AGAINST widespread signs that the UK’s economic growth momentum is slowing, how encouraging to be sent a demand for an extra £1.7 billion contribution to the EU because of our outperformance. This back-dated demand – by far the largest for any EU country – is due to the recalculation of GDP numbers this summer that included “informal economy” estimates including earnings from drug trafficking and prostitution. The new payments would add about a fifth to the UK’s annual net contribution of £8.6bn.
France, Germany and Denmark, astonishingly, are to get rebates, while Greece has to pay more. The coincidence of this back demand with slowdown signals adds a perverse piquancy. If this is not the economics of Bedlam, it’s hard to know what is.
How worrying are our slowdown signs? And is there need for policy intervention? I list six such signs and score them according to seriousness on a scale of one to ten – one being “panic not” and ten indicating serious cause for worry.
By far the most important is the latest reading on UK GDP. Preliminary figures for the third quarter show the economy grew by 0.7 per cent in the July-September period. The reading was in line with expectations, but services growth was disappointing, with the Office for National Statistics estimating that the sector grew by 0.7 per cent over the quarter, compared with 1.1 per cent in the second.
Industrial production grew 0.5 per cent over the quarter, including a 0.4 per cent increase in manufacturing. Construction expanded by 0.8 per cent with the ONS having factored in an abnormally large 4 per cent surge in September, effectively overturning a substantial decline in August. Hence much of the “slowdown” during the latest quarter appears to be due to curiously soft data for August.
Overall, and after base revisions, this takes the level of GDP to 3.4 per cent above the pre-crisis peak in the first quarter of 2008. Looking at slightly weaker-than-expected household spending and stronger business investment, the recovery, says Investec, “is better balanced than was hoped previously… we do not consider that the recovery is losing serious momentum”.
Worry score: Four
The latest October CBI Industrial Trends Survey showed further easing of manufacturing growth. The sector is still expanding but at a significantly reduced rate compared to the early months of 2014.
The survey details show the CBI’s total orders balance retreated further to a 15-month low of minus 6 per cent in October from minus 4 per cent in September and plus 11 per cent in August. And the balance of manufacturers expecting to increase their output over the next three months retreated markedly to a 2014-low of +18 per cent in October from +27 per cent in September and a peak of +32 per cent in April-June.
Weak Eurozone performance is having an adverse impact on demand for manufactured goods while the strength of sterling has not helped exports.
Nevertheless, there are still some grounds for optimism for manufacturers. Robust consumer confidence, high and rising employment and relatively decent housing market activity should underpin demand for consumer durable goods, although muted earnings growth is a constraining factor.
Worry score: Six
Latest figures show manufacturing output edged up by just 0.1 per cent month-on-month in August, after an increase of 0.3 per cent month-on-month in July, dragged down by a sharp drop in car production. Says Global Insight economist Howard Archer: “The clear overall impression is that manufacturing activity has lost appreciable momentum compared to the early months of 2014. This is disappointing for hopes that UK growth can be broad based on a sustained basis and less dependent on services sector.”
Worry score: Six
Last week also brought news from the British Bankers Association of a slowdown in mortgage approvals for the third month running to a 14-month low in September.
This points to an underlying loss of momentum with buyer interest softening. House prices are expected to rise by around 1 per cent quarter-on-quarter in the fourth quarter of this year and to rise by around 5 per cent next.
Worry score: Three
Poor figures on retail sales added to the woes of the week. Sales volumes dipped 0.3 per cent month-on-month in September, mainly due to sales of autumn and winter clothing being hammered by the mild weather. This is a notable slowdown from growth of 1.5 per cent quarter-on-quarter in the April-June period and fuels concern that overall consumer spending moderated in the third quarter. However, set against this is the fact the high street should enjoy continuing support from high and rising employment, very low consumer price inflation – and rock bottom interest rates.
Worry score: Three
Arguably the most worrying feature of the week was the continuing rise in the budget deficit. Public sector net borrowing (PSNB) excluding public sector banks came to £11.8bn in September, up 15.3 per cent from £10.3bn a year earlier. This takes the PSNB total for the first half of the financial year to £58bn, up 10 per cent from £52.6bn during the corresponding period in 2013-14.
The poor performance reflects weaker-than-expected earnings, which limited income tax receipts, and a large number of people now being in low-paid jobs or self-employed.
The consequentials are that the government will miss its fiscal targets for 2014-15, the annual debt interest bill still keeps going up, cramping government spending and that Chancellor George Osborne will have little scope to announce any significant sweeteners in the Autumn Statement in December.
Worry score: Nine
Overall average score: 5.1
Prospects for 2014 as a whole are for growth of 3.1 per cent this year and 3 per cent next. However, continuing poor performance in the Eurozone and slowing global growth mean the upturn here in the UK may yet slow further in the period ahead.