The release of the second estimate of GDP in the 3rd quarter brought few surprises. Growth was confirmed at 1.7% year on year following growth of 1.4% in the second quarter.
Service sector output continues to drive the recovery with particularly strong growth in the leisure sector. Construction output increased by 4% with manufacturing growth relatively flat in the latest three month period.
In current value spending terms the economy grew by 3.8% as incomes of employees and businesses continued to show strong growth. Expenditure within the economy was driven by household spending up by 2.4% in real terms plus a build up in inventories.
Government spending was up by just 1.1%, investment fell slightly and the trade figures continue to disappoint. Exports fell and imports increased as UK domestic demand exceeded the rate of growth in Europe and the USA.
So what does this all mean? We expect strong growth to continue into the final quarter with overall growth around 2.4% bringing the year on year growth rate to 1.3%. We still think the economy is on track for growth of around 2.4% in 2014. Check out our latest publication “Modeling GDP(O)”. We release the forecasts of the ten key sectors and sub sectors in the UK economy over the next two years.
Should we too worried by the lack of investment? Not really. At this stage in the cycle we would expect investment to be weak. Plant and machinery accounts for just 20%, of total investment. Spending on commercial real estate will continue to be subdued for some time yet as the overhang continues. We expect strong growth in productive capacity in the final quarter of the year and into next year. The four year capital stock model is down by just 15% from the peaks of 2008. No need to worry about “lost output” for the years ahead, trend rate of growth can be recovered and maintained. Investment will receive a significant boost in the final three months of the year and into next. Our UK investment model will be released next week.
Prospects for the UK look good, but without a strong recovery in Europe and sustained growth in the USA, the trade figures will continue to be a net drain on overall performance. This should be no surprise to regular readers! The trade deficit in goods will increase largely (but not entirely) offset by a strong performance in service sector exports.
Is this the wrong kind of growth?
The UK economy has been dependent on domestic consumption since our records began. Growth based on investment and exports a policy dreamboat. There will be no rebalancing of the economy just more of the same to come.
Bank moves on mortage lending
Which is perhaps why the Bank of England modified the terms of FLS away from mortgage lending towards business loans. The old lady is no fan of the help to buy votes scheme. The Governor has made it clear the Bank of England will move to prevent another housing boom. The policy response includes several options this time around including post code selective spread and capital provisions to curb excessive movements in house prices if necessary.
What happened to sterling?
The pound closed up at £1.6360 from £1.6215. Against the Euro, Sterling closed at €1.2045 from €1.1966. The dollar moved down up the yen closing at ¥102.4 from ¥101.3 and closing at 1.3582 from 1.3555 against the Euro. Sterling is on a rally which has led to a break out above £1.60, pushing through resistance at €1.20 euro basis.
Oil Price Brent Crude closed at $109.65 from $111.05. The average price in November last year was almost $110. The average price just $106 this year.
Markets, US pushed higher - The Dow closed at 16,086 up from 16,065. The FTSE closed at 6,650 from 6,674. 7,000 FTSE still the call before Christmas.
UK Ten year gilt yields closed at 2.78 from 2.79 US Treasury yields closed at 2.75 from 2.74. Yields will test the 3% level over the coming months but this may await the New Year.
Gold closed at $1,252 from $1,244.
That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow and watch out for news of our Monthly Markets updates coming in the New Year.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.