A glut of data was released by the ONS today, including the final estimate of q4 GDP and the balance of payments figures for 2015. The stats reconfirmed two things – first, that the economy grew at a solid pace in 2015 and second, that the UK continues to exhibit a large current account deficit.
Also of interest is the revised business investment release, which includes manufacturing data. This is even more so after the OBR’s to quote “colossal” downgrade to its business investment forecasts for the UK economy over the next five years. Business investment in 2015 grew by 5.2%, considerable lower than consensus expectations at the start of last year.
GDP growth a one-sided affair
The economy posted another year of solid growth in 2015. Growth in q4 2015 was revised up by 0.1pp to 0.6%, taking up the GDP growth rate over 2015 to 2.3%. Growth was driven almost exclusively by the services sector which contributed 2.1pp to GDP.
Construction was the second largest contributor with 0.2pp after a volatile year, which saw some hefty quarter-on-quarter fluctuations. Output from the mining and quarrying sector proved surprisingly resilient, contributing 0.1pp to GDP, with profit margins and capital expenditure rather than output bearing the brunt of ultra-low commodity prices.
Manufacturing’s contribution was negligible, neither contributing nor contracting from GDP growth, after a challenging year that saw output fall by 0.3%.
Manufacturing investment coming off the boil
Business investment in the whole economy made a solid contribution to economic growth in 2015, adding 0.5pp to GDP, albeit once again playing second fiddle to household consumption which was responsible for the lion’s share of that at 1.7pp.
Manufacturing business investment made its own contribution to GDP, growing by 4.3% over the year as a whole. Nevertheless, investment by manufacturers has tailed off progressively over the year, as headwinds – both domestic and global – have built up in the sector, an issue we have discussed extensively in previous blogs.
Confidence among manufacturers to invest has taken a hit, now posting a run of three consecutive quarters of negative growth. Our Investment Monitor survey, to be released in April will take a closer look at what the next two years hold for manufacturers’ investment intentions. The decline in investor confidence is not limited to the manufacturing sector however, with business investment in q4 2015 for the whole economy contracting by a worrying 2.9%.
Another year, another current account deficit
A tough year for manufacturing – the UK’s most export-intensive industry – spells bad news for the current account, which posted the largest deficit as a percentage of GDP since records began in 1948. The current account deficit for 2015 stood at £96.2bn or 5.2% of GDP, a widening of £3.7bn from 2014. To put that into perspective the UK’s current account deficit is about the size of the economy of Hungary.
Trade was responsible for the main chunk of the deficit, with the total trade shortfall widening by £2.3bn, as both exports fell (£1.9bn) and imports increased (£0.4bn). This meant that net trade made another negative contribution to GDP growth of -0.5pp in 2015.
The deficit was financed with more borrowing, penciling in another £4.4bn on the debit side of the capital account. Perhaps a victim of its own growth success story, UK investors also made less money from their investments overseas than their counterparts made from their investments in the UK.
Today’s figures show a fast growing economy, powered by the UK consumers’ seemingly unending appetite to spend, as witnessed by the record low savings rate of 3.8%. The UK’s ever-growing current account deficit however, is becoming an increasing cause of concern.
This is especially true for monetary authorities, where the FPC has flagged its growing uneasiness with the possibility that an event – such as a possible UK exit from the EU – could trigger a loss of confidence in Britain’s ability to repay its debts. Surely, a strong manufacturing sector has an important role to play in running down the UK’s mounting tab with the rest of the world.