Recent economic performance

Gross Domestic Product— Britain managed to avoid a recession in the early 2000s despite weakness elsewhere in the global economy. At that time, economic growth came from a strong and thriving services sector that more than offset a weak manufacturing sector. One reason for manufacturing's weakness had been the strong value of the pound especially against the euro and the dollar. This made British manufactured products expensive in the Eurozone, the nation's primary export market. As in the U.S., the consumer and housing provided the backbone of growth — until now.

 

 

After several quarters of weakening, growth contracted in the second quarter of 2008 as the credit crisis engulfed the important financial sector and the housing sector crumbled. At the same time, inflation — thanks to commodity price increases — limited the Bank of England's actions to stimulate growth by cutting interest rates. GDP shocked analysts and declined for five consecutive quarters before growing again in the third quarter of 2009. GDP contracted once again for three quarters — from the fourth quarter of 2011 through the second of 2012. Third quarter GDP jumped 0.9 percent on the quarter thanks to a boost from the Olympic Games. GDP contracted 0.3 percent in the fourth quarter, threatening yet another recession. However, the UK dodged another recession and has grown in each quarter since.

 

The first quarter 2015 GDP disappointed, expanding only 0.4 percent on the quarter and 2.9 percent from a year ago. But growth improved in the second quarter — GDP was up a quarterly 0.7 percent but the annual rate eased to 2.6 percent from 2.9 percent in the first quarter. Household consumption was up 0.7 percent after a 0.9 percent increase in the first quarter and within a 0.9 percent advance in gross fixed capital formation, business investment expanded a solid 2.9 percent, up from 2.0 at the start of the year. With government final consumption spending posting a second consecutive 0.9 percent increase, domestic demand would have been a good deal more robust but for a hefty drop in inventories. Exports added 3.9 percent after a 0.4 percent gain previously. With imports up only 0.6 percent, this meant net trade added 1 percentage point to the quarterly change in total output.

 

Industrial Production — Industrial production was a drag on the economy for some time even though it only accounts for about 16 percent. Initially, British manufactured goods were expensive in its two primary markets — the Eurozone and the U.S. — thanks to a strong currency. But with weak to nonexistent growth in its primary markets and at home, industrial and manufacturing output continues to struggle. The Queen's Jubilee and its extra holiday in June 2012 combined with August's Olympics distorted both industrial and manufacturing output along with many other economic indicators.

 

 

The goods producing sector started 2015 on a surprisingly soft note. Total production slipped 0.1 percent on the month while manufacturing output declined a steeper 0.5 percent, its first drop since October. Weakness continued into February. Total industrial production rebounded with a 0.1 percent increase leaving the annual increase at just 0.1 percent. However, manufacturing output expanded 0.4 percent on the month when it declined a marginally steeper revised 0.6 percent. On the year, manufacturing output was up 1.1 percent. In March, output was up 0.5 percent on the month and 0.7 percent from a year ago. Manufacturing output was 0.4 percent higher on the month and 1.1 percent above the same month a year ago. Within manufacturing only six of the thirteen reporting subsectors posted monthly gains. Total industrial production was 0.4 percent higher on the month following a marginally weaker revised 0.3 percent gain in April. However, manufacturing posted a 0.6 percent decline to compound the unrevised 0.4 percent drop seen at the start of the quarter. Output here was 1.0 percent firmer on the year, an improvement on April's 0.1 percent increase but only due to an even steeper slide a year ago.

 

Goods production expanded in May but only due to a bounce in the volatile oil and gas sector. More significantly, manufacturing output surprisingly contracted for a second consecutive month. Total industrial production was 0.4 percent higher on the month following a marginally weaker revised 0.3 percent gain in April. Annual growth was 2.1 percent, up from 1.2 percent last time. By contrast, manufacturing posted a 0.6 percent decline to compound the unrevised 0.4 percent drop seen at the start of the quarter. Output here was 1.0 percent firmer on the year, an improvement on April's 0.1 percent increase but only due to an even steeper slide a year ago.

 

June industrial output slid 0.4 percent on the month but was up 1.5 percent from a year ago. However, manufacturing added 0.2 percent and gained 0.5 percent on the year. In July output was down 0.4 percent for a second month but up 0.8 percent on the year. Manufacturing tumbled 0.2 percent and was up 0.5 percent from a year ago. The monthly fall in manufacturing output reflected decreases in seven of the thirteen reporting subsectors.

 

Inflation — Inflationary pressures despite the weak economy limited Bank of England policy actions as the CPI remained above the Bank's inflation target of 2 percent. The graph below compares two measures of consumer inflation. The retail price index excluding mortgage interest payments was the Bank of England's inflation measure until January 2004 when it was replaced with the consumer price index. The CPI uses Eurostat's harmonized index of consumer price methodology and is comparable across the European Union. The RPIX has been used for a variety of domestic purposes including cost of living adjustments. With an inflation target of 2.0 percent, the Bank of England continues to monitor consumer prices closely. In the last few months of 2013, the CPI eased toward the inflation target — it finally reached it in December when the CPI registered an annual gain of 2.0 percent. The CPI was below the BoE's inflation target in each month of 2014 and into the third quarter of 2015. Monthly changes continued to hover around zero, disappointing BoE policymakers.

 

 

Producer prices are measured two ways — input prices and output or factory gate prices. Whether input or output, the PPI which had been influenced by higher input prices for raw materials has seen these pressures disappear. Prices continue to be mired in deflationary territory.

 

 

Unemployment — Two unemployment measures are used to evaluate labor market conditions. The first is the timelier claimant unemployment rate, which increased to 4.9 percent before easing to 4.5 percent in April 2011. This rate climbed again to 4.9 percent where it remained from September 2011 to June 2012. After declining to 4.5 percent in March 2013 it remained there for three months until edging down to 4.4 percent in June and to 4.3 percent in July. The claimant count unemployment rate continued to slide through 2014 and into 2015. From March through June, the unemployment rate by this measure was stabile at 2.3 percent. It remained stabile for the first two months of the third quarter at 2.3 percent.

 

The second unemployment measure is the International Labour Organisation (ILO) unemployment rate, which excludes jobseekers that did any work during the month. The ILO rate had also been steadily declining. However, it jogged up to 5.6 percent from 5.5 percent in the latest three months. It currently returned to the 5.5 percent level.

 

 

Merchandise trade — Ever since statistics on exports and imports of goods were first collected in 1697 trade has been one of the country's key economic indicators. Britain's merchandise trade balance has historically been negative. Like the U.S., Britain must rely on healthy investment income from abroad and service exports to fund its appetite for imported goods. The greatest volume of trade takes place with other EU countries, thus the exchange rate between the pound sterling and the euro plays a crucial role.