. In terms of current prices GDP seems to have increased by 0.9% for that period.

The households savings ration was at its lowest since Q1 2009 with an estimate of 4.2% in Q1 2013. Household real disposable income increased by 1.4% between 2011 and 2012, the highest since 2009.

Durables Maintaining Growth Trends

Motor vehicles in particular have continued the growth trends in consumer goods in the first quarter of 2013 according to the ONS. The latest Consumer Trends statistical bulletin suggests that purchases of cars and household appliances has continued to gain in strength as spending on cars increased by 3.1% in terms of volume and on durables by 2.1%. Spending on major household appliances increased by 5.7%.

Household spending grew by 0.3% in the first quarter of this year due mainly to growth in spending on housing, water, gas elecytricity and other fuels. Households spent 0.3% more in volume terms well below the peak of Q4 2007 but 3.4% more than the recent low of Q2 2009. Current price spending was 17.6% higher than Q2 2009.

Household spending per head in current price terms increased by 0.8% to £3993, £340 more than in Q4 2007.

GDP Up By 0.3%

GDP increased by 0.3% in the most recent quarter (Q1 2013) compared with the last quarter. It has been flat for over 18 months. The biggest upward contribution by far to the increase was from services growing by 0.6% and adding 0.47% to the increase of 0.3% in GDP.

Weaker Sales Growth In December

Retail sales increased more weakly in December than in previous months but continued to show the upward trends seen in the sector since August 2011. The quantity of goods bought (volume) increased by 0.3% compared with December 2011 and the amount spent (value) is estimated to have increased by 0.7%. It is the lowest year-on-year growth since 1998 (excepting December 2010 and the winter weather conditions).

The monthly comparison with November 2012 shows a fall of 0.1% in both the quantity bought and the amount spent. Online sales fell more slowly between November and December and were 1.2% higher compared with December 2011 but 0.1% lower than November 2012. Internet sales accounted for 10.6% of all retail sales. There was an estimated spend of £8.5bn in December (£8.4bn in 2011).

GDP Up And Down In Europe

GDP fell by 0.1% in the euro area but increased by 0.1% in the EU27 during Q3 according to the second estimates of GDP from Eurostat. In Q2 both zones grew at -0.2%.

UK FDI Continues To Increase

Companies from the UK have continued to increase their net investment overseas to give the highest figure since 2008 for 2011. Inward investment flows to the UK however continued to fall to reach £31.9bn the smallest since 2004. Outward and inward investment positions increased to reach record highs of £1098.2bn and £766.2bn respectively in 2001. Net earnings from outward investment reached £101.6bn the highest since records began (1958). Net earnings from direct investment are recovering from the falls of 2008. Earnings reached £37.6bn in 2010 and £43.6bn in 2011. Net investment overseas is possibly a reflection of strong growth in emerging markets like China and India.

OECD Growth Of 0.2% In Q3

The OECD's provisional estimates for growth in member's GDP suggest an increase of 0.2% for the third quarter of 2012. The rate is the same for the previous quarter but there was divergent change across countries. GDP growth in the UK accelerated to 1% due to the Olympics. In the US growth increased to 0.5% from 0.3%. Growth in Framnce was also up to 0.2% from 0.1%. Growth slowed down in Germany and Italy saw the fifth consecutive month of contraction. In the G7, the seven major economies, on the annual comparison the US had the highest growth rate with 2.3% and Italy the largest contraction, -2.4%.

Signs Of Weak Growth Prospects In OECD CLI's

The composite leading indicators of the OECD suggest there may be weak growth prospects in major economies. The CLIs for Japan, Germany, France and the Euro Area pont to weak growth but there are signs of stabilisation in other economies such as Canada, China and the US and possibly Italy as well. Weak growth signs also appear in India and Russia.

Deceleration In World Trade Expected

World trade expanded by 5% in 2011 but it was a sharp deceleration after the 13.8% rebound in 2010. Growth is expected to slow even more in 2012 to 3.7% below the 5.4% 20-year average according to the WTO. The slowdown was attributed to a number of shocks including the European sovereign debt crisis, Japanese tsunami and Thai floods hitting production in Japan and China.

Developed economies with export growth of 4.7% did better than expected but developing economies did worse than expected with an increase of 5.4% (developing economies include CIS and China). Developing economies were disproportionately affected by the Japanese earthquake and tsunami, the Thai floods and the disruption in oil supplies from Libya.

The rate of world output growth fell to 2.4% in 2011, down from 3.8% in 2010. The European sovereign debt crisis was the biggest problem along with the supply chain disruption from the natural disasters in Asia and the turmoil of the Arab Spring. Expansion was below the 3.8% 20-year average. The fastest growing economies in 2011 were China with 9.2% then the Middle East with 4.9%, CIS 4.6%, South and Central America 4.5%. The slowest included Japan with -0.5%, US with 1.7% and the EU with 1.5% growth.

Countries with the fastest growing trade volumes included India on 16.1% growth, China with 9.2% and the US with 7.2%. Africa had the biggest decline in exports with a decrease of 8.3%, Japan decreased by 0.5% and the Philippines exports declined 14.3%. China and India had the fastest growing imports with 9.7% and 6.6% respectively. Greece and Chinese Taipei had the most serious decline in imports with -20% and -3% respectively.

There were significant appreciation of the Japanese yen and the Swiss franc against the US dollar in 2011. The yen went up by 10% year-on-year and the franc by 17%. The Swiss National Bank had to intervene in currency markets to keep the value of the currency down against the euro. The IMF real exchange rates show the US dollar's depreciation was stronger in real effective terms at -4.9% and that the average appreciation of other currencies was overstated. The yen only appreciated 1.7%, the yuan (China) rose 2.7%, the Brazilian real stronger at 4.7% and the euro with a rise of 1.8% was quite small.

China was the world's biggest exporter with the USA second biggest, Germany third and Japan fourth. The USA was the world's biggest importer, China second, Germany third and Japan fourth. The Uk was the 11th biggest exporter after Belgium and the 6th biggest importer after France. The UK was second biggest exporter of commercial service after the US and the fourth biggest importer after the US, Germany and China.

OECD GDP Growth Slows But Stays Positive

Real GDP growth in the OECD countries slowed down to 0.2% in Q4 2011 compared to 0.6% growth in Q3. The major components were all included except for changes in inventories. There was slower growth in private consumption, investment and net exports but they remained positive. Government consumption was the main contributor to the slowdown decreasing growth by 0.1%.

The broad based slowdown in demand differed at national level reflecting amongst other things differences in rates of economic growth. GDP growth was strongest in the US at 0.7% largely due to private consumption. Private consumption was also the main driver in Canada which showed growth on 0.4%. France remained positive at 0.2%. Japan and Germany both reported negative growth of 0.2%. Other countries with negative GDP growth in Q4 2011 included Italy -0.7% and the UK with 0.3%

Global FDI Rises But Financial Turmoil Slows Growth

Inflows of global foreign direct investment (FDI) rose by 2% in the first half of 2011 compared with the second half of 2010 according to the latest Global Investment Trends Monitor released by UNCTAD. The increase maintains the 5% moderate recovery of 2010.

The effects of the financial crisis however are precipitating a slowing down of growth in FDI according to preliminary estimates of cross-border mergers and acquisitions and greenfield investment. The outlook is predicted to remain optimistic with FDI flows expected to be close to pre-crisis levels over the next twelve months. The emphasis on crisis management is making policy makers more cautious diverting attention away from the need for more private investment to generate growth and jobs.

In the first half of 2011 more than half of global FDI was directed towards developing and transition economies as transnational corporations are still directing their investment to emerging markets. Developed economies experienced a 4% decline in FDI in the first half of 2011.

SPPI Up 2.4%

The services producer prices index (net aggregate) rose by 2.4% in Q2 2011 compared with Q2 2010 according to ONS. Growth between Q1 and Q2 2011 was 0.9%.

The biggest price increases contributing to the quarter on previous quarter percentage changes were made by advertising placement and sewerage services with 0.33% and freight transport by road offset by a fall in prices for freight forwarding.

NIESR Estimate Growth Rate Of 0.3%

The latest NIESR monthly estimates of GDP released on 12 May suggest the underlying quarterly growth rate of GDP was 0.3% in April 2011. The growth estimate for March was 0.5%It does not take into account the Royal Wedding and the activites associated with it. The index for output for industry was estimated to have increased from 89.9 to 90.3. The indices for output by sector also suggest that agriculture remained unchanged at 91.0, private services decreased from 102.8 to 102.5 but public services increased from 103.6 to 104.1.

OECD CLIs Show Signs Of Expansion

The composite leading indicators of the OECD countries for February 2011 signify continued expansion in the economies of most member countries. The OECD area annual growth rate was 1.8% compared with the Euro area 1%. The trend of expansion is continuing in Germany and the United States. The rate of expansion seems to be slower but stable in the UK. France and Canada are possibly regaining momentum but Italy may be losing momentum.

Russia seems to be continuing its current economic expansion phase while China shows signs of more moderate economic activity. India is pointing towards a slowdown but Brazil should remain near its long-term potential. The Major 5 Asian economies grew by 0.2% over the last year and the Major 7 by 2.1%.

Small Retailers See Larger Increase In Sales In March

The most recent retail sales index published by the ONS shows that the seasonally adjusted value of retail sales increased by 4.5% in March 2011 compared to March 2010 and the volume increased by 1.3%. The index also showed that on a month by month basis sales increased by 0.1% in value and 0.2% in volume between February and March 2011.

The March bulletin also included a supplementary study on small and large retail stores. The non-seasonally adjusted volume decreased by 0.1%. Over the same period large retailers decreased by 1.2% but small retailers increased by 3.9%. The biggest difference between large and small store growth was on food stores. The growth rate for all stores showed a 3.2% decrease but a 4.1% decrease for large stores and a 2.5% decrease for small stores. Food stores can be sub-divided into specialised and non-specialised stores. Non-specialised stores decreased by 3.1% within which large stores decreased by 4.4% but small stores increased by 12.3%. Specialised stores increased by 0.4%.

The non-food stores showed more varied results. Small non-specialised stores saw the biggest increase with 31.2%, followed by small other non-food stores with 8.5% and all other non-food stores with 7.6%. The biggest decrease was in small household goods stores with -10.2% with all household goods stores and large household goods stores following with -8.7% and -8.1% respectively.

Small stores are those with less than 100 employees. Large retailers are those with more than 100 employees or those with less than 100 employees but a turnover greater than £60m. All 900 large retailers were included in the sample. a representative sample of 4,100 small retailers was also included in the sample. The largest growth was in the 10-39 employment group with an average increase of 6.6%, then 0.9 employees with 6.5% average growth, 40-99 reprted 5.2% growth and the group with over 100 employees reported growth of 2.3%.

Price estimates for retail sales between March 2010 and March 2011 rose by 4.4%. The value of Internet sales in March 2011 was £529m or 9.8% of total retail sales in March.

Health And Education Businesses Surviving Well

Business demographics for 2009 show that there were 236,000 business births, a rate of 10.1% and 279,000 business deaths, a rate of 11.9%. There were 2.3m active businesses in the UK during 2009, up 16,000 on 2008. The highest birth rate was in business administration and support services with 13.9%, the lowest was production with 7.3%. The highest death rate was also in business administration and support services with 14.8% and the lowest was in health with 7.2%. The median birth rate was property with 9.1% and death rate professional, scientific and technical with 11.2%. London had both the highest birth and death rates with 12.6% and 13.7% respectively. Outside of London, the highest birth rate was in the North East with 10.4% and the highest death rate was in the North West with 12.8%. The five year survival rate from 2004 was 46.8%. N.Ireland had the highest five year survival rate with 52.9% the lowest was London with 41.9%. Health had a five year survival rate of 58.9% and education 58.1%. Hotels and catering was lowest with a 35.2% five year survival rate.

GDP Up 0.8% In Q3 2010

GDP in the UK rose by 0.8% in the third quarter of 2010 compared with the previous quarter. Ouput in the production industries increased by 0.6% and manufacturing by 1%. Household expenditure increased by 0.3% gross fixed capital formation by 0.6% and current market prices by 1%. The service industries increased their putput by 0.6% and construction by 4%.

Eurostat released figures showing GDP increased by 0.4% in the euro area and 0.5% in EU27 during Q3 2010 compared with Q2. Compared with last year GDP increased by 1.9% in the euro area and 2.2% in EU27. In the OECD, GDP rose by 0.6% the sixth consecutive month of growth on the quarter and 3.1% compared with last year.

Manufacturing Output Expected To Grow

Production is expected to grow in the next three months manufacturers said in the latest CBI Industrial Trends Survey. There is a general improvement in the trend of demand for UK manufactured goods and growth expectations have accompanied the need to replenish stocks. Price pressure intensified again and many firms expect to raise prices.