Rebalancing a mountain | EEF

Rebalancing a mountain

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The second cut of GDP data released today confirms the UK economy and industry grew at a fairly healthy pace in the third quarter of 2013. Both GDP and manufacturing output growth were unrevised at 0.8% and 0.9% respectively.

In addition to confirmation of headline growth figures, business investment growth and net trade were also released and highlight the ongoing recovery challenges we face.

Business investment grows …

Business investment growth has been relatively flat since the end of the recession and we have yet to see the sustained recovery long forecast. This quarter we have seen another tentative sign of growth.

Business investment grew 1.4% in the third quarter of 2013 and contributed positively to growth.

While overall economic conditions currently seem to be on the improve. All sectors of the economy are growing and surveys, such as EEF's Business Trends Survey, show output and orders picking up along with businesses investment intentions. However, the challenge of rebalancing is still as large as ever – Business investment remains 26% below its pre-recession peak.

Investment data has been quite volatile lately with significant backdata revisions, in part due to the ONS reviewing their methodology. As Mark Carney admitted in yesterday's Treasury Committee looking at the BoE's Inflation Report, the investment data and how it is calculated does provide challenges for policy.

… net trade drags on growth …

The other part of the rebalancing story – net trade – is still some way from supporting growth.

Exports fell 2.4% in the third quarter of this year and net trade was a -0.9% drag on growth over the three months to September.

Exports grew in both the first and second quarters of this year and seemed to have turned a bit of a corner towards more sustained growth. The three months to September, however, once again shows the uncertain international economic environment impacting the UK economy.

… there is still a mountain to climb

We have been talking about rebalancing for some time and we will continue to talk about the need to see the economy driven to a larger extent by trade and investment. If anything, today's data points out that there is still a mountain to climb to get business investment and trade playing a more sustained part in driving our economy.

To give a bit of a sense of just how large this task is, in order to meet the OBR's March forecast of 1.9% growth this year, Business investment will need to grow a whopping 33% in the fourth quarter of this year. As you can see on the chart below, this is many times bigger than the growth we have seen in the last few quarters.

Quarterly Business Investment growth% quarter-on-quarter business investment growth; % growth necessary to meet OBR's 2013 growth forecast

Next week's Autumn Statement must send out a powerful signal that government will continue to act to deliver a competitiveness business environment that will give the private sector confidence to invest. See what our Autumn Statement submission says here.


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