25th July 2014 by The Harried House Hunter
Today is a day which is in tune with the hot sunny weather that most of the UK has been receiving recently. This is because the UK economy has now officially broken new ground compared to its past pre credit crunch peak. From the Office for National Statistics.
In Q2 2014 GDP was estimated to be 0.2% above the peak in Q1 2008. From peak to trough in 2009, the economy shrank by 7.2%.
So we have clambered some 7.4% higher since the credit crunch hit us. However there is a nuance to this which is that it is an aggregate number that has been achieved by more people than before, so in terms of per person we are still not back to where we were. There is some debate over the increase in size of the UK population over this period but most estimates seem to be in the range of 4% to 4.5%.
Actually if we were looking for links back to the pre credit crunch era today has already thrown up a more surprising one from Royal Bank of Scotland. From the BBC.
Royal Bank of Scotland (RBS) has reported pre-tax profits of £1.6bn for the three months to the end of March, almost double the profit recorded in the same quarter a year earlier.
These were not due until August 1st but it would appear that RBS could not wait to share them with everyone. Talking of the shares they are up around 10% as I type this. So if you are an RBS shareholder it has been a good morning. Looking forwards however it still looks likely to be a tough year for it and what this figures really reveal is how bank performance these days depends on how much they write-down for losses.
These pretty much continued the current good news story when they were released yesterday.
In June 2014, the quantity bought in the retail industry increased by 3.6% compared with June 2013 and by 0.1% compared with May 2014.
Perhaps a small fly in the ointment was the lack of monthly growth but the monthly numbers can be erratic and as you can see below the quarterly ones are very strong.
The quantity bought also increased in Q2 2014 compared with Q2 2013, by 4.5%.
Accordingly we can conclude that the UK consumer continues to have an appetite to do exactly that in spite of the fact that real wages continue to fall. One factor that may come more into play was this one.
Following a four month period of disinflation, the average prices of goods sold in June 2014 showed no change compared with June 2013 after a fall of 0.7% in May 2014.
We have not had many signs so far of a possible pick-up in inflation in the UK’s current boom and admittedly this is in fact a decrease in disinflation but it will need to be watched. Oh and my reminders to the Office for National Statistics that they were seeing disinflation and not deflation appear to have born some fruit.
Is the housing market losing some steam?
Hometrack have issued their regular monthly report and in it are some signs of a bit of loss of steam. From Bloomberg News.
Across England and Wales, prices grew 0.1 percent in July, compared with an increase of 0.3 percent in June. That makes this the slowest month since February 2013. The number of new buyers registering with estate agents fell 0.9 percent.
Also the London house bubble has given a hint of deflating as there was a stagnation is house prices there. Of course prices remain at what are very elevated levels and some wags are already calling this a Russian exodus!
What about private-sector rents?
There is an experimental statistic started in 2011 for this and here it is below.
Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to June 2014.
A very different pattern to house prices is it not? This was a major reason why I argued against using rents as a proxy for owner-occupied housing costs in CPIH (H=Housing). It is not for exactly the same period but here are the latest house price increases.
UK house prices increased by 10.5% in the year to May 2014, up from 9.9% in the year to April 2014.
The growth we have
The level of UK quarterly economic growth has over the past 5 quarters been remarkably consistent as it has gone 0.7%,0.8%,0.7%,0.8% and now.
GDP increased by 0.8% in Q2 2014,
However the consistency in the overall result hides quite a few changes in how it is constructed. If we examine the latest quarter we see this.
In order of their contribution, output increased by 1.0% in services and by 0.4% in production. However, output decreased by 0.5% in construction and by 0.2% in agriculture.
I am assuming that agriculture was affected by all the rain back then – in the sun it is easy to forget now- but the fall in construction is disappointing. It remains strongly positive on a yearly basis but did not have a good quarter. Also for those of you who have followed all the discussions and promises of rebalancing in the UK economy may like to have a wry smile at this.
The largest contribution to Q2 2014 GDP growth came from services; these industries increased by 1.0%, contributing 0.77 percentage points to the increase in GDP.
I wonder if the rebalancing King as in the former Governor of the Bank of England has seen those numbers! There is a marked shortage of rebalancing away from services there. Just to complete the series there was a 0.05% contribution from production and a 0.03% subtraction due to constructions fall.
If we look at changes in the credit crunch era (since the first quarter of 2008) we see that our service-sector has risen by 3%. Not only does this crunch the rebalancing mantra into pieces it means that some area must have shrunk. The just under 11% fall in construction may not surprise much but the fact that production has fallen by a similar amount may surprise a little more. If we raise our gaze we see that more than a few Western countries have experienced such a fall. Whilst declining North Sea production has had an impact it is also true that whilst we are doing better now in other production areas we have a lot of lost ground to recover. Agriculture also provides some food for thought as it is down just under 6% when one might reasonably have expected the devaluation of the UK Pound in 2007/08 to have boosted it. Can anybody think why it might have shifted to a lower plane?
Still we should enjoy the fact that we are enjoying a period of sustained economic growth as hints of a change do appear from time to time. For example, the International Monetary Fund joined the party and raised its forecasts for future UK growth yesterday. What could go wrong? Well something along the lines of the United States where its forecast of only three months ago of 2.75% growth in 2014 has fallen to 1.7% now.
There is much to consider in today’s economic growth release for the UK. If we look in headline terms then we have finally after 6 years passed our previous peak. At the moment like the weather in London the outlook is sunny. However as we delve deeper we see not a few issues. The first is that the population increase means that individually we have about 4% to regain to get back to where we were. Secondly the rebalancing theme has pretty much collapsed which is rammed home by services being 0.77 of the 0.8 growth in the second quarter of 2014. More deeply there is the question if whether we wish to ape the past peak as some of it was an illusion and we all know what happened next.