Tuesday, June 10, 2014

The industrial production statistics for April show continued healthy expansion in this sector, providing further evidence of continued economic recovery. The data continue to suggest that we are experiencing a spike in growth, however. The prospect for this year is for the rapid pace of growth to continue, but - while continued growth is likely into next year - the rate of growth is likely to slow down quite sharply as we look further ahead. The latest forecast from my neural network model is shown below.

Monday, May 12, 2014

The CBI has revised upwards its forecast of GDP growth for the current year, to 3.0%. This prediction appears reasonable. The confederation now expects growth in 2015 to be 2.7%, and that may be optimistic.

A striking feature of the detailed aspects of the CBI forecast is that - like the EY ITEM Club - it signals a substantial growth in investment during the current year. While total business investment fell by 1% in 2013, the CBI expects it to grow by 8.3% this year and by a further 9.1% next year. With growth and confidence returning, a return to growth in investment would not, of course, be surprising. But the magnitude of these estimates is striking.

The growth we are now experiencing is, of course, welcome. There are, however, aspects of the economy's trajectory that look like bubbles. The housing market is one, and business investment may turn out to be another. Some observers have suggested that the Bank of England should look to raise interest rates sooner rather than later. In light of the considerable spatial disparities that are emerging (with London booming while the recovery is still nascent in peripheral regions), an interest rate hike would be premature in the absence of substantial support to the regions. A reduction of fiscal stimulus to the core region - particularly through housing market support - may, however, be timely.

Friday, May 09, 2014

Industrial production data were published earlier today, an event that always causes me some excitement because it means I can update the forecasts produced by my neural network model. Here they are. They continue to suggest that the current rapid recovery is set to continue, but that the rate of growth will become much more modest over the next two years. The recovery is good news, but we should not get carried away - it looks a lot like blipping, and we may need to get used to slower growth than we are currently experiencing.

Thursday, May 08, 2014

The latest index of house prices produced by Halifax reports an annual rate of growth of 8.7% across the UK. The rate is highest in Greater London, at 15.7%, but several other regions are now experiencing substantial increases in prices. These include the North West (12.7%), Northern Ireland (11.4%) and the West Midlands (9.6%). By way of contrast, price rises in the North have been very modest indeed (1.5%), and in Scotland prices have fallen by 1.4% over the past year. The recovery in the housing market does appear to be spreading at last, but it remains patchy.

Increases in prices in the South East have been modest relative to those in the capital - some 5.3%. Of course, prices are determined by a mix of demand and supply factors, and there is scope to raise supply in London itself.

Doing so is important - with such an uneven economic recovery, lagging regions would be ill-served by a premature hike in interest rates. Ensuring that the housing market is not constrained in areas where supply needs to expand is key to spreading the benefits of recovery to all.

Tuesday, April 29, 2014

The latest data indicate that, in the first quarter of this year, GDP grew by 0.8%. This implies a very healthy 3.1% growth over the course of the last year.

The performance across sectors is uneven, with particularly strong growth in manufacturing and in distribution. Manufacturing grew by 1.3% over the quarter, and by 3.5% over the year. This is clearly good news in that it addresses concerns that the UK had, before the recession, become over-reliant on services. Strong growth in manufacturing helps raises incomes, but with developments in technology making this sector increasingly capital-intensive, the progress of the sector may not be reflected in such strong employment growth. The extent to which this concern is well founded will require monitoring as the recovery progresses. The strength of recovery in the distribution sector (which includes, amongst other things, retail and wholesale industries) reinforces the extent to which this has, at least until very recently, been a recovery led by consumer spending. Recent forecasts from, amongst others, the EY ITEM group, suggest that investment is set to rise significantly this year. If it does - and there is still surely a question mark surrounding their precise forecasts - then that will strengthen the underpinnings of a recovery that has, till now, been built on rather fragile foundations.

Other metrics of the recovery, including house price changes, suggest that experience across the regions is very patchy. Data on output growth by region are produced with long lags and are not considered to be terribly reliable, but the evidence that this recovery is spatially uneven suggests that the very encouraging aggregate statistics may serve to conceal what is, in reality, a much more nuanced picture. The data on underemployment released by the Work Foundation likewise suggest that the impact of output growth on the labour market is very different to – and less comforting than - what we have experienced in the past.

Nevertheless these most recent data offer much hope that the economy is indeed recovering.

Wednesday, April 16, 2014

This morning's release of the latest labour market statistics provides a dose of good news all around. The unemployment rate has fallen below 7%, and earnings are rising at 1.9% over the year. The rate of earnings growth is particularly pronounced in manufacturing, where it is 2.8%, possibly reflecting the onset of skills shortages. In finance and business services, meanwhile, earnings have grown at only 0.3%, possibly reflecting in part the decline of bonuses.

The detailed data still paint a more nuanced picture. Take productivity as an example. Output per job rose by 1.3% over the year to quarter 4 in 2013. This is a marked improvement on the 0.5% achieved the previous quarter, and certainly better than the declining productivity that was still being experienced in the first quarter of last year. However, improvement in output per hour has been considerably less impressive. This was still falling as recently as the third quarter of last year. The final quarter figures are a little more encouraging (suggesting 0.7% growth on a year earlier), but remain fairly muted.

Another aspect of the labour market which has been interesting in recent years is the dramatic rise of self-employment. Between December-February and the previous quarter, self-employment rose by some 146000, and the total now stands at more than 4.5 million. The latest figure represents a 7.1% change over the year. Self-employed workers now comprise 14.8% of the workforce. We know that much of the increase in self-employment has taken place amongst older demographic groups, and it remains unclear how much of the rise is due to entrepreneurial development as opposed to people running out of labour market options. Clearly more research is needed on this.

In sum, therefore, the statistics are encouraging. But the labour market is clearly changing rapidly, and an exclusive focus on the headline metrics risks being more than usually misleading.

Tuesday, April 15, 2014

The rate of growth of consumer prices in the UK has again slowed - to an annual rate of 1.6% in March. This has raised hopes that real wages, which have fallen and then stagnated over recent years, may finally have turned a corner. Earnings data become available tomorrow, but - since they are produced with a longer lag than the price data - will cover the three months to February. But clearly, if real wages do turn out to be on the rise, a major component of any explanation will be the slow increase in prices.

The low rate of price inflation thus merits some consideration. Since August of last year, the value of the pound relative to other major currencies has increased. Against the euro, it has risen over 5%, while against the US dollar it has risen by well over 20%. This has led to cheaper imports, putting downward pressure on price inflation. The fundamental basis for this appreciation is unclear - while confidence in the economy's ability to deliver growth has clearly increased, the current account balance has deteriorated sharply over the last two years.

If nominal earnings do indeed soon rise faster than prices, then that would suggest a turnaround in productivity - and that would of course be welcome. But the growth rate of productivity looks set to remain slow, well shy of its trend, for some time to come. The supply side issues underpinning low productivity still need to be addressed urgently. The labour market is still some way off returning to normal.