The UK economy breaks new ground or rather the service sector does

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.

Retail Sales

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.






20 thoughts on “The UK economy breaks new ground or rather the service sector does”

  1. Pavlaki says:

    Interesting that despite good UK news the pound has dropped as markets were expecting even more. Against this has been mainly weak results from Euro land and the odd bit of good news and yet the Euro shot up. The markets are still bullish on the Euro given half a chance! Overall the Euro is down against Sterling but the slightest bit of contrary news brings a swift reversal. Given what Draghi has said and what most countries want you would expect a steady Euro decline.

    1. Anonymous says:

      Hi Pavlaki

      There does seem to have been a change in the pattern of behaviour of the UK Pound £. It has ended the last couple of days below US $1.70 and now has ended the week there too. I am starting to wonder if the push from the UK’s economic boom has had its effect on the £.

      As to what it will do against the Euro is harder to say as with the Ukraine/Russia issues it should be falling too!

    2. Noo 2 Economics says:

      By my reckoning the pound has another 11% to fall before reaching fair value and I think the EZ is turning. Expect better news from here on in which can only lead to further Euro strengthening, which is currently, in my reckoning fair value – Germany and France despite all it’s current travails have strong/very strong economies whilst the periphery continues to recover.

  2. theyenguy says:

    You write like the weather in London the outlook is sunny; 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.

    Those who are aware of the Business Cycle know what will happen next; the bounty of bright summer days have passed.

    The Business Cycle is one of investing, and its nascent entrance into its final phase, that is Kondratieff Winter, is seen in trade lower in European Financials, EUFN, on June 24, 2014, which is the result of a trade lower in the Euro, FXE, beginning in early May 2014, and its full entrance with the failure of credit, seen in Aggregate Credit, AGG, trading lower in value on July 24, 2014.

    In July 2014, Global Growth, DNL, started trading lower, communicating that investors no longer trust the monetary policies of the world central banks to stimulate investment gains, and global economic growth; in recognition of this, AP reports IMF Cuts US and Global Growth Forecasts for 2014.

    With the failure of credit, seen in AGG, trading lower, on July 24, 2014, and the death of currencies, seen in Major World Currencies, DBV, trading lower in June 2014, the age of investing is over, through finished and done; the age of debt servitude has commenced.

    Disinvestment out of debt trade investments, such as the UK’s PUK, ABY, NGG, KNOP, GSL, MANU, and deleveraging out of currency carry trade investments, such as the UK’s BT, SNN, EROS, UL, PSO, RUK, will not only destroy Nation Investment in the UK, EWU, EWUS, but will also introduce economic deflation, and thus compel the development of regional fascism.

    1. Forbin says:

      so whats the score on the Baltic Dry Index?


      Hopes popcorn shipments are strong ….

  3. Forbin says:

    Hello Shaun,

    well yes we are happy we’re back on t’rack

    6 years to get back to GDP of bubble year , 9 to get to GNP or will that be 10 or11 as we import more people

    and exactly who got the cream in the meantime? let me guess…..

    I take it this is all inflation adjusted ? with hookers and druggies? seems we have that to come……

    And yet the economy remains unbalanced , BoE interest rate at emergency levels still and citizen inflation being under reported

    no wonder I dont feel better !

    On the GDP/GNP malarky , listen we can import India and GDP will be bigger , hurrah !! but we’d be each as poo as they are – except hoi oligoi

    Great huh ?

    And he bank reforms still have not and I posit will not be implemented even past 2018 when they will be forgotten about


    1. Forbin says:

      poor of course – typo

      1. Anonymous says:

        Hi Forbin

        To answer you question yes this is inflation adjusted or to be more specific GDP deflator adjusted. So the replacement of the RPI with the CPI for ~24% of the GDP deflator will have had an impact.

        Your point about the growing population is an intriguing one. How long will we be chasing our tail in per capita terms? Let us hope it is not too long…

        1. forbin says:

          hi shaun,

          the population point was one thats been tagged onto in the mainstream – that is although in absolute terms GDP has now back to bubble time levels , its the wealth of the people of the country that counts

          and lets face it , do we know if the top 1% ever had a recession / depression ?

          I think not – its the rest of us who did and now apparenlty that will be 2017/18

          but will it? cut the top 10% and bottom 10% and what do we see?


  4. Noo 2 Economics says:

    The UK cannot rebalance towards manufacturing for the simple facts that it was never any good at mass production and can now always be undercut by the far east. The sooner the idiots, excuse me, authorities recognise that the better!

    1. Noo 2 Economics says:

      ..and expect inflation to steadily rise from here on in too ending at about 2.5% – 3% by year end unless the FX markets become even more wacky about the GBP.

      1. Paul C says:

        Yes Noo 2, you’ve called it right. And what will Mark Carney say when his ideal 2% limit is breached. I think he will say that their macro-prudential framework is robust enough to suffer minor over limit rates for short periods. Behind closed doors he’ll be celebrating with G. Osborne how the debt and QE is being whittled away. I see economic overheating already and most people aren’t even working properly/productively in the UK..

        1. Noo 2 Economics says:

          I agree with everything you say Paul, however (There’s always a “but” with me!), most people disagree with me/you and say the real exchange rate of the GBP is at historically low levels which, if we are proved wrong, will result in further SUSTAINED GBP appreciation and act as a drag on inflation (tough luck Markey and Georgie!).

          I believe in that case the higher GBP combined with lower productivity will make a perfect storm for exporters, where, again, most people disagree with me claiming UK exports are not affected by GBP exchange rate, there is some evidence to back this argument but I feel that there is a threshold where a high GBP will affect exports and when it does, it will happen suddenly and brutally.

    2. Anonymous says:

      UK invented the industrial revolution, so I disagree it was never any good,

      Also Germany does very well out of manufacturing – and the UK could do better. But until the authorities recognise the need to keep housing affordable (ala Germany) they are saddling UK manufacturing with unnecessary costs.

      1. Noo 2 Economics says:

        Sorry, wasn’t quite precise enough in my comment but to do so would require a very verbose essay which I’m not going into here. So, over simplifying the UK began to be overtaken in terms of quality mass produced items between the Great Wars by America and Germany. Then came Japan in the 60’s systematically destroying the UK motorbike and car industry because UK products couldn’t compete on quality or price.

        Electrical items and electronic goods are yet another area where the UK was overtaken on mass produced quality as long ago as the 70’s.

        So the UK was “good” when it had no competition, as soon as competitor countries started up the UK fell behind and has been comprehensively behind since the 70’s. The skills base does not exist in the UK for mass production to be successfully expanded, unlike Germany, although I accept your point re property costs which can only be addressed via culture change – break the British love affair with property. Good luck with that!

        1. Anonymous says:

          When did the USA start producing the model T ? I’d suggest that the USA was a mass production champion long before the 1970s.

          The problem is Brit politicians who talk the manufacturing talk, but lack the ability or willpower to walk the walk and set up education, infrastructure, cost base and tax rates necessary to deliver manufacturing success.

          1. Noo 2 Economics says:

            “Between the great wars” means between 1918 – 1939? “…education…” yes – “The skills base does not exist in the UK”?

            German business pays way more tax than UK and pay rates are higher too.

            I would suggest we are in broad agreement on structural problems (lack of “right” education/skills that come from education) and although I didn’t mention it, yes infrastructure i.e. education and transport system, but we will have to remain in disagreement over cost base and taxes as my final comment on this is that where Germany makes up on UK for cheaper premises it loses to the UK on higher German wage levels and tax base – swings and roundabouts.

          2. Noo 2 Economics says:

            OK granted the T Ford started before WW1 indeed the T Ford was the herald of things to come, which didn’t start arriving on the scale of the Ford until after WW1as aggregated American mass produced industry started in earnest after WW1.

          3. Anonymous says:

            Taxes – not sure. A German friend in the UK said that once family deductions are taken out, German taxes aren’t bigger.

            Many British rocket scientists go to the city and perform financial wizardry/chicanery because Brit scientists and engineers have low pay & status.

            I think German engineers get better pay and status – so their best and brightest contribute to Germany’s manufacturing success.

            I don’t like never, it cannot be done attitude. But I come from a new world, can do country.

          4. Noo 2 Economics says:

            Couldn’t resist – “I don’t like never, it cannot be done attitude. But I come from a new world, can do country.”

            Please… just try a culture change and see how long it takes – you and I will be long dead before it could be achieved and it may change in unintended ways whilst circumstances could have changed by then requiring the opposite of what you worked towards. Your best approach is to work with what you have instead of wishing.

            I come from the USA, we understand the importance of being realistic in our objectives….

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