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The key economic stories from National Statistics produced over the latest month, painting a coherent picture of the UK economic performance using recent economic data.
The preliminary estimate of Gross Domestic Product (GDP) indicated that the UK economy continued to grow in the first three months of 2014. Output grew by 0.8% in Q1 2014, following growth of 0.8% and 0.7% in Q3 and Q4 2013 respectively. Output is now 3.1% higher than the same period a year ago and while GDP remains 0.6% below its pre-downturn peak, the pace of annual growth is now faster than at any point since the onset of the economic downturn. Excluding oil & gas production, Gross Value Added (GVA) in the UK surpassed its pre-downturn peak in Q1 2014.
Acknowledgements: This paper has benefitted from the valuable comments from Kirk Hamilton (Grantham Research Institute on Climate Change and Environment, London School of Economics), colleagues from the Ecosystems Evidence team (Department of Environment, Food and Rural Affairs), Natural Capital Committee Secretariat and members of the Natural Capital Committee, and members of the Natural Capital Steering Group.
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The preliminary estimate of Gross Domestic Product (GDP) indicated that the UK economy continued to grow in the first three months of 2014. Output grew by 0.8% in Q1 2014, following growth of 0.8% and 0.7% in Q3 and Q4 2013 respectively. Output is now 3.1% higher than the same period a year ago and while GDP remains 0.6% below its pre-downturn peak, the pace of annual growth is now faster than at any point since the onset of the economic downturn. Excluding oil & gas production, Gross Value Added (GVA) in the UK surpassed its pre-downturn peak in Q1 2014.
Against this background of stronger growth, the May edition of the Economic Review examines several trends which underpin the sustainability of the recovery. Firstly, it examines the recent moderation of UK inflation. Following six consecutive months of lower Consumer Prices Index inflation, services inflation is now lower than at almost any point in the history of CPI, notwithstanding upwards pressure from the recent introduction of higher university tuition fees. Examining the goods and services which have contributed to annual price changes since 2007, this edition of the Review finds that household energy and food, drink & tobacco account for much of the changes in inflation over this period. These same products have contributed to the recent moderation of price rises.
The reduction of domestic price pressure has come alongside an appreciation in the value of Sterling and a fall in the rates of inflation in many of the UK’s international trading partners. Both of these effects are likely to reduce the price of UK imports. This edition of the Economic Review finds that input prices for manufacturing firms have moved with the exchange rate to differing extents, partly reflecting their relative import intensity and in a manner consistent with lower upwards price pressure from UK imports.
Thirdly, this Review examines how the different regions of Great Britain have contributed to the recent strengthening of the labour market. It finds that while the recent recovery in the employment rate appears to have been led by London, more recent increases in the employment rate have arisen as a consequence of a more widespread labour market recovery. Higher self-employment cushioned the fall in employment in many regions between 2008 and 2011.
Finally, while recent analysis of capacity utilisation in the UK economy (Economic Review - March 2014) has suggested that there remains a degree of spare capacity in the labour market, the number of vacancies posted by firms has risen to a post-downturn high. Vacancies in the construction industry in particular have risen recently, consistent with firms seeking to recruit more staff to meet growing demand.
The preliminary estimate of Gross Domestic Product (GDP) indicated that the UK economy continued to grow in the first three months of 2014. Following quarter-on-quarter growth of 0.8% and 0.7% in Q3 and Q4 2013 respectively, output grew by a further 0.8% in the first three months of 2014. The UK economy has now grown for five consecutive quarters - the longest run of growth since the onset of the economic downturn in 2008. The sustained nature of recent economic growth has also helped to propel the UK economy to its fastest annual rate of expansion since Q4 2007. GDP is estimated to have been around 3.1% higher in Q1 2014 than in the same period a year earlier, and as a result, the volume of output in the UK is now just 0.6% below its pre-downturn peak.
While the recovery of the UK economy continues to gather pace, it has been slow by historical and international standards (An international perspective on the UK - Gross Domestic Product) and the performance of different industries remains strikingly varied. Figure 1 shows the output of each of the main industrial groupings indexed to their respective pre-downturn levels, and indicates that only the services industry has re-attained the level of output it achieved in Q1 2008. Despite a recent recovery in construction - led by strong growth in particular in the building of new homes - output in this industry remains 12.2% below its pre-downturn peak. Output in the production industry - which grew by 0.8% on the quarter and added around 0.1 percentage points to total output growth in Q1 2014 - is relatively little changed since the trough of the economic downturn.
The weakness of output growth in the production industry reflects the performance of its constituent sub-industries, and in particular the pronounced fall in output from mining & quarrying. As Figure 1 highlights, oil & gas production has been a drag on GDP growth over this period. Gross Value Added (GVA) excluding oil & gas output has grown more quickly than GDP - in particular since 2010 - and surpassed its pre-downturn peak in Q1 2014.
Figure 2 analyses the impact of mining & quarrying output growth on production as a whole by indexing the constituent sub-industries of production to their respective pre-downturn peaks. It shows that while manufacturing and the utilities industries all experienced a fall in output during the downturn, the contraction of mining & quarrying output was particularly marked. Output from this industry was 35.6% below its pre-downturn peak in Q1 2014, substantially lower than in manufacturing (7.7%), electricity, gas, steam & air conditioning (12.0%) and water & sewerage (2.2% above its pre-downturn peak in Q1 2014). While production output has risen by just 2.5% since Q1 2013, manufacturing output has risen by 3.4% over the same period.
Despite concerns about the extent of available spare capacity in the UK economy, the recent acceleration of growth has been accompanied by a marked weakening of inflationary pressure. The all-items Consumer Prices Index increased by 1.6% in the year to March - down from 1.9% and 1.7% in January and February respectively and down from 2.8% a year earlier - and the lowest annual rate since October 2009. Figure 3 shows the annual inflation rates for goods and services alongside the growth of the all-item index, between 1989 and 2014 . It suggests that following two peaks of inflation in 2008 and 2011, both goods and services inflation have moderated recently and the current rate of services inflation (2.3%) is weaker than at almost any point during the history of the CPI. This reduction in services inflation is particularly marked given the recent upwards pressure applied by the introduction of higher university tuition fees. Excluding education from the analysis, services inflation was 1.9% in March, while the annual percentage change in the equivalent all-items index was just 1.4%.
What factors have driven these recent changes in inflation? Figure 4 shows how a selection of goods and services has contributed to the annual rate of CPI inflation since 2007. It suggests that the primary drivers of higher inflation rates in 2008 were the costs of household energy - including electricity, gas, other household fuels and fuels & lubricants used in transport equipment (primarily petrol and diesel prices) - and price increases in food, drink & tobacco. Combined, these products accounted for around 3.5 percentage points of the 5.2% inflation rate experienced in September 2008. While upwards pressure from these products abated during 2009, they also contributed to the resurgence of inflation during 2011. Since 2010, the rise in prices has become more broad-based, with positive contributions arising from a wide range of different goods and services - represented by the larger contribution of the ‘other’ category.
The moderation of inflation over the last six months - shown in the shorter bars to the right of Figure 4 - also appears to be partly a result of abating energy costs. On this measure, the contribution of household energy bills to overall CPI inflation has fallen from 0.37 percentage points (pp) in the year to March 2013, to 0.25 pp in January 2014 and actually reduced inflation in March for the first time since October 2009. The contributions of food, drink & tobacco and housing costs have fallen sharply between January 2013 and January 2014 (0.8 pp to 0.4 pp and 0.2 pp to 0.1 pp respectively). Lower price increases in transport & package holidays (and lower prices of air passenger transport in particular), have also helped reduce the overall annual rate of increase.
Period | Electricity | Gas | Fuels & Lubricants | Other Fuels | Total contribution |
---|---|---|---|---|---|
2007 | 0.14 | 0.13 | 0.12 | 0 | 0.39 |
2008 | 0.27 | 0.31 | 0.55 | 0.09 | 1.21 |
2009 | 0.1 | 0.25 | -0.27 | -0.05 | 0.02 |
2010 | -0.05 | -0.14 | 0.63 | 0.06 | 0.51 |
2011 | 0.14 | 0.24 | 0.61 | 0.06 | 1.04 |
2012 | 0.11 | 0.23 | 0.09 | 0.01 | 0.45 |
2013 | 0.14 | 0.23 | -0.05 | 0.01 | 0.33 |
2014 | 0.14 | 0.16 | -0.18 | -0.02 | 0.1 |