Next week the Office for National Statistics (ONS) publishes its preliminary estimate of UK GDP for the final quarter of 2013. The economy has rebounded unexpectedly strongly over the past year, prompting a series of upward revisions to official and independent growth forecasts. Real GDP expanded by 0.8% in both the second and third quarters of 2013, marking the first successive three-month periods of near-trend growth in almost six years. With business surveys remaining robust in the final months of 2013—albeit edging back slightly from October highs—we expect the initial GDP estimate for Q4 growth to show a similar outturn of around 0.8%.
Real GDP*(% change, quarter on quarter)
Source: Office for National Statistics.
* 2013 Q4 figure is EEF forecast.
Following ONS revisions last month to GDP data for the previous 18-month period, which indicated that the economy had more momentum than previously thought, this Q4 outturn would imply full-year GDP growth in 2013 of around 1.9%. This would mark the strongest annual rate of expansion since 2007. Remember, however, that until the recent pick-up the pace of recovery in the UK since the global financial crash had lagged well behind that of most other G7 economies. As of September 2013 economic output was still 2% below its pre-crisis level of early 2008. In contrast, real GDP has rebounded strongly in the US, Germany and Canada to well above pre-recession levels, while France and Japan are both very close to making up their lost ground.
The near-term outlook in the UK is nevertheless much brighter, not least in the manufacturing sector, where data have shown a steady improvement in sentiment and activity since mid-2013. Mirroring developments in the broader economy, manufacturing output rose by 0.8% in both the second and third quarters of last year, its best performance since 2010. More recent data have been steady rather than spectacular—production edged higher by 0.2% over the month in October and was unchanged in November. We expect output to have picked up again at a moderate pace in December, which overall should equate to another solid quarterly increase in Q4.
The improving trend in manufacturing is welcome and part of a fairly broad-based rise in activity across the economy. Despite very weak real disposable income growth, household spending has so far been the main driver of the upturn, supporting a rise in private-sector services on the back of employment gains, broader credit availability, a rise in housing market activity and evidence of stabilisation in parts of the euro zone. Output in the UK services sector (which accounts for around three-quarters of total GDP) rose by a quarterly 0.8% in Q3, while the construction sector recorded a second consecutive quarterly rise of 2.6%. Both sectors are expected to show further solid rates of expansion in Q4.
It should be noted that the tone of official monthly indicators from the ONS on retail sales and industrial production in October-November actually disappointed slightly when compared with the still robust picture implied by business surveys (trade data were also weak, although this was less of a surprise). As a result, it is possible that the Q4 GDP estimate from the ONS could come in slightly weaker than consensus expects. It is only a preliminary release, however, based on less than half of actual data for the full quarter, and as we have seen in the past, national accounts figures are often revised upwards in subsequent months. It is quite likely that this trend could be repeated for the Q4 data.