16th May 2013
The Bank of England has upgraded its economic growth forecast. BBC reports. The perennially gloomy Sir Mervyn King says the Bank now expects GDP growth of 0.5% during the current quarter. This flies in the face of the current vogue for seeing the UK economy as a basket case, limping from one lacklustre economic quarter to the next as Cherry Reynard reports.
But the reality is more nuanced: there are areas of significant strength in the UK economy, alongside areas of real weakness. This has some implications for the strength of future growth in the UK.
Ian Stewart, Deloitte’s chief economist in the UK, says that the UK’s recovery has been just as unbalanced as the boom that preceded it. The most extreme weakness has been in North Sea oil production and financial services. These account for 4% of all jobs and 14% of output and are ‘high-productivity’ parts of the economy. The weakness may account for the overall decline in productivity across the UK economy in spite of rising unemployment – a statistic that has taxed economists. Overall, these two sectors have exerted a drag of 5.4% per year on the economy as a whole.
So far, so predictable. But there are parts of the economy that are doing far better. – notably, the services sector. Ruth Lea, economic adviser to the Arbuthnot Banking Group says: “The services sector now dominates GDP, accounting for over 75% of total output. Indeed, the economy is becoming more reliant on services while the traditional industries continue to perform poorly, casting doubt on government ambitions to rebalance the economy from services to manufacturing in order to stimulate export-led growth.” Manufacturing output (10.5% of GDP) slipped back further in the first quarter 2013, falling 0.3%.
Within the services sector, business services – around 12% of the economy – has been the most successful, according to Deloitte. This has been growing by an average of 4.8% per year and includes computing, research, legal services, accounting, management consultancy, architecture, engineering and advertising. Other major sectors which have grown far faster than the overall economy in the last three years include health and social work, and catering and hotels.
In other words, there are parts of the UK economy that may emerge to support growth in future. Deloitte also asks the question of whether the weak sectors in the UK are likely to be permanently weak and argues that the worst may be over. Financial services have had a boom and bust – they were the super-growth sector of the boom years, growing 5% per year in the decade to 2008, but the weakness of the banking sector has dragged down performance since. However, areas such as insurance, fund management and securities dealing may prove more resilient. The oil and gas sector may benefit from higher oil prices and an improved tax position.
Deloitte’s Stewart also suggests that manufacturing is one of the few sectors that has posted stronger growth in the last three years than it did in the years before the recession and may be poised for stronger growth. However, Lea still sees long-term weakness. “The news out of the Eurozone continues to be gloomy, with the European Commission downgrading its forecasts yet again, though admittedly only modestly. There are no signs of recovery. As the Eurozone is still Britain’s largest export market, this is discouraging news for Britain’s exporters.”
That said, the latest Markit/CIPS surveys are moderately encouraging for the second quarter of the year and beyond. Specifically in services, the headline Business Activity Index rose to 52.9 in April, to reach an eight-month high. Construction and manufacturing remained below the crunch 50 mark, which implies falling activity, but the sectors were still higher than expectations.
Perhaps more importantly, there were signs that growth was reorientating away from the Eurozone. Stephanie Flanders of the BBC has already pointed this out in her blog. “Exports to non-European markets grew 10% on the previous month, with exports to the US up by more than 20%,” she wrote.
Equally, the latest export statistics show manufacturers benefiting from a modest improvement in new export order inflows, attributed to activity in North America, Middle East, Latin America and Australia.
The picture for the UK economy is perhaps not as dismal as has been suggested and the latest Bank of England figures support that. While the manufacturing-led recovery on which the Coalition rested its hopes on appears to be elusive, certain sectors are leading the economy higher and in some cases they are the type of creative, high value-added industries that the Government would wish to encourage.
It is difficult to disagree with Deputy Governor Paul Tucker, reported in the Guardian this week saying – “looking over the past year (the UK economy is) perhaps not as bad as the headline figures suggest…I think there’s a long way to go but there’s certainly reason for hope”.