2014 growth round up

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GDP growth came in slightly stronger in the final three months of 2014 than ONS’s previous estimates had suggested. The economy is now thought to have grown 0.6% - an upward revision of 0.1 percentage point. This nudged the full year rate of expansion up to 2.8%.

Manufacturing growth was also a touch higher last year than first thought. The sector expanded by 2.9% in 2014, with growth being reported in each of the past seven consecutive quarters. While the pace of growth eased over the course of the year, business survey indicators suggest that manufacturers have a solid platform for growth going into 2015.


Looking at the expenditure components of growth the story is a familiar one - households spending up, investment up, net trade down. As we’ve discussed previously exports rallied in the final quarter of 2014, but this wasn’t nearly enough to make up for a weak showing in the rest of the year and stronger import growth throughout the year.

In contrast, total business investment clocked up its fifth year of growth in 2014 and at 7.5%, this was the fastest pace of expansion since 2007.

But, over the last two quarters of 2014, it has somewhat run out of steam falling by 1.2% and 2% in Q3 and Q4 respectively.  A good chunk of this deceleration is attributed to the impact of the lower oil price on the North Sea oil & gas extraction sector. 

The oil & gas effect

North Sea oil accounts for just under 2% of UK GDP. However, its weight on whole economy investment is more than three times larger at over 7%. This is down to the investment-intensive nature of the industry which has led to unusually high levels of investment over the last years. The high oil price since the recession had allowed for a safe and steady revenue stream from oil & gas extraction spurring big investments in the industry.

The massive slump in oil prices since June 2014 however, has triggered the cancellation or postponement of projects in the high-cost North Sea oil & gas sector causing investment to plummet. Data from the ONS today put this fall in investment at 19% in 2014.

These trends urged the OBR to downgrade its short-term forecast for investment by a full 3.3 percentage points in 2015 before creeping up in 2016 and onwards as the oil-price effect is expected to dissipate.

Manufacturing investment hits a high note

Manufacturers have also notched up five years of investment growth, including growth of 6.4% in 2014. The recovery in manufacturing investment has been rather impressive – capital expenditure in the final quarter of 2014 was nearly £7.1billion, the highest level since 2000q1 and a whopping 20% up on the pre-recession peak at the start of 2008.

So what can we expect from here? Inevitably there are risks on both sides – there will likely be further fall out from lower investment levels in the North Sea as it flows through the manufacturing supply chain. Similarly, the rapid catch up rates we’ve seen since the end of the recession are unlikely to be sustained as the replacement cycles normalises again.  

On the upside, temporary tax breaks which will continue through 2015, a continuing appetite to invest in productivity enhancing equipment and a gradually improving outlook in major markets could all lead to a further climb in investment levels.



Chief Economist

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