Headlines:
- UK GDP unrevised in Q4 with net trade and consumer spending helping to support growth
- Business investment declined at this fastest rate for six years
- A period of deflation is possible in the coming months, but unlikely to last
Overall, last month’s data releases confirm that the UK’s economy remains strong. However, the recovery still faces several obstacles, intensified by political and economic uncertainty. More must be done to support long-term business investment in particular if the UK is to remain among the fastest-growing countries in the G7
Economic growth in Q4 unrevised at 0.5%
The second official estimate for Q4 2014 economic growth (GDP) was unrevised at 0.5% and therefore remains the slowest rate of growth since Q4 2013. This easing in growth mirrors the results from the BCC Quarterly Economic Survey (QES) over the same period where most of the key national balances are now below the all-time high levels recorded over the last year. In annual terms, UK GDP growth was unrevised at 2.7% in Q4. The latest GDP figures confirm that, despite a recent easing in growth, the UK’s recovery remains strong.
UK exports helping to power growth
The second estimate of Q4 2014 GDP revealed that exports played a major role in driving growth in the quarter. The UK’s trade balance (exports minus imports) deficit narrowed from £13.1 billion in Q3 2014 to £10.4 billion in Q4 2014. This improvement was driven by a 3.5% rise in exports, the biggest quarterly rise since Q2 2013, which more than offset the 1.3% rise in imports over the same period. Consumer spending continues to help power growth, rising by 0.5% in Q4, the fourteenth consecutive quarter of growth.
Business investment weakens
While net trade and consumer spending rose in the final three months of 2014, business investment weakened. UK business investment fell by 1.4% in Q4 2014, the second successive quarterly fall and is the biggest drop since Q2 2009. This fall can be partly attributed to weaker investment by the oil and gas industry, amid falling oil prices. Nonetheless, the fall in business investment over the second half of 2014 is a timely reminder that more needs to be done to promote business investment and achieve better balanced growth.
UK growth likely to quicken this year
In its latest inflation report, the Bank of England expects that the UK economy will grow at a faster rate this year, compared to 2014. The central bank forecasts UK GDP to grow by 2.9% in which if achieved would be the fastest rate of growth for nine years. The Bank of England has upwardly revised its UK GDP forecast for 2016 to 2.9%, from 2.6% and for 2017 from 2.6% to 2.7%. While its growth forecast is higher than our own, their view that UK economic growth has a good chance to regain stronger momentum in the medium term is broadly in line with our own.
Supported by a strong jobs market
In the three months to December 2014, UK employment rose by 103,000 compared with the previous three months to 30.9 million, the highest number since records began. The number of people who are unemployed fell by 97,000 over the same period to 1.86 million. As a result, the unemployment rate was 5.7%, down from 6.0% in the previous three months. This mirrors the Q4 2014 QES where the backward looking employment balances rose in the quarter. However, the youth unemployment rate, at 16.2%, remains almost three times the national average.
Consumers spending power is rising
Average earnings, including bonuses, rose by 2.1% in annual terms in the three months to December 2014. This is more than four times December’s comparable inflation rate of 0.5% and means that wages have their biggest lead over inflation since April 2008. With two-thirds of UK GDP driven by consumer spending, the rise in real earnings and therefore consumer’s spending power is good news for the UK’s near term economic outlook. However, it is important to remember that wage rises can only be sustainable if they are matched by rises in productivity.
