RaboResearch - Economic Research

United Kingdom: consumers benefiting from rising asset prices

Economic Update

  • The recent batch of positive data suggest that the recovery is gaining traction. Thus, the risks to our growth forecast are tilted to the upside.
  • UK’s GDP grew 0.6% q-o-q in Q2, which was double Q1’s 0.3% increase.
  • After rising in 13Q1, unemployment fell by 56,000 in the three months to May.
  • Households’ are benefiting from rising asset prices and looser credit conditions.
  • The strengthening job market, the expected improvement in real wage growth and receding uncertainty has also helped to push up consumer confidence significantly.
  • Increased optimism is being reflected in the business surveys as well. 

Year-on-year change in %

Source: Reuters EcoWin, Rabobank

A very robust Q2 GDP growth

The weather is great, British sportsmen are performing very well (Cricket, Wimbledon and Tour de France), the Royal baby is born and, to top it all, economic data continues to surprise on the upside. The 0.6% quarterly rise of Q2 GDP was double Q1's 0.3% increase and in line with the picture painted by the leading indicators. The breakdown was also encouraging as all sectors contributed to growth. But we must not get carried away since the latest GDP revisions show that the UK has even further to go in terms of regaining pre-crisis levels of output than previously thought. Based on current estimates, output in Q2 was 3.3% below its peak in 2008 while it would have been 2% without any revisions.

Contribution to quarterly growth

Source: ONS

The labour market seems to be back on track

After rising in Q1, unemployment (ILO definition) fell by 56,000 in the three months to May. We do note though that this was mostly thanks to the contraction of the labour force (40,000). The timelier claimant count measure of unemployment fell by 21,200 in June and the decline in jobless claims in May was revised from -8,600 to -16,200. Meanwhile, there are no signs of improvement in earnings growth. The annual growth rate of average weekly earnings (excl. bonuses) dropped from 1.4% in April to 1.0% in May. At least, the good news is that inflation (2.9% in June) is expected to fall in 13H2 amid favourable base-effects, thereby alleviating the big squeeze on households' incomes.

Contribution of labour force and employment to change in unemployment

Source: Reuters EcoWin

Consumers benefiting from rising asset prices

The UK economy may benefit from a positive wealth effect. The FTSE100 is up by almost 13% since the beginning of the year and house prices are up by 8.6% since the trough in April 2009 (Halifax data). The housing market leading indicators such as the RICS survey in June and drop in mortgage rates suggest that the recovery is not about to run out of steam. In specific, the Q2 Credit Conditions Survey indicated a further significant easing in household credit conditions for the fourth quarter in a row. This, on top of the strengthening job market, the expected improvement in real wage growth and receding uncertainty suggests that British households are finally experiencing some tailwinds.

Net % balance of lenders expecting change in credit conditions

Source: Bank of England

…which is boosting confidence…

The better-than-expected economic data combined with other positive news recently has boosted consumer confidence. The GfK consumer confidence figure rose from -21 to -16. The breakdown reveals that the general economic situation and personal financial situation over the next 12 months have improved. The only disappointment came from a slight decline in the level of major purchases. The European Commission (EC) consumer confidence indicator also increased markedly in July with most sub-indices improving. That said, we were surprised to see that unemployment expectations dropped from 29.8 in May to 19 in July even though the labour market is on the mend.

Consumer confidence

Source: Reuters EcoWin

Business sentiment also on the rise

UK businesses are also being increasingly optimistic about the future. The services PMI increased from 56.9 to 60.2, the seventh consecutive monthly rise. On the face of it, the balance points to the economy growing at a quarterly rate of around 1.3%. Admittedly, the services PMI has recently been painting a rosier picture of the economy than the official data. Even so, July’s manufacturing PMI (54.6) rising to a 28 month high and the construction PMI (57.0) surging to its highest level in over three years suggest that the UK recovery is becoming entrenched. While it is a bit early to revise the outlook, we must admit that there are clear upside risks to our growth forecast for 2013/14.

Purchasing Managers'Indices vs GDP growth

Source: Reuters EcoWin


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