ONS will be publishing its first estimate of growth in the economy tomorrow. Forecasters are expecting GDP to have increased by 0.6% in the three months to June. If we exclude the Jubilee/Olympics effects in the third quarter of last year, this would be the fastest rate of growth reported for three years and twice the rate posted in the first three months of this year.
Let's start with what's happened over the past quarter.
Business surveys point to expanding activity in manufacturing and services
UK manufacturing output and ordersSource: EEF Business Trends Survey
EEF's 2013q2 Business Trends Survey pointed to the strongest output and orders balances across manufacturing for a year, with improving prospects widespread across sub-sectors. Our survey stacks up with the PMI activity indicator, which was in expansionary territory in May and June.
Activity in the services sector has also been growing, according to the PMI, with the average index over the quarter coming it at its highest level since 2012q1.
Consumer confidence turns a corner
Households are feeling their least downbeat since September 2010. While still somewhat concerned about personal finances, the index notes an improving outlook for the economy and a bit more confidence to make major purchases.
Housing market activity edges higher
A number of indicators suggest the housing market is showing signs of improvement. In the three months to May mortgage approvals for new purchases were at their highest since the end of 2009. The impact of Funding for Lending on the mortgage market is creating new demand here. And a survey from RICs points to rising activity in the market across most parts of the country.
It's been all quiet on the eurozone front
Manufacturing PMI – EurozoneSource: Markit
On-going contraction in the eurozone has impacted both on business confidence and the UK's export performance. The tide of bad news has eased over the past quarter and there may even be some signs of improvement emerging. The flash composite PMI for the bloc in July put output at an 18 month high, with manufacturing activity growing for the first time in two years.
So does this mean we are seeing green shoots/an economy firing on all cylinders/the UK on the road to recovery/insert other economics cliché as appropriate?
The fact that the economy has been expanding in the first half this year is undoubtedly positive news. But ONS is only telling us what has happened, not what the future holds. There are some parts of the economy that are struggling to get going and even those that are doing better don't guarantee a return to pre-recession growth rates just yet. Here are some reasons why…
- Despite the need for growth to be more evenly spread across the economy, we've reverted to relying on the consumer to drive growth. Business investment was still falling at the start of the year (see more here) and sustained positive contributions to growth haven't yet materialised either.
- Consumer spending has picked up – inflation is starting to ease and the labour market has performed better than expected. However, while employment has edged up wages haven't and disposable incomes remain under pressure. This will provide a limit on households' contribution to growth.
- While any good news from Europe is welcome, recovery is still some way off. Growth has slowed in China as policy makers seek to rebalance the economy and although the US has been a bright spot in the global economy, big fiscal challenges are yet to be dealt with. All this is likely to mean that world trade will grow rather than soar.
The real question (obvs) is whether the arrival of a new royal baby will bump up growth in the third quarter? Some analysts have suggested the effect of this event will be ‘overwhelming positive' for the economy. It could be argued that this along with sporting successes and an actual British summer will provide a bit of a boost to the general feel good factor.
Without pouring cold water on these events, it's highly questionable whether they will provide a real lift to the economy (similar royal baby events in 1982 and 1984 didn't seem to). And even if there were a marginal positive impact, it would only be temporary. With output still 3% below its peak we are past the point where one-off events are what the economy needs.