The First Quarterly Estimate of GDP growth in 2021 was released this week. GDP growth increased by 7.5% compared to prior year. The number was exactly in line with our central forecast. It could well edge higher in subsequent releases.
Construction growth was up by 12.7% in the year, following a 16% setback in 2021. Service sector growth underpinned the recovery, up by 7.4%.
Manufacturing increased by 7% following a 9% downturn in 2020. Output stalled into the second half of the year, as component shortages and supply side difficulties increased. Levels flat lined in the final quarter. There is a problem within the data set. The estimate for manufacturing output will be revised up to 8% or more in later releases, pushing overall GDP growth towards our higher 8% level.
We model GDP(O) in our forecasts for the economy. It is the closest comparison to business modeling one can get. No theoretical overlays besetting the expenditure models.
We also model trade. The revisions to the trade figures reveal an increase in the trade in goods deficit to £156 billion from £139 billion prior year. At 7% of GDP this of itself is problematic. More concerning, the trade in services surplus fell to £127 billion from £132 billion. Even as the tourism deficit fell. The overall trade deficit increased to £29 billion from the £3 billion surplus prior year. At just over 1% of GDP, that's hardly stuff for a balance of payments crisis. Enough to ensure capital flows will cap any real upside for Sterling.
The Benefits of Brexit ...
Reading this week "The Benefits of Brexit" it runs to 105 pages. Particularly inspired by the ability to use the crown stamp on pint glasses, moved to tears by the return of the "iconic blue passports". " This marks "A return to their original appearance of the color first introduced in 1921". David Lloyd George was in office, car tax discs were introduced and the PM moved into Chequers. Excellent!
Good news Jacob Rees-Mogg has been made minister for Brexit opportunities. It will begin with a trawl through the Benefits of Brexit document to begin with. First having completed the search for the holy grail.
Good news, the trade in goods deficit with the EU fell by 20% last year to £70 billion. Not so great really, the deficit with the rest of the world doubled to £80 billion. Truly global Britain offering greater import opportunities around the world.
Markets Excite About Base Rate Hikes ...
Markets are impressed by the growth data. They now assume the Bank of England will be more aggressive in tightening monetary policy this year. In our Friday Forward Guidance, we plug in a base rate forecast 1.25% by the end of the year.
In the US, traders now expect a 50 basis point rise by the Fed in March. Super hawks in the UK now think a similar hike could be possible by the Bank. Base rates would end the year at 2%.. This would seem to be at odds with the statements from Governor Andrew Bailey and Chief Economist Huw Pill. Step by step, steady and sure the mantra. Bond yields failed to hold the 1.50 level at close. Watch our for our Friday Forward Guidance for regular updates.
So what of growth this year?
Watching the NIESR Economic Outlook update yesterday, the NIESR forecast for growth in 2022 is 4.8% compared to the rather gloomy Bank of England estimate of 3.75%. Analysts are concerned about the cost of living squeeze and the rise in taxation and interest rates.
For the moment we still think growth could be around 5% or more this year. The output gap to trend will average 4% through the year. Capacity to be realised. The recovery continues. The Bank will be cautious about killing the bounce back. We will expand on this in greater detail in the weeks to come, no doubt.
"The Benefits of Brexit", "The Leveling Up Agenda", "Sound Bites and Sophistry" Tory back benchers are nervous. Two years to go to the next election. Time is running out as tax hikes and rate are brought in ...
That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets steady, Bond Yields Surge, Crypto Rallies, Tech Stocks Tormented, Sterling Higher, Don't Miss that!
Have a great weekend,
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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