Growth in UK economy slows down

Three rows of £1 coins sitting on top of Sterling notes.

The UK is experiencing a moderation in growth this year after expanding by a strong 3% in 2014 writes Oliver ManganChief Economist atAIB.

The latest UK GDP figures show that the economy grew by 0.7% in the second quarter, after a relatively soft 0.4% in the first quarter. However, the pick-up in growth in the second quarter had much to do with a sharp increase in North Sea oil production, which is not expected to be sustained.

Excluding oil and gas, the economy expanded by 0.5% in the second quarter, not much better than the 0.4% increase experienced in quarter one. This is half the growth rate recorded during 2014.

Net external trade did make a large contribution to growth in the second quarter, but this was due to temporary factors and thus is also unlikely to be sustained. Indeed, there was a marked widening of the trade deficit in July. The view that the UK economy has slowed is supported by trends in other key indicators. Retail sales grew by 0.5% in the three months to July, considerably weaker than the rate of over 2% seen late last year.

Growth in manufacturing production has slowed very sharply in 2015, with output falling by 0.5% on a year-on-year basis in July. This represents its weakest rate since August 2013.Meanwhile, activity appears to have levelled off in the housing market too, in terms of new house building and transactions.

PMI data also suggest that UK growth has lost its momentum and that this trend has continued in the second half of the year.The latest data show that the manufacturing sector continued to struggle in July and August. Meantime, growth in services fell to an over two year low in August.

The pace of improvement in the UK labour market has also eased off. Employment growth averaged 2.2% in 2014, but this slowed to 1.8% in the first quarter of 2015 and 1.2% in quarter two.Indeed, employment fell by 63,000 in the second quarter, the first such decline in two years.

The employment component of the PMI surveys continued to move lower in July/August, suggesting that employment growth may have weakened further in the third quarter. Meanwhile, the unemployment rate edged up to 5.6% in quarter two from 5.5% in the first quarter of the year.

Overall, it would seem that the growth of the UK economy has decelerated to 2% or below this year, from 3% in 2014.This is a bit surprising as income growth has picked up, while inflation has fallen, giving a significant boost to real spending power.

Year-on-year growth in wage earnings has reached a 6½-year high of 2.8% this year. Meanwhile, inflation has slowed down considerably. The CPI rate was at just 0.1% in July, weighed down by the impact of lower energy prices. This means that growth in real wages is now quite strong in the UK, which should provide good support for consumer spending.

Meanwhile, a strengthening of growth in the rest of the EU, the main market for UK exports, is also positive news for the economy. The UK is also continuing to enjoy a very low interest rate environment, with the Bank of England in no hurry to begin tightening monetary policy.

However, the UK economy is still faced with some headwinds, including high household debt, fiscal tightening, and the negative drag on trade caused by the ongoing strength of sterling, as well as slower growth in emerging economies. These factors do appear to be weighing on UK growth this year.

Not surprising, then, the marked rise of sterling against the euro in recent years has come to an end, with the exchange rate very much range-bound in a 70p-74p trading corridor over the past six months.

With a referendum on the UK leaving the eurozone, or ‘Brexit’ on the horizon, and the eurozone economy also now improving, it is hard to see sterling resuming its uptrend against the euro anytime soon.

Source: Irish Examiner September 15th 2015