Download Economic Review, May 2013 - Office for National Statistics

01 May 2013
Economic Review, May 2013
Author Name(s): Michael Hardie and Frederick Perry, Office for National Statistics
Abstract
This note draws together key economic stories from National Statistics produced over the latest
month. This is in order to paint a coherent picture of the UK's economic performance using recent
economic data.
Summary
The UK economy grew by 0.3% in the first quarter of 2013. With four out of the preceding five
quarters seeing negative quarterly growth rates, over the period since the third quarter of 2011 the
economy has expanded by a meagre 0.4%. Excluding the oil and gas sector, total growth has been
0.6%.
Although there has been much talk of a 'double dip' recession, economic growth is most realistically
described as being broadly flat, or at best rising very slowly, during the past two and a half years.
The annual average growth rate since mid-2010 is only 0.5%, compared with annual growth of 3% a
year in the decade before the 2008 recession.
The period since the end of the 2008-2009 economic downturn is characterised by steady growth
in the output of the services sector, while construction output and industrial production have
fallen. Within the latter, mining and quarrying output has fallen sharply.
The upward momentum of the labour market during 2012 faltered in the latest period, while the
squeeze on real earnings growth intensified further.
Compared with previous recessions, growth in real GDP per capita has been weaker than that
in aggregate GDP. The usual driver of growth in the early stages of the recovery – households’
spending – has been more muted during the latest period than following previous recessions. The
contribution of net overseas trade to GDP growth has been no stronger than in previous recessions
despite the benefit of sterling’s depreciation during 2007 and 2008.
Gross domestic product grew in the first quarter of 2013
The UK economy grew by 0.3% between the final quarter of 2012 and the first quarter of 2013,
following a period when four out of the five previous quarters had seen falls in output. Growth in the
latest period was led by the services sector, while there was also a small positive contribution from
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the production sector as mining and quarrying output rebounded following the big fall in the final
three months of 2012. Growth in these sectors was partly offset by the steepest fall in construction
output since the first quarter of 2012.
The service sector grew by 0.6% during the first quarter and contributed 0.5 percentage points to
GDP growth. Services sector output jumped sharply in February across all the main sub-sectors,
with distribution, hotels & restaurants and transport, storage & communication growing the fastest in
the quarter, up by 1.2% and 1.4% respectively.
Figure 1: Contributions to quarterly growth in output of service industries (percentage
points)
Notes:
1. Figures may not sum due to rounding.
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Notably, these are the sectors that lost output at the fastest rate during the recession, stagnating in
the interim. Recent strength in these sub-sectors indicates a bounce back, though the output of both
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remains some way below pre-recession levels. More generally, growth in the service sector since
the recession has been underpinned by government & other services which has grown by 6% since
the first quarter of 2008.
Output of the production sector grew 0.2% from the previous quarter, following the the largest
quarterly contraction in the last four years. Growth in the latest quarter was mostly attributable to
3.2% growth in mining and quarrying, only partly offsetting the 10.7% fall in the previous quarter
which was due to extended maintenance at the UK’s largest North Sea oil field.
The extraction of North Sea oil has been declining since the late 1990s with the rate of decline
increasing markedly since 2008. Despite mining and quarrying (which predominantly consists of oil
and gas extraction) accounting for just 2.4% of the economy, the severity of its decline has impacted
GDP. Excluding oil and gas from gross value added throughout the recession alters the overall
picture slightly: though there is still a pronounced fall in output followed by a lacklustre recovery the
recovery becomes slightly more assured.
Figure 2: Whole economy output, including and excluding the oil and gas sector (Index, 2008
Q1=100)
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The construction sector has also generally acted as a drag on economic growth since the 2008
downturn. In the first quarter of 2013 output dropped to its lowest level since the recession, down
by 18.9% when compared with the first quarter of 2008. Public new work (including infrastructure)
increased every quarter between 2008 Q4 and 2010 Q3. Contrasting this, new work in the private
sector (including infrastructure) has fallen by 26.8% when compared to its pre-recession peak.
Figure 3: Breakdown of construction output since the 2008 recession (Index, 2008 Q1=100)
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Has there been a double dip recession?
There has been much talk of a double dip recession, based on the fact that, following the deep
recession in 2008 and 2009, output fell again in the final quarter of 2011 and in each of the first two
quarters of 2012. This meets the convention that a recession is defined by two consecutive quarters
of falling output.
However there is no universally agreed definition of recession. Determining when an economy is in
recession necessarily involves an element of judgement, taking into account relevant factors such as
the scale of the fall in output, the normal margins of error around the statistics, and the presence of
special factors which might have influenced the figures.
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Table 1: Quarterly growth rates of real GDP (% changes on previous quarter)
Per cent
2011 Q4
-0.1
2012 Q1
-0.1
2012 Q2
-0.4
2012 Q3
0.9
2012 Q4
-0.3
2013 Q1
0.3
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The falls in output from 2011 Q4 to 2012 Q2 are all modest. In total the economy contracted by 0.5
per cent. The decline in output in the first two of these quarters is particularly small. When growth is
very weak, the difference between, say, estimated growth of 0.1% and -0.1% in a quarter is actually
within the statistical margin of error.
The contraction in the economy in the following quarter, the April-June period of 2012, is explained
by the additional bank holiday which was called in June as part of the Queen’s diamond jubilee
celebrations. The impact of such special factors should not perhaps contribute towards a recession.
Rather than relying on small changes in quarterly growth rates to justify calling a recession, we
should consider the growth rate of the economy over a longer period. Figure 4 below suggests that
the economy has seen three distinct phases since 2008. During the recession itself, the economy
contracted by 6.3% in total between the first quarter of 2008 and the second quarter of 2009. This
was followed by five quarters of steady recovery up to the third quarter of 2010, with cumulative
growth of 2.7% - an annual average rate of 2.2%. Since then the recovery has faltered, and the
annual growth rate has averaged only 0.5%. The trend during this latest period is therefore best
described as one that is flat or at best gently rising.
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Figure 4: Real GDP levels in latest and previous recessions
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Labour market and inflation
The labour market hesitated in the three months to February following consistent growth in
employment over the past 18 months. Employment decreased by 2,000 and unemployment
increased by 70,000, producing a fall in the employment rate from 71.5% to 71.4% and a rise in
the unemployment rate from 7.7% to 7.9%. Falling inactivity over the same period suggests that
an increase in unemployment may be a consequence of people entering the labour market as well
as a fall in the number of available jobs. The reduction in inactivity was driven by a reduction in the
numbers looking after a family and those classifying themselves as retired.
Growth in average weekly earnings (excluding bonus payments) fell to 1% when comparing the
three months to February with the same period a year earlier – the lowest rate since records began
in 2001.This compares with the annual rate of consumer price inflation of 2.8% in March 2013,
indicating a renewed squeeze on households’ real purchasing power.
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The 2008-2009 recession in context
Five years after the start of the 2008-2009 economic downturn, the UK economy remains 2.6%
smaller than at the pre-recession peak. By this measure of economic output the recovery from
recession has been weaker than any seen in the twentieth century.
Real GDP measures the total size of the economy. GDP can also be expressed on a per capita
basis – ie per head of population – as an indicator of individual living standards as measured by
average income per person. The drop in GDP per capita has been more pronounced than that of
GDP, having fallen by 7% during the recession itself (compared with 6.3% for the corresponding fall
in GDP), and it is now 6.3% lower than at the pre-recession peak.
Figure 5: Real GDP levels in latest and previous recessions (Index, pre-recession peak=100)
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In terms of GDP, the present recovery is 7.5 percentage points lower than at the same stage of the
1970s recession, while the corresponding difference in GDP per capita is 12 points. The current
weakness in GDP disguises the fact that the population size has been growing more during the
past 5 years than during previous recessionary episodes, and average incomes have therefore
been weaker still. Since the 2008 recession, the UK population has increased by 3.8% (2.3 million
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people). Over an equivalent time period, population following the 1980s and 1990s recessions
increased by 0.3% and 1.4% respectively.
Figure 6: Real GDP per capita in previous UK recessions (Index, pre-recession peak=100)
Notes:
1. This data uses the latest population estimates with the exception of the latest year where population projections are
used. The quarterly data does not sum to annuals, please see explanation in the background notes section.
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Figure 7: UK population estimates (millions)
Notes:
1. This data uses the latest population estimates with the exception of the latest year where population projections are
used. The quarterly data does not sum to annuals, please see explanation in the background notes section.
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In each of the two previous recessions, household spending has played an important role in leading
the economy out of recession. At the corresponding stage of the two previous UK recessions, in the
early 1980s and the early 1990s, the volume of household consumption had risen by more than 10%
from its post-recession trough. In the current episode, the corresponding increase has been less
than 3%.
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Figure 8: Household final consumption expenditure (Index, pre-recession peak=100)
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In part this is due to the rise in the rate of inflation since 2009. Figure 9 shows price inflation (as
1
measured by the retail prices index excluding mortgage interest payments ) was much lower at
the start of the recession than in either of the previous two recessions, reflecting the success of
inflation control mechanisms during the previous 15 years (1992-2007). However a combination of
factors – the devaluation of sterling in 2007-2008, strong global oil and other commodity prices, and
successive increases in the rate of VAT – pushed inflation up again during 2010 and 2011. Having
started off at a very low level, by this point inflation was back to the levels seen at the corresponding
stage of the previous two UK recessions.
This squeezed real household income growth, already weakened by the slow growth in earnings,
and intensified the pressures to reduce debts through expenditure restraint.
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Figure 9: Inflation (retail prices index excluding mortgage interest payments, RPIX) in
previous UK recessions (Index, pre-recession peak=100)
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Figure 10 shows the growth of real wages in different recessions. The last four years have seen
earnings growth consistently falling behind the rate of price inflation. By contrast the corresponding
period following the recessions of the early 1980s and 1990s saw rising real wages. This may be a
factor behind the weakness of labour productivity during the recent period, as firms have adjusted by
reducing wage growth as well as by cutting employment.
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Figure 10: Real average weekly earnings in previous UK recessions (average earnings
growth less the rate of RPIX price inflation) - (% change on a year earlier)
Notes:
1. In the most recent recession average weekly earnings (AWE) have been used. In the two previous recessions the
historic time series - average earnings index (AEI) - has been used. Estimates before 1989 should therefore be
treated with caution.
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Overseas trade is also an important contributor to economic growth. Since 2008, the UK has
continued to run a substantial trade deficit – imports of goods and services have exceeded exports.
Figure 11 indicates the nominal trade balance in goods and services remains in deficit. This is
largely the result of a deficit in traded goods - £27.1 billion in the last quarter of 2012 – only being
partly offset by a surplus in traded services - £17.9 billion over the same period. The weak trade
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balance has persisted despite the 19% depreciation of sterling’s effective exchange rate (ERI)
during 2007 and 2008. This might have been expected to boost the UK’s trade performance in real
terms as UK goods and services become relatively cheaper compared with those produced abroad.
However, exports of goods have not responded strongly to the fall in sterling, rising by just 4.9%
since the first quarter of 2008 in volume terms. In part this may reflect the timing of the depreciation,
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which occurred at the start of a global recession, meaning that the demand for UK exports has
remained depressed. Exports to the EU – the UK’s main export market – have suffered as a result of
the problems facing the euro area economies and the resulting weakness of economic growth there.
Figure 11: UK trade performance (balance of trade in goods and services, current prices)
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When observing the actual price of exports relative to the price of imports, otherwise known as
the terms of trade, there has been little movement since 2008. This effect can be divided into two
distinct periods:
Comparing 2008 Q1 with 2011 Q1, the price of exports and imports both rose by around 20%, such
that the terms of trade were broadly unchanged. A possible explanation for this behaviour is that
following the initial depreciation of sterling in 2008, firms increased their sterling prices in order to
keep prices constant in foreign markets, thus raising profit margins. This could apply particularly for
UK exports with a low price elasticity of demand.
Since 2011, price growth of both imports and exports has been relatively flat, increasing by 1.6%
and 0.4% respectively, while exports of goods fell by 0.2% in volume terms.
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Figure 12: UK trade, ratio of goods exports to imports and price indices
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Notes
1.
This type of price inflation has a long time series and can be used to compare recessions.
2.
Defined as the exchange value of the pound against a weighted basket of other currencies.
Background notes
1.
Income per head
The annual per head data is calculated using mid-year population estimates. The quarterly per
head series will not sum to the annual total as the quarterly series uses constructed population
numbers estimated using successive annual mid-year population figures.
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2.
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www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media
Relations Office email: [email protected]
Copyright
© Crown copyright 2013
You may use or re-use this information (not including logos) free of charge in any format
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The National Archives, Kew, London TW9 4DU, or email: [email protected].
This document is also available on our website at www.ons.gov.uk.
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