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Expenditure on cars boosts UK growth

On 30/03/2010, by Andrew Brigden. Keywords: Global recovery

This morning saw the publication of better-than-expected UK GDP data for the final quarter of last year. The UK economy is now estimated to have expanded by 0.4% in 2009 Q4. That compares with a month 1 estimate (published in January) of 0.1% growth, and a month 2 estimate (published last month) of 0.3% growth. Over the past month there have been small upward revisions to the estimated rate of growth of output in most sectors of the economy.

But the picture on activity in 2009 Q4 is still far from clear. Of the three approaches to measuring GDP – output, income and expenditure – the ONS considers that, in the short term, the output measure provides the most accurate guide. Until the National Accounts are ‘fully balanced’, which takes around two years, the ONS makes an alignment adjustment to both the income and expenditure measures so that all three approaches provide a single estimate of growth.

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'No change' announced by soon-to-be ex-Chancellor

On 24/03/2010, by Andrew Brigden. Keywords: Deficit

One message from today’s Budget clearly designed to sooth financial markets is that the structural element of the UK’s deficit, in other words that part that will persist even when output is in line with potential, is forecast to decline by 5.3 percentage points over the next three years, from 8.4% of GDP in 2009/10 to 3.1% of GDP in 2013/14.

How is this to be achieved? What is striking, to us at least, is that at the time of the 2009 Pre-Budget Report, the structural deficit was forecast to narrow by 5.4 percentage points over the same three years. At the time of the 2009 Budget, it was forecast to narrow by 5.3 percentage points. So, on that basis, it would seem that today’s Budget contained relatively little in terms of new fiscal measures. If the structural deficit is to narrow by 5.3 percentage points over the next three years, we need around £75 billion of savings in today’s money. Today, the Chancellor fleshed out around £19 billion of tax rises, and around £20 billion of spending cuts. On that basis, we have detail on just over one half of the necessary measures. Just over half of the spending cuts are to come from ‘efficiency savings’, which is never encouraging, while just over £3 billion is to come from limiting increases in basic pay in the public sector to just 1% in each of the next two years – regular pay growth in the public sector is currently running at 4.1%, so that would be some achievement.

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Falling Business Price Inflation means CPI will follow

On 23/03/2010, by Erik Britton. Keywords: Proprietary indices

According to the latest reading on the London Chamber BPI, UK business cost inflation was -0.5 per cent in the year to February. The figure for the London region was also -0.5 per cent.

Falling business costs are a forward-looking indicator of weak consumer price inflation to come. For a period, firms will benefit from falling costs by rebuilding their profit margins. But that cannot last forever – eventually, competition will force them to bring the growth in their prices into line with the growth in their costs. We see that story playing out over the coming year or two, with low costs bringing down consumer price inflation gradually to the target of 2 per cent, and below.

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The end of empire

On 22/03/2010, by Erik Britton. Keywords: Quarterly G4 forecast

The lost US decade

The peak of the stock market ten years ago ushered in one of the worst decades on record for the G4 economies and their stock markets. Most strikingly, the US economy fared particularly badly. In absolute terms, the past decade constitutes the worst since the 1930s. Employment failed to grow for the first time during the twentieth century. This is in stark contrast to the 7 million jobs generated by its European counterparts, and the 20 million jobs the US itself produced in each of the two preceding decades. Only Japan fared worse among the G4.

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Record rise in inactivity points to UK labour market weakness

On 17/03/2010, by Andrew Brigden. Keywords: Labour market

At first glance, the latest set of UK labour market data, released this morning, were stronger than expected. Claimant count unemployment fell by 32k in February when a 24k rise was expected. The ILO measure, regarded as more economically meaningful, fell by 33k during the three-months to February. But unemployment is only one part of the picture. In the three-months to February, employment also fell, by 54k. The fall in the number of employees, at 86k, was particularly large. And inactivity, which includes those who are not looking for work, or are unable to start work, rose by 185k over the same period, driven by a 98k rise in the number of students. The rise in inactivity was the strongest since at least the early 1970s. In our view, the UK labour market remains particularly fragile. As our chart shows, employment is on a downward trend again. The fall in ILO unemployment is of little comfort when inactivity is rising so sharply.