Three charts to bear in mind
Posted on April 29, 2014 by Paul Mac Flynn
Today's UK GDP figures showed continuing growth of 0.8% in the first quarter of 2014. Growth was mainly due to the UK's large service sector but there was also welcome if not belated growth in manufacturing. Year on year growth is now calculated to be averaging at about 3%, well above most other developed economies. While growth is welcome, if the experience of the last number of years has taught us anything it is that we should question good news as much as we do bad news.
There are several worrying trends within the UK economy at the moment. Firstly there has been no recovery in business investment, a key driver of sustainable growth. Despite many commentators citing balanced growth, as the chart below shows business investment shows no sign of driving the recovery.
So what is driving the recovery? It is too early to say for Q1 of 2014 but the figures for 2013 show that household expenditure increased 2.2% in 2013 at a time when wages were still declining in real terms. The increase in services sector in Q1 of 2014 was largely driven by increases in the Distribution, Hotels & Restaurant sector, which is quite dependent on discretionary spending by households as well as tourism. Where could this increased consumption be coming from? The chart below shows the evolution of the Household Savings Ratio since 2010. Households have started to run down savings and borrow to fund consumption. In GB a lot of this leverage has been driven by rapidly increasing house prices. Starting to sound familiar?
Finally it is worth remembering that lots of other things have changed since 2010, in particular the population of the UK. While in Q4 of 2013 the UK economy was 2.6% below its peak in Q1 2008, GDP per head (GDP divided by population) was still some 6.1% below its 2008 Q1 level. It remains to be seen how much of 2014's growth will be down to population increases.
All of this to say that while recent growth has been positive and more broad-based than before, major macro risks remain. Monetary policy remains exceptionally loose and cannot remain that way forever. The Eurozone has entered a period of relative calm, but the dangers of a relapse are significant. Investment, increased wages and trade should be driving this recovery. They are not. It is worth asking why.