GDP data published for Q4 2012 afforded a slightly better perspective on the year as a whole.
Growth was disappointing when judged in the context of forecasts made at the start of the year. However, there are trends that are more encouraging.
We have already seen some upwards revisions to official growth estimates. When the ONS published its preliminary GDP ‘guess’, it indicated there was no growth during the year; now it is telling us the economy expanded by 0.3% – not much, but better than nothing. However, the conundrum remains that total employment grew by 2.1% and total hours worked increased 1.9%.
The contrast is even starker when we look at market sector output, which is estimated to have dropped 0.7%, whereas private sector employment jumped 2.8%. Even allowing for some substitution between labour and capital, it is impossible to reconcile these numbers.
Eurozone crisis cost the UK 1% of GDP in 2012
So, it is hard not to conclude that growth for last year will be revised higher – towards 1%. That would still not equate to what might be considered the UK’s trend growth rate, but it would suggest we are crawling back to pre-recession output levels slightly faster.
Having a full set of national accounts for 2012 also allows us to look at contributions to growth within the various categories of demand. This provides interesting insights.
For instance, GDP growth based on aggregate demand was 0.5% in 2012 - the ONS reconciling this to its output growth measure through the use of a ‘statistical adjustment’.
Within this 0.5%, there was a negative contribution to GDP of 0.9% from a deterioration in net trade. This was due largely to a widening trade gap with the European Union (in current price terms, the deficit increased to £41.0bn from £27.6bn in 2011, whereas the trade surplus with non-EU countries improved to £4.9bn from £3.5bn).
So, what is often referred to as total domestic demand (or expenditure) contributed 1.4% to GDP growth (in absolute terms, domestic demand also rose 1.4%). The story gets fractionally better when we strip out inventories, which detracted 0.1% from growth in demand.
We have 1.5% of demand growth left to explain. 0.7% came from household spending (which rose 1.2% during the year); 0.5% came from government spending; and the rest, 0.2%, arose from a 1.5% rise in capital investment (difference due to rounding).
It is not unfair to suggest that a 5% drop in exports of goods (in current price terms) to the EU was in large part responsible for the UK’s problems growth-wise in 2012.
Interestingly, imports from both EU and non-EU countries grew circa 1.5%. If exports to the EU had grown at the same rate as those to non-EU countries (2.1%), I estimate GDP growth would have been some 1% greater than the currently published rate.
Hopefully this analysis paints a fairly realistic picture of what went wrong in 2012. Let’s see what happens with future revisions to growth numbers – eventually we may get close to the 1% I anticipate. But even without this process kicking in, growth would now look more than respectable (1.3%+) were it not for the eurozone crisis.
This, of course, does have some policy implications. The UK authorities should be wary of taking further steps aimed at kick-starting the economy. In demand terms, it has already gained reasonable momentum.
Indeed, all that is likely to happen is that Bank of England and Treasury lending initiatives encourage households to increase debt-to-income levels at a time when we actually have an admirable combination of rising household spending and falling debt. Beware of what you hope for – and also the law of unintended consequences.
Richard Jeffrey is chief investment officer at Cazenove Capital Management
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