UK Economy on the Rise, But Not There Yet

The UK’s Office for National Statistics recently released their report regarding the second fiscal quarter for the country.  While is did show a fall in GDP, the level was slightly less than one half of one percent.  That’s significantly lower than their original estimate of a 0.7% drop.   In fact, they say that excluding the financial impact of the Queen’s  Diamond Jubilee, GDP may have held flat, or perhaps even shown a very slight gain.

Clearly, this good news is welcome, but perhaps not a reason to celebrate just yet.  Looking back over almost three years, the GDP is relatively flat, and there are still daunting issues like the ppi claims scandal to account for.

Investment

Included in the report was a nugget of information that may be more interesting than a flat GDP.  While there was also a  drop in investment levels, the drop was much less steep than originally anticipated and there is credible evidence that the inflation rates are coming down.  The drop in inflation would likely have a noticible effect for lower and middle-class families.

The Upcoming Third Quarter

With this report behind them, the UK government now moves it’s attention to the third quarter GDP figures, which are due to be released at the end of October.  The hope is that the October figure show an official end tho the current recession, driven by an uptick in production   The effect of the Olympics being held in London should also be visibile in the report, with some hoping for an overall GDP growth of about 1%.

Growth is certainly welcome, but even a 1% rise would leave the economy 3% smaller than it’s 2008 levels.  Additionally, fourth quarter isn’t expected to deliver on the same level as the upcoming 3rd quarter, which will likely leave the full-year figures showing either flat or slightly down.  So, despite the headlines claiming “Sailing Into Recovery”, the UK seems to be “Sailing into Calmer Waters”.

Jobs and Industry

Jobs, on the other hand, are looking up.  Over the same 3 month period that the report covers, overall employment grew by 230,000 jobs.  That, according to the BBC, means that about 700,000 more people are work ing than were at the beginning of 2010, when the UK’s labor market started to recover. This unexpected growth in jobs is not without controversy, with some claiming that the job swell is more about wages, and productivity being down. However,  there is general agreement that growth in jobs is having a positive effect on the economy.

The UK also showed growth in the industrial sector, with July production figures showing the fastest growth rate in decades. The service sector, responsible for more than 75% of the country’s economy, is also experiencing a rebound, showing a 1.1.% uptick for July after a disappointing 1.5% fall in June.

Consumer and the Homefront

Perhaps all of this positive movement is being noticed on the homefront as well.  The figures for the household savings ratio, showing the amount consumers either save, or put towards paying off debts, now sits at 6.7%, up  from 6.0% earlier.  Consumer spending, however, is expected to follow GDP, with only modest growth in 2012, but perhaps rising in 2013 at an estimated 1.3%.  This rise is expected to be driven by a fall in inflation back to a target rate of 2% .  A fall in inflation at that level would easing the pressure on household income.

Good news on consumer confidence as well  The well-known market research company, GfK NOP, released it’s survey that show numbers higher than seen in over a year. The survey shows -28 in September up a point from the -29 level that it’s been holding at for four months.

There’s also an interesting economic side effect that’s been produced by the Payment Protection Insurance (PPI) scandal.  As thousands of consumers in the UK begin receiving their part of the £10 billion earmarked for the claims, this cash is being injected into the economy as either savings, or unexpected consumer spend.  Since the rate of PPI claims is on the rise, it’s difficult to pinpoint the exact effects this phenomenon will have.  There is the danger, of course, that the unprecedented costs could put smaller banks in financial trouble.

Outlook

Overall, the theme seems to be that rather than a recovery, the UK has pulled out of a nosedive and into steady flight.  This “level flight” period is good news, if perhaps not as good as news of real growth. History shows, however, that a flat period should allow for key factors like inflation to start improving, setting the stage for potential growth in 2013.