9th April 2014 by The Harried House Hunter
The latest news on the UK economy has been very positive. The strong industrial and manufacturing production figures that I analysed yesterday were followed by more good news in the afternoon. From the NIESR (National Institute of Economic and Social Research) came this.
Our monthly estimates of GDP suggest that output grew by 0.9 per cent in the three months ending in March after growth of 0.9 per cent in the three months ending in February 2014. This robust growth was relatively broad based.
I had suggested that this might show signs of economic growth accelerating even further and indeed it did. Added to this was the statement that the growth was broad based. Indeed there was further welcome news although the NIESR did present it with a less optimistic rider.
Even though the level of economic output has almost regained its pre-recession peak (January 2008), a sizeable negative output gap remains.
The concept of an output gap is something of a moveable feast and you could argue that if you project the growth of the pre-credit crunch era forwards then we will never catch up! But personally I felt it was nice to see that we were about to regain the levels of 2008 as it has been a long wait these last six years.
Hope on inflation
Last night came the news that shoppers are, according to the British Retail Consortium, seeing falling prices. Apologies for the capitals they use.
BRC-NIELSEN SHOP PRICE INDEX MARCH 2014: FOOD PRICE INFLATION AT RECORD LOW AS OVERALL SHOP PRICES CONTINUE TO FALL.
After many years of above target inflation in the UK this sort of data is very welcome for issues such as real wages and the cost of living. If we look at the detail we see this.
Overall shop prices reported deflation for the eleventh consecutive month in March, accelerating to 1.7% from 1.4% in February……
Food inflation slowed to 0.8% from 1.1% in February – the lowest ever recorded.
Non-food reported annual deflation of 3.2% in March from 3.0% in February
So whilst food prices continue to rise (albeit slowly) other prices are now falling and at a record rate, although some care is needed with the concept of a record rate as the series only began in December 2006.
This measure of consumer inflation does tend to have an optimistic bias but even so the news here is good especially as the UK economy is accelerating. So far there are few signs of an immediate inflationary response from the UK retail sector.
A wages pick-up?
It would seem that slower inflation and maybe a touch of disinflation in some areas is being combined with a pick-up in wages. From the Recruitment and Employment Confederation (REC) and KPMG Report on Jobs.
Permanent salary growth accelerates Starting salaries for people placed in permanent jobs increased strongly in March, with growth picking up to the sharpest since July 2007.
Indeed their view of the labour market has become quite optimistic.
The trend of growth in people finding jobs across all industrial sectors and regions continues. Starting salaries and hourly pay rates are up as employers battle to entice the talent they need.
At this point the UK economy looks as though there is a Goldilocks scenario in play. What is there not to like about rising output and wages combined with hints of falling inflation? No wonder the pound’s value rose again and it pushed above US $1.67 and Euro 1.21. At such a level its rise since the lows of March 2013 has been equivalent to a rise in official base rates of 2% according to the rule of thumb that the Bank of England used to use but has apparently forgotten. So again policy has also adjusted albeit that it has nothing much at all to do with the official “Forward Guidance” mantra!
The problem which is trade
A situation which moves us away from hopes of an outright Goldilocks scenario is the UK balance of payments. Here the imports porridge has been too hot for years and indeed decades and in comparison the exports porridge has been rather lukewarm. The latter issue has been reinforced by this morning’s data release.
In the three months ending February 2014, exports of goods decreased by 2.5% to £72.7 billion, reflecting falls across a range of commodities.
So whilst yesterday’s manufacturing figures gave us a hint of the so far mythical “rebalancing” today’s export figures pour a dash of cold water on it. However if we consider that pretty much every measure has the UK going at full steam ahead we saw some odd import data.
Imports of goods decreased by 4.7% to £99.0 in the three months to February 2014, reflecting falls in semi-manufactures and oil.
So exports falling but imports falling even faster led to this.
The total trade deficit has almost halved in the three months to February 2014 compared with the previous three months, from £8.7 billion to £4.8 billion, mainly due to a narrowing of the trade in goods deficit.
A hopeful move? Well yes except for the fact that falling imports are inconsistent with the rest of the UK’s current economic data. We also have the problem that the best sector for us (services exports) is not far off a number pulled from thin air.
In the three months ending February 2014, the estimated surplus on trade in services was £21.4 billion.
The underlying position has been grim for many years and this is reinforced one more time by the details below.
In 2013, the deficit on trade in goods narrowed by £0.9 billion to £107.8 billion (annually). The level of exports increased to a record £304.7 billion in 2013, up 1.4% from £300.5 billion in 2012.However, the rise in exports was accompanied by an increase in imports to a record £412.5 billion in 2013, up 0.8% from £409.2 billion in 2012.
If we switch to the overall picture we see this.
In 2013, the current account deficit equated to 4.4% of GDP at current market prices, compared with 3.8% in 2012.
Which follows on from this.
The UK has run a combined current and capital account deficit in every year since 1983 and every quarter since Quarter 1 2008.
The numbers above created quite a stir when they were released at the end of March but as I suggested the media storm soon died down and found other avenues to explore.
We see that the UK economy has started 2014 in a strong manner combined with weakening inflation and signs of a pick-up in wage levels. So three points of the Christmas wishlist look well on their way! Even the pound is for once helping by rising into this move and contributing a dash of disinflationary monetary tightening. What is there not to like about the spring-like data we are getting from these areas?
Where matters are more difficult are if we look at the housing market or the subject of new data today our trade position. These look like victims of a deja vu like scenario as how many times have they been flashing yellow if not amber alert into a General Election season? In a way this is reinforced by this picture being shown by the Financial Times Alphaville section discussing the number of cranes in view from their London office.