Here's What It Means ...
Last week we explained how the surge in world trade is causing problems at the docks. This week we explain how the surge in UK growth is much faster than expected and much faster than currently forecast.
Growth in the second quarter was up by 24% compared to prior year. For the year as a whole we expect growth of between 7.5% and 8.5%. Growth could well be over 15% over the two year period. No wonder the economy is showing signs of overheating. We map the trend rate of growth over the ten years prior to the shut down at 2% per annum.
The rate of change is slowing as the economy returns to the trend rate of output. Fears for the current year are over blown. If there was no growth at all from Q2 levels, the comparisons with prior year would still show growth of 7.2% for the year as a whole. Last year was so bad after all.
Manufacturing was up by 28% in the second quarter. Construction was up by 57%. Service sector growth was up by 23%. No wonder, there are over one million vacancies in the economy and wages are rising.
Household spending was up by 20% in the second quarter. Business investment was up by 13%. We expect consumer spending to increase by over 8% this year. With a strong surge in leisure, clothing and tourism sales, forcing the pace.
The furlough scheme ended in September. Most furloughed are expected to return to work. Some "frictional" unemployment may arise before the u rate returns to current levels over the next six months.
Strong domestic demand led to a surge in imports up 20%. No evidence of a strong performance from "Truly Global Britain", exports were up by just 3.5%.
Strong growth continues into the third quarter. The so called GDP "slow down" in July meant that output was up 7.5% year on year. The latest IHS / Market CIPS UK Manufacturing PMI headlined "Manufacturing upturn slows further as supply chain and labour shortages stymie growth". Was it really that bad? The headline index was 57.1 in September with an average of 60.0 in the quarter as a whole. That is actually higher than the second quarter!.
Sterling was hit this week, closing at $1.3562 against the dollar. The Pound was out of favour as traders fear slowing growth will inhibit the capacity of the Bank to raise rates before the end of the year. As if that was on the cards anyway.
The government is acting to deal with the emerging crises. Subsidies to boost CO2 emissions, the army to deliver petrol and pick the daffodils. Visas for EU drivers and chicken pluckers. Imports of turkeys from Poland and France to save Britain's Christmas Dinner. Older drivers to be captured from care homes to return to the cab.
Driving tests to eased and fast tracked. No need to test for reversing skills or the ability to hook up the trailer in the new era. Extended hours for existing drivers, five star hotels for those away overnight. What next? Lorry drivers allowed to use the hard shoulder to help push the deliveries through.
Growth is much faster than expected. It will continue into next year. Shortages and supply constraints will be measured as demand deferred into the later period. Strong growth is producing signs of overheating .. Inflation pushed higher by rising energy and commodity costs ...
Signs of Overheating ...
But commodity prices are easing. Oil Brent crude basis closed at $78.77 this week, the move over $80 dollars proved too much. We expect the trade to continue between $75 and $80 dollars in the current quarter. This compares to an average $42 dollars in the final quarter last year. The inflationary impact will fade by Spring next year.
Gas prices moved off peak, closing at $5.576 from $6.000. Copper closed at $4.20 from $4.70. Aluminum leading the chase higher, was off the top closing at $2,852 from $2,937 in September.
Remember the stress in the lumber region? Prices closed at $620 at the end of the week, compared to $1,670 in July. Freight costs are moving lower, the cost of shipping to the west coast was off 5% from peak in September.
The best cure for rising prices is rising prices. CPI inflation is projected to rise temporarily in the near term, to 4% in Q4. Thereafter, inflation is expected ease back towards target by the end of next year.
Signs of overheating are evident as the economy returns to trend. Rising cost prices. Delivery shortages. Higher wage levels and a high level of vacancies persist. The surge in world trade is causing problems at the docks. Covid disruption in Vietnam still plays havoc with the global supply chain.
Growth in the UK is much faster than expected and currently forecast. Signs of overheating are evident. The underlying trend is that of strong growth, set to continue. It is important to distill the signals from the noise. At The Saturday Economist we always keep you in the picture ... Our September forecast available to Premium Subscribers, members of The Saturday Economist Club ...
That's all for this week. Have a great weekend and a great week ahead,
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