InvestmentsJul 28 2014

GDP figure is a ‘statistical mirage’

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The UK economy might have finally recovered to pre-crisis levels but the situation is far from normal and challenges remain, economists have warned.

Official figures from the Office for National Statistics (ONS) last week revealed the UK’s GDP is now 0.2 per cent above its pre-crisis peak in the first quarter of 2008, a figure released alongside an 0.8 per cent reading for second-quarter growth.

This came just days after the International Monetary Fund predicted the UK would grow by 3.2 per cent this year – making it the fastest-growing economy in the G7 group of nations.

But economists were keeping their feet on the ground.

“The economy is not back to normal, whatever normal is,” said Peter Dixon, economist at Commerzbank. “There are deep scars that will take many years to heal.”

Ian Kernohan, economist at Royal London Asset Management, said while the growth in GDP was good news, it had been “a long time coming”.

Until now, the UK and Italy were the only remaining G7 countries that hadn’t returned to pre-crisis levels. Germany surpassed its pre-crisis peak in the first quarter of 2011, with the US hitting the same milestone the following quarter.

Digging into the fundamentals, the data tells a “different story”, according to Mr Kernohan.

UK GDP has grown between 0.75-0.8 per cent for each of the past five quarters.

But GDP per capita, which some economists think is a better economic indicator, is still about 5 per cent below pre-crisis levels.

Samuel Tombs, senior UK economist at Capital Economics, said: “For most households the recovery probably still seems to be a statistical mirage.”

This is a major concern for economists, as they fear the UK economy will run out of momentum.

Only two of the four main industrial areas reported growth in the second quarter. The service sector and production rose by 1 per cent and 0.4 per cent, respectively. Meanwhile, construction and agriculture fell by 0.5 per cent and 0.2 per cent.

The fact the economy is being driven by the service sector may not be sustainable if wages remain weak, according to Kathleen Brooks, research director at Forex.com.

Real wages are 10 per cent below their former high in 2010 and have yet to rise, the ONS said.

The next big test for the economy will be how it responds to the expected increase in interest rates.

Mr Dixon does not think it will derail the economy, but it could lower the speed of growth.

Another concern for Mr Kernohan was the Scottish referendum. If the result is not what the market expects, it could pose a “stumbling block” for the UK, he said.

Azad Zangana, European economist at Schroders, said while he expected growth to slow in the second half of the year “the strong momentum that has been built should help broaden out the economic recovery further”.

Furthermore, this is only a first reading of GDP. Economists expect that growth was actually higher, with the pre-recession peak probably surpassed a couple of quarters ago.

Mr Tombs said he was optimistic.

“Our forecast for growth in real GDP remains an above-consensus 3.3 per cent this year and a robust 3 per cent in both 2015 and 2016,” he said.

Bank of England minutes reveal key risks for the UK economy

While the headline rate of economic growth in the UK should be welcomed, it is just that – a headline rate.

When scrutinised, economic data shows services and production were the biggest drivers of the economy, while construction has been dubbed ‘disappointing’ and agriculture also fell.

The service sector is dependent on consumers spending money but there is a concern here.

In the Bank of England’s minutes released last week, Forex.com’s Kathleen Brooks said the Monetary Policy Committee highlighted that its outlook for household spending was weaker for the rest of the year due to real income growth having been slower than expected in the first half of 2014.

“Due to the fact that the UK’s economy is reliant on the service sector, the market may ask how sustainable the expansion is if wages do not pick-up,” she said.

“The Bank of England also expects a ‘modest slowing in output’ in the second half of the year.”

The second reading of the second-quarter UK GDP is expected on August 15 and will no doubt be keenly watched now this headline rate seems to be consigning the crisis to the past.