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Robust first-quarter UK growth supported by boom in business investment

by International Commercial Investment on June 27, 2014

Source: Reuters

British business investment grew at the fastest rate in two years in the first quarter of 2014, supporting robust economic growth and adding to signs that the country’s consumer-led recovery is becoming more sustainable.

The headline economic growth rate for the first quarter was unchanged at 0.8 percent in revised official data on Friday, but the numbers showed that business investment was growing almost twice as fast as previously thought.

Bank of England Governor Mark Carney has said he wants to see the economic expansion becoming more broad-based before interest rates rise – something which many economists think could happen before the end of the year.

“While it is often argued that the economy suffers from a number of structural imbalances, notably excessive consumption and insufficient investment, the recent robustness of business investment should help to alleviate some of these concerns,” said Investec economist Philip Shaw.

Business investment rose by 5.0 percent on the quarter, up from a previous estimate of 2.7 percent and its fastest rate of growth since the first quarter of 2012. Annual growth was revised up to 10.6 percent, also a two-year high.

In all, business investment contributed 0.4 percentage points of the 0.8 percentage points of growth in the economy in the first three months of 2014. Household spending remained the biggest driver, adding 0.5 percentage points, and net trade added 0.3 percentage points.

Falling consumption by non-profit organisations acted as a drag on growth, as did firms’ lower inventories.

Annual GDP growth was revised down slightly to 3.0 percent from 3.1 percent, but remained the strongest since 2007.

Most economists had expected GDP growth figures to be unrevised. A minority had expected a previously reported big upward revision to first-quarter construction data to nudge up the overall growth rate, but a downward revision to services output in Friday’s numbers cancelled this out.

CLOSE TO PRE-CRISIS PEAK

Britain’s economy was still 0.6 percent smaller than before the start of the financial crisis in the first quarter of 2014, but looks set to surpass its pre-crisis peak in the current quarter – albeit years later than the United States and Germany.

Households have also yet to feel the full benefit of the past year of strong economic growth as wage growth remains slow – a gnawing issue for finance minister George Osborne in the run-up to a national election in May 2015.

However, Friday’s figures show that falling inflation is reducing some of the pressure on living standards. Household income after tax and inflation rose by 2.1 percent on the year in the first quarter, its biggest annual rise in 18 months.

A separate survey also released on Friday showed that consumers’ mood is more upbeat, with the long-running GfK NOP consumer sentiment index showing the most buoyant morale in more than nine years.

Households’ ability to save has also stopped falling. They are now saving 4.9 percent of their income, up from 4.8 percent in the final three months of 2013.

Recent data and surveys point to a further strengthening of growth in the second quarter, with the Bank of England forecasting a 3.4 percent expansion this year.

Carney has said the economy is showing more momentum than the central bank had expected, and raised the possibility of an interest rate hike later this year if wage growth picks up and growth does not slow down.

He said on Friday that rates are unlikely to return to levels seen as normal before the financial crisis, because the economy is still vulnerable.

ONS figures showed on Friday that the services sector expanded 0.3 percent on the month in April, after a 0.5 percent rise in March.

The ONS also released first-quarter current account data, which showed that Britain’s deficit with the rest of the world narrowed, although less than expected. At 18.5 billion pounds ($31.46 billion), it is equivalent to 4.4 percent of GDP.

The BoE has said this could prove a problem if the deficit remains near recent record highs. But some economists think it will narrow once Britain’s direct investments in euro zone businesses start to perform better.

“While the pound’s appreciation is likely to prevent the trade deficit from narrowing much soon, the current weakness of investment income looks likely to be partly temporary,” said Samuel Tombs, senior UK economist at Capital Economics.

“Now that the euro zone is out of recession, these earnings should slowly recover.”

International Commercial InvestmentRobust first-quarter UK growth supported by boom in business investment