First estimate of GDP growth in fourth-quarter 2013 heads UK economic releases for the week beginning 27 January

GDP growth in fourth-quarter 2013

Tuesday’s preliminary estimate of GDP in the fourth quarter of 2013 will be based solely on the output side of the economy.

Our best bet is that GDP growth edged back to a still very decent 0.7% quarter on quarter (q/q) in the fourth quarter of 2013, after accelerating to 0.8% q/q in both the third and second quarters from 0.5% q/q in the first quarter. This would still result in year-on-year GDP growth accelerating to 2.8% in the fourth quarter of 2013 from 1.9% in the third quarter, thereby giving the best annual growth rate since the first quarter of 2008. It would also result in overall GDP growth in 2013 coming in at 1.9%, which would be the best performance since 2007 and up from growth of just 0.3% in 2012. Even so, GDP in the fourth quarter of 2013 would still be 1.3% below the peak level seen in the first quarter of 2008.

Although it only accounts for 6.3% of total output, it looks like a markedly weakened performance in the construction sector compared with the limited GDP growth in the fourth quarter of 2013. Construction output rose 2.6% q/q in the third quarter, thereby contributing 0.16 percentage point to q/q GDP growth, but latest hard data surprisingly showed construction output plunged 4.0% month on month (m/m) in November, which was the sharpest drop since June 2012. This followed a rise of 2.0% m/m in October. Without revisions to the back data, construction output would needed to have spiked 2.8% m/m in December to have even been flat q/q in the fourth quarter. This would have been a mightily difficult feat to accomplish, even without the bad weather during the month. One proviso to this is construction output can be highly volatile from month to month and the data can be significantly revised. It is also notable survey evidence for construction output in the fourth quarter was healthy.

Meanwhile, industrial production probably essentially matched the third-quarter growth rate in the fourth quarter. Latest hard data show industrial production was only flat m/m in November after growing 0.2% in October. Industrial production therefore needed to have grown by 0.4% m/m in December for fourth-quarter expansion to have matched the 0.6% q/q rate achieved in the third quarter. On the positive side, robust survey evidence for December suggests this may well have happened.

We also suspect output in the dominant services expanded at a similar rate in the fourth quarter to the 0.8% q/q rate achieved in the third quarter. Latest hard data show services output rose 0.1% m/m in October, which was down from increases of 0.2% in September and 0.4% in August. However, survey evidence for the services sector was largely robust for the fourth quarter, so there seems every chance there was ongoing healthy expansion.

So with services output and industrial production likely expanding at similar rates in the fourth quarter to that achieved in the third quarter, we suspect GDP growth slowed modestly to 0.7% q/q from 0.8% q/q in the third quarter because of weakened construction output.

Although the preliminary estimate of GDP in the fourth quarter is based on the output side of the economy, it is worth noting consumer spending likely grew at a significantly slower rate in the fourth quarter after rising by a robust 0.8% q/q in the third quarter. This is significant as consumer spending accounts for some 65% of GDP on the expenditure side. While retail sales volumes jumped 2.6% m/m in December, this followed lackluster performances in both November and October. Consequently, growth in retail sales volumes was limited to 0.4% q/q in the fourth quarter of 2013, which was only a quarter of the 1.6% q/q expansion seen in the third quarter. Even if consumer spending on services was stronger in the fourth quarter, it will highly likely not have prevented an overall slowdown in consumer spending growth.

On the positive side, it is likely business investment improved further in the fourth quarter, after returning to growth in the third quarter. Meanwhile, net trade certainly will not have been the major drag on GDP growth that it was in the third quarter, although it may be too much to hope that it made a positive contribution. While the trade deficit narrowed in November and October from September’s five-and-a-half-year high, it was still sizeable.

GDP outlook

We expect the economy to expand 2.7% in 2014 with q/q growth centered around 0.6–0.7% through the year. This forecast is above the 2.4% growth rate projected in December by the Office for Budget Responsibility for the chancellor’s Autumn Statement, but just below the Bank of England’s forecast in the November Quarterly Report for growth around 2.9%. Consumer spending should be decent, supported by improving purchasing power as 2014 progresses and higher employment, while business investment should increasingly contribute to growth. Exports should benefit from improving global growth in 2014 although net trade’s contribution will still be limited by solid domestic demand sucking in imports. A strong pound could also have some limiting impact on exports.

Markedly rising employment is supportive to consumer spending, as is the strongly improving housing market. However, the squeeze on consumers’ purchasing power has so far only eased modestly as while consumer price inflation has come down, earnings growth is yet to see any meaningful pickup. Specifically, consumer price inflation has fallen to a four-year low of 2.0% in December from 2.9% in June. However, annual earnings growth dipped to 0.7% in November after rising to 1.1% in October from 0.6% in August.

Consumers’ purchasing power should improve over the coming months, although it will likely be the second half of 2014 before earnings growth finally moves above inflation. Earnings growth seems likely to pick up as 2014 progresses as the improved economic environment, rising employment, and increased optimism in the outlook cause a growing number of employers to lift pay. Even so, the increase in pay will probably be gradual as companies will still be keen to contain their costs in a still-competitive environment while still appreciable labor market slack limits workers’ ability to push for higher pay. Meanwhile, consumer price inflation is likely to hover around 2.0%. Consequently, we doubt earnings will move above consumer price inflation before mid-2014. Purchasing power should gradually improve thereafter.

For sustainable, decent growth to occur it is vitally important growth becomes more balanced. Business investment should increasingly kick in and contribute to growth during 2014 as more confident companies respond to the sustained improvement in economic activity. Companies’ generally healthy cash positions, improving profitability, and likely easing credit conditions should support stronger business investment. Meanwhile, the robust housing market should underpin residential investment. Government investment and spending will continue to be limited by the ongoing fiscal stance, although there should be some increase in infrastructure investment going forward.

Meanwhile, it remains hard to see net trade making much of a contribution to UK growth in 2014. Stronger global growth should help UK exports, but the upside for exports may well be limited by only gradually improving domestic demand in the Eurozone. A stronger pound could also hinder UK exporters given that it currently remains very near to the five-year trade-weighted index high seen in December, and will likely be relatively well supported during 2014. Meanwhile, imports are likely to be buoyed by relatively healthy UK domestic demand.

Other key economic releases

Mortgage approvals in November and house prices in December

We expect forthcoming data from the Bank of England (on mortgage approvals in December) and the Nationwide lender (on house prices in January) to indicate that the housing market maintained marked upward momentum around the turn of the year. This will likely fuel concern that a new housing bubble could really develop in 2014, especially as the strength in house prices is becoming widespread. House price rises in London are already of significant concern; and while it is premature to talk of a housing market bubble anywhere else in the country, latest data and surveys generally indicate that house prices are now increasing across the country and in some cases starting to pick up appreciably.

Specifically, we expect the Bank of England to report on Thursday that mortgage approvals for house purchases climbed to a 72-month high of 72,500 in December from 70,758 in November, 68,029 in October, 67,118 in September and a 2013-low of 52,054 in February. This would cause mortgage approvals to be up 29.7% year-on-year from 55,501 in December 2012. Even so, despite rising for a 10th successive month to be at a 71-month high, mortgage approvals at 72,000 in December would still be below their long-term average level. Specifically, mortgage approvals have averaged 84,511 a month since 1993. They had averaged as high as 119,038 a month during 2006 and 104,206 during 2007.

The British Bankers Association has already released data showing a further increase in mortgage approvals data for December. The BBA reported that mortgage approvals for house purchases climbed to a more than six-year high of 46,521 in December from 45,394 in November, 43,490 in October and a low of 30,900 in February. This was the highest level since September 2007 and up 42.1% year-on-year from 32,733 in December 2012. At 46,521 in December, mortgage approvals were getting back towards their monthly average of 53,871 during 1997-2013. There was a peak of 78,158 in November 2006

Markedly improving housing market activity is underpinning a recent substantial firming in house prices and we forecast data to be released on Friday by the Nationwide lender to show that house prices rose by 0.7% m/m in January following an increase of 1.4% in December (which was the strongest m/m increase since August 2009). House prices on the Nationwide’s measure rose by at least 0.7% m/m through the second half of 2013. An increase of 0.7% m/m in January would cause house prices to be up by 8.5% year-on-year, which would be the highest annual increase since June 2010. This would be up from year-on-year increases of 8.4% in December, 6.5% in November and 0.0% in January 2013. According to non-seasonally adjusted data, the average house price on the Nationwide measure was GBP175,826 in December, which was the highest level since April 2008. It is worth noting given all the debate of whether a house prices bubble is developing that on the Nationwide’s measure house prices in December were still 5.5% below the record high of GBP186,044 seen in October 2007.

Latest data and surveys consistently show markedly rising buyer interest and strengthening housing market activity so house prices look set to see further strong increases over the coming months despite the Bank of England ending Funding for Lending support for mortgage lending from the start of January. It is evident that housing market activity is being supported by substantially improved consumer confidence overall, markedly rising employment and extended low mortgage interest rates and has been fuelled by the Funding for Lending Scheme and the Help to Buy initiative (the second stage of Help to Buy, the mortgage guarantee scheme, came into effect in October).

Meanwhile, limited supply of houses is a factor pushing up prices in an increasing number of areas and not just in London and parts of the South East. Indeed, the latest survey by the Royal Institution of Chartered Surveyors (RICS) indicated that the headline sales-to-stock ratio rose to 35.2% in December, the third consecutive month above its long run average of 32% and the highest reading since September 2007. However, the Halifax have reported that an increasing amount of people think it is a good time to sell their house.

We expect house prices to increase by around 8% in 2014 with gains across the country. Furthermore, there is a genuine possibility that this could prove to be a conservative forecast as there remains a very real danger that house prices could really take off over the coming months, especially if already significantly improving housing market activity and rising buyer interest is lifted appreciably further by the “Help to Buy” mortgage guarantee scheme which was launched in October.

Consequently, the decision of the Bank of England and the Treasury to end Funding for Lending support for lending to households from January looks a highly sensible decision, although in itself it is unlikely to act as a major brake on housing market activity. We believe that it is very important that the Bank of England has indicated that it is prepared to take further action to rein in the housing market if prices continue to rise markedly amid ongoing strengthening activity. Indeed, Bank of England Governor Mark Carney has indicated this week that there are some concerns within the Bank of England over the pace at which the housing market is picking up. He has also commented recently that “there is a history of things shifting in the UK and the housing market from stall speed to warp speed with underwriting standards slipping. So we want to avoid that.” In addition, Bank of England deputy governor Andrew Bailey has recently stated that the Bank of England is closely watching the housing market while Business Secretary Vince Cable has indicated his belief that the government should reconsider its Help to Buy scheme as it was conceived under very different circumstances.

Consumer credit in December

The Bank of England is expected to report on Thursday that net unsecured consumer credit eased back to GBP500 million in December after rising to GBP627 million in November from a four-month low of GBP452 million in October. This is down from a 2013-high of GBP1.1 billion in September. Data already out from the British Bankers Association indicates that consumers were more careful in their borrowing in December.

While reduced consumer borrowing in December would ease some concerns that consumers are building up their debt, it would also fuel uncertainty as to how robust consumer spending will be over the coming months given that purchasing power is currently still being squeezed by inflation running clearly above earnings growth. It is also notable that consumer confidence edged back for a third month running in December, although these small dips were from a near six-year high in September. While latest hard data show that retail sales spiked up 2.6% year-on-year in December, overall retail sales growth was limited to 0.4% q/q in the fourth quarter of 2013, which was only a quarter of the 1.6% q/q rate seen in the third quarter.

It is very possible that consumers will take a breather over the coming weeks after finally splashing out for Christmas and in the clearance sales. Having said that, markedly rising employment is supportive to consumer spending, as is the strongly improving housing market.

Consumer confidence

We expect consumer confidence (out overnight Thursday/Friday) to have edged back up in January after trending gently down through the fourth quarter of 2013 from a near six-year high in September. Specifically, we forecast the GfK/NOP consumer confidence index to have edged back up to -12% in January after dipping to -13% in December from -12% in November, -11% in October and a 70-month high of -10% in September. The consumer confidence index had previously risen strongly to the September peak from -13 in August, -16 in July, -21 in June, and -27 in April 2013.

The main driving force behind the strong improvement in confidence between May and September was consumers upgrading their assessment of the economy's recent performance and becoming more optimistic about the outlook. However, while consumers’ view of the economy’s performance over the past 12 months essentially stabilized in October-December at its recent markedly higher level, there has been a clear overall easing back in their expectations for the economic outlook for the next 12 months since September (although this sub-index was still 27 points higher in December than it had been a year earlier).

Recent lower inflation including major discounting in the post-Christmas clearance sales, a strongly improving labor market and extended improved economic activity may well have caused consumer confidence to end its recent modest dip. However, the upside may have been limited by ongoing significant concerns about squeezed purchasing power given that earnings growth remains weak.

By Howard Archer