GDP UPDATE
July 2013
McIlvaine Company
TABLE OF CONTENTS
(1.) Barclays has cut its second-quarter GDP trading estimate to 1.0% from 1.6% after the trade deficit widened in May. In a note to clients, Barclays blamed the larger-than-expected increase in imports in the month for the downward revision. A higher trade deficit is a drag on GDP. Earlier, the Commerce Department reported that the May trade gap rose 12% to $45 billion in May, well above economists' forecast of a deficit of $40.3 billion.
(2.) The U.S. economy suddenly looks weaker, after the government revised its data for the first quarter. Gross domestic product -- the broadest measure of economic activity -- rose at a mere 1.8% annual pace between January and March, marking a sharp downward revision from the 2.4% pace reported by the Commerce Department last month.
The government revises its GDP figures several times, but economists weren't expecting such a dramatic change from the third estimate.
"This was certainly unexpected and, I believe, rare," said Jennifer Lee, senior economist with BMO Capital Markets, referring to the revision.
The weaker figures came primarily from revisions to consumer spending, exports and commercial real estate.
Consumer spending, which alone accounts for roughly two-thirds of the GDP measure, rose at a 2.6% annualized pace in the first quarter, according to the revisions. That's down from the 3.4% pace the Commerce Department estimated in its prior report.
Meanwhile, spending on nonresidential buildings shrunk 8.3% in the first quarter, offsetting some of the economic boost from the ongoing housing recovery.
U.S. exports to other countries contracted, and government spending cuts continued to be the largest drag on economic growth.
Economists have already turned their attention to studying how the economy fared in the spring. Their estimates point to more of the same slow growth.
Goldman Sachs (GS, Fortune 500), Barclays (BCS), Nomura (NMR) and Macroeconomic Advisers economists estimate that the economy grew at a 1.5% to 1.9% annual pace between April and June.
The numbers could change again next month. The Commerce Department is planning a complete overhaul of its GDP data, going back to 1929. That process, which is known as the "comprehensive revision," only happens every four to six years.
In 2012, Belize’s robust economic growth was praised throughout the region as GDP grew by 6%. Projections for 2013 were more conservative, at an expected 2 to 2.5% - but there was still hope that the 2012 momentum would carry over. Well it hasn’t – and the only growth to report from the first quarter is negative growth!
Figures released today by the Statistical Institute of Belize show that the economy contracted by point-five per cent (.5%) in the first quarter of 2013. That’s sharply down from the first three months of 2012 when growth clocked in at 6.1%.
So, what went wrong? Well, there were sharp downturns in citrus, crude petroleum and electricity production and a modest contraction in bananas. Citrus was the hardest hit with fruit and juice production declining by about 35% and 40%, respectively, the lowest in 18 years. According to the Statistical Institute some of this is owing to heavy rains in the southern districts.
And while citrus had its lowest first quarter out-turn in two decades, Sugar had its best year since the early 90’s, growing by 4%.
And while rains affected the south, electricity generation declined considerably because of low rainfall at the Chalillo and Mollejon hydroelectric plants.
Crude oil production, which is Belize’s biggest export earner fell for the third straight year as the Spanish Lookout Oil Field nears depletion.
On the upside, the service industry led by tourism, expanded by 5.3%.
Overall the first quarter contraction is bad news for Belize because the first quarter – based on tourism numbers is usually the strongest – so this does not bode well for the year-end figures.
The Chilean economy this year will grow at a slower pace than forecasted in March, as local activity and demand decelerated more than anticipated in the first quarter of 2013, according to the central bank.
In its second Monetary Policy Report for the year, the central bank downwardly revised its gross domestic product growth outlook to a range between 4% and 5%, from a range of between 4.5% and 5.5% it had estimated in its first report in March.
The deceleration seen between January and March continued in April to June, although at a slower pace than in the first quarter, the bank said.
In the first quarter, local activity slowed down partly on a decrease in investments in energy and mining projects.
Chile is the world's largest copper producer and the metal accounts for about 60% of the country's exports, 15% of GDP and 20% of fiscal revenue.
The bank also downwardly reviewed its 2013 copper price estimate to an average $3.25 a pound, from $3.50 in the previous report. Lower copper prices will widen the current account deficit to 4.7% of GDP, the bank said.
Regarding inflation, the monetary authority estimated consumer price index will increase 2.6% in 2013, within the bank's tolerance range of plus or minus one percentage point around its 3% target.
A decrease in fuel prices and the peso's appreciation versus the dollar in January to April contributed to an inflation figure below the bank's tolerance range. The bank anticipated inflation will end close to its target as in the recent month the peso has lost value versus the greenback, in line with other emerging-market currencies, on concerns that the U.S. Federal Reserve will end its economic stimulus program sooner than expected.
"Our economy is on a strong footing to face this transition...We're ready to make adjustments to our monetary policy if needed," central bank Governor Rodrigo Vergara said in prepared remarks to the Senate Finance Committee.
In emerging markets, the Fed's comments about its program triggered capital flights, lower asset prices and a depreciation of local currencies as well as lower commodities prices.
The bank also said it expects lower growth in China, Chile's main trading partner and largest copper customer.
A deceleration in China would contribute to lower copper prices, the bank said.
So far this year, the bank has left the benchmark overnight lending rate at 5%, considered neutral for the Chilean economy. In its May and June meeting, the monetary authority considered reducing the rate by 25 basis points but partly stayed pat as private consumption remained strong. The bank has maintained the interest at 5% since January 2012.
A Chinese think tank has opined economic growth will be steady in the second half of the year, with a GDP growth rate of 7.6 percent.
In a report by the State Information Center, it cited the government's "stabilizing economic growth" measures will have a positive effect.
However, the report cited risks of bad local government loans, slowing growth of central government revenue, diminished export competitiveness and industrial capacity are growing.
Chinese markets are recovering from a crunch in the domestic financial markets that saw short-term money rates spike to record highs and stock markets swoon in recent weeks.
An analyst in China has suggested the Chinese government will map out changes to policy in July to December, with reform as a key economic agenda fuel present and future growth.
During this process, new investment opportunities will be scheduled providing momentum for economic recovery, a series of reforms concerning resource product prices, land expropriation, medical and health care system, private investment, and a VAT scheme.
Among the measures, optimizing the investment structure and avoid deterioration of excess capacity, advance manufacturing, and service industries to be more open to private capital.
Malaysian Institute of Economic Research (MIER) is set to revise its initial economic growth forecast for 2013 at a mid-year review on slumping exports and slower private consumption.
The think tank had in January projected that the Malaysian economy will expand 5.6% this year.
"Our export performance in recent months is a major concern,'' executive director Dr Zakariah Abdul Rashid said.
"It would be very difficult for Malaysia to achieve the targeted growth this year if exports continue to shrink,'' he told reporters.
Zakariah said the growth target would probably be lowered soon after reviewing the country's performance in the first half of the year.
He also said that the latest round of lending curbs by Bank Negara Malaysia would also have a "negative impact" on private consumption.
Exports in May slumped 5.8% from a year ago, worst than what most economists had expected as Malaysian exporters continued to struggle against weak global demand and softer commodity prices.
CIMB Research predicts that exports growth to remain "soft" until August this year on weak external factors and seasonal slowdown during Ramadan fasting month.
In his presentation, Zakariah noted that one factor that is holding back exports is the lack of "domestic value added" contents to products that are shipped from Malaysia.
"Malaysia is still poor in generating value,'' he said when comparing the export value of products shipped from countries such as Japan, South Korea and Poland.
Manufactured goods accounted for about 75% of Malaysia's total exports. This underlines the importance of the manufacturing sector to our economic growth.
One analysis suggests that Malaysia is still trapped in what experts called a "factory economy" situation. To move up the ladder to what is known as "headquarters economy,'' Malaysian firms need to develop ownership advantages such as indigenous technology that can be exported.
So what is hindering Malaysia's quest to become an exporter of innovation?
One expert pointed out the so called "flexible policy" on foreign workers, especially in the manufacturing sector as one of the stumbling blocks in moving up the value chain.
"This peculiar feature enables firms to hire and fire workers to manage volatility to maintain local equilibrium and also make manufacturers more reluctant to take the risky innovation route,'' said Professor Dr Tham Siew Yean, the deputy director at Institute of Malaysian and International Studies.
She said that Malaysia cannot afford to lose out in the manufacturing industry and called for the deepening industrialization of the sector.
Tham highlighted the need to attract "the right type" of foreign direct investment into the sector and promote the development of human capital to encourage productivity growth in the manufacturing, as well as in the service sector.
"Whatever ails the manufacturing sector is also a constraint for the service sector,'' she said.
The International Monetary Fund (IMF) said it expects Philippine GDP to grow 7% this year thanks to strong domestic consumption.
"The economic growth momentum here (Philippines) is higher. The region's growth has been softer than expected, but the Philippines is an outlier," IMF resident representative Shanaka Peiris said during a briefing.
Peiris said strong consumption, driven by billions in remittances, as well as an acceleration in government spending could fuel local growth.
The Philippine economy expanded 7.8% in the first quarter.
The National Statistics Committee of Belarus has carried out the second evaluation of Belarus’ gross domestic product in the first quarter of 2013. The evaluation has revealed that GDP made up Br129 trillion in current prices, up by 3.8% in comparable prices over the first quarter of 2012, BelTA learned from the National Statistics Committee.
The first evaluation estimated Belarus’ GDP at Br123.3 trillion, up by 3.5% compared to January-March 2012. The previous evaluation was tentative, because it was based on the data obtained via statistical surveys, expert analysis and indirect calculations, the National Statistics Committee informed.
The second evaluation of Belarus’ gross domestic product in the first quarter of 2013 was conducted using three methods: the production method, the method based on the sources of income and the method based on the use of income.
Mr. Alfred Ekow Gyan, Deputy Western Regional Minister, has said there is a need to further develop tourism to enable the industry to increase its contribution to the Gross Domestic Product (GDP).
Mr. Gyan said Ghana could follow the example of other countries that have developed tourism in order to increase their GDP.
He said Ghana has numerous attractive tourist sites and has the potential to develop its tourism industry.
Mr. Gyan called on players in the industry to design attractive strategies and vigorous promotion activities to inculcate into the people the desire to visit tourist sites in order to derive revenue.
He said land administration in the country is one of the impediments to prospective investors in the industry and land owners and managers are “caught in the web of long land litigations on the rightful ownership of lands”.
It may be opportune to undertake institutional reforms to address non-transparency and other challenges that frustrate speedy land registration and delivery of titles, he said.
Launching the awards, Awulae Annor Adjaye III, Omanhene of Western Nzema Traditional Area, said the concept of the community police must be revisited to support the local tourism industry.
Deputy Commissioner of Police (DCOP) Kofi Boakye, the Regional Police Commander, urged players in the industry to abide by the laws of the country.
He said the police provide the necessary security for the development of the industry in collaboration with stakeholders.
As crisis-hit Italy struggles to stimulate growth, new figures released recently showed that the country's economy was in decline.
According to the Italian central bank, national public debt reached 127% of gross domestic product (GDP) last year, up from 120.8% in 2011, placing the country second in the European Union (EU) after Greece.
Tax burdens continued to be a major obstacle to recovery, increasing to 44% of GDP in 2012, up from 42.6% in 2011.
Hit by the longest recession in over 20 years, Italian households have been largely cutting back on spending. The percentage of those cutting back on food quality or quantity rose to 62.3% last year from 53.6% in 2011, the national statistics institute Istat said in a report.
Overall consumer spending in the eurozone's third-largest economy also dropped by a record 2.8% in 2012, the deepest plunge since Istat started its current measuring system in 1997.
Unemployment levels for young Italians under the age of 25, presently at almost 40% compared with an EU average of 23.5%, remained "unacceptable," according to the International Monetary Fund (IMF).
The IMF also revised down its forecasts for Italy to a 1.8% contraction in 2013 from a previous 1.5% drop. Italy's leading industrial association Confindustria expects GDP to fall by 1.9% this year.
Gross domestic product is a powerful political tool — but it hides more than it reveals.
Since 2012, the government of Nigeria has been working to revise the calculation of economic performance with a view to producing new measures for its gross domestic product (GDP). The central goal of this reform is to update the so-called base year, which is the benchmark for all calculations used in computing the GDP of a nation.
The base year is of critical importance as it determines the year in which prices are held constant, (which enables statisticians to distinguish economic growth from inflation), the weighing of each economic sector with respect to the whole economy and, crucially, the type of data that is included in the final calculation.
Although most, higher income countries revise their base year every five years in order to account for changes in the nature and shape of their economies, the majority of low- to middle-income countries do so more sporadically, as they lack the technical resources to overhaul the national income accounts at regular intervals.
Thus far, Nigeria has been no exception and its latest revision dates back to 1990, which means that some booming sectors such as information communications technology and entertainment (especially the Nollywood film industry) are systematically undercounted in official statistics. But what may appear to be a mere statistical endeavor may easily trigger a political earthquake in Africa, with repercussions on traditional power balances throughout the continent.
Most estimates suggest that, as a result of the revisions, Nigeria’s GDP may increase by up to 40% in nominal terms, which means that the West African powerhouse would overtake South Africa as the continent’s largest economy in 2014. Similar leaps have happened in the past. In 2010, GDP revisions elevated Ghana to the status of a middle-income country thanks to a sudden 60% jump in nominal growth. In Turkey, the rebasing of GDP produced a 30% increase in 2008.
As I show in my latest book, Gross Domestic Problem: The Politics behind the World’s Most Powerful Number, GDP is a powerful political tool. The most important global governance institutions, from the G8 to the G20, are based on GDP credentials. Thus far, South Africa has been the only African country represented in the G20 on the grounds of the scale of its economy.
What will happen if Nigeria claims this status? Would it affect South Africa’s membership of the Brics, and would Nigeria become the preferred counterpart of Brazil, Russia, India and China? There are many who believe Nigeria’s overtaking of South Africa would produce significant effects in the governance structures of the continent.
In the past few years, Nigerian politicians have become increasingly assertive with respect to their role in the continent and they wait for the GDP revisions to do the trick. Several pundits already see the West African giant as the new continental leader.
Arguably, this GDP battle may ruffle some feathers in Pretoria, where policymakers fear their country may lose its traditional crown as leader of the African continent in world politics.
But the GDP battle hides more than it reveals. This is because GDP is a very misleading measure of economic performance, let alone social and political progress. Neither Nigeria nor South Africa is a healthy economy.
For many reasons, however, the former is far worse than the latter, and the whole continent would be much worse off if Lagos were to replace Johannesburg as Africa’s economic hub.
Both South Africa and Nigeria are among the least sustainable economies in the world. According to the World Bank, the depletion of nonrenewable energy in Nigeria accounted for about 25% of its GDP in 2013.
South Africa is Africa’s most polluting country and the 13th worst emitter of carbon dioxide in the world.
According to the United Nations Development Program, both South Africa and Nigeria have experienced a significant decline in natural resources since 1990. Although these countries enjoy relatively large pools of fossil fuels, their reliance on energy-intensive economic growth has imposed huge drawdowns on their natural capital base, with serious risks for human health, the environment and the subsistence of local communities.
In most areas, Nigeria has been faring much worse than South Africa. The Inclusive Wealth Index (IWI) published by the UN measures the growth of produced capital (for example, GDP) against the stocks of natural resources that are depleted in the process. For the IWI, Nigeria is by far the worst performing country.
When the gains in terms of GDP are offset against the depletion of human capital and natural resources, the Nigerian miracle evaporates altogether. Rather than increasing its overall wealth, the West African country has been accumulating economic losses at an average annual rate of 1.8% since 1990. Nigeria has also overtaken South Africa in the costs associated with environmental degradation: 2.51%, compared with the 2.24% of the Rainbow Nation.
During the period 1990 to 2008, Nigeria destroyed 41% of its forest resources, one of the highest deforestation rates in the world. According to the Resource Governance Index, Nigeria falls at the bottom of the global ranking, with a very poor record in terms of transparency and accountability in the management of its oil riches, more than 20 places below South Africa.
We all know about the dire effects of multinational companies’ systematic exploitation of oil fields in the Niger delta: environmental destruction, political destabilization and human displacement.
But GDP regards these phenomena as “positive” for the economy, with paradoxical consequences for the way in which most African economies are designed and run. No surprise, therefore, that one of the world’s least sustainable societies is now touted as a role model for the continent.
As the UN recognizes, GDP focuses exclusively on the “cash” being generated by market activities (that is, present income and production flow) whereas alternative measures of inclusive wealth highlight the importance of stocks of assets and their changes over time.
The politics of GDP makes countries blind by rewarding short-term consumption and wholesale exploitation of natural assets at the expense of social justice and sustainability.
There is no economic success without sustainable progress, and African economies would be better off if their leaders realized that GDP-based frameworks are very misleading. If South Africa is serious about leading the continent towards a brighter future, it should develop a more comprehensive wealth-based accounting system and help the rest of Africa, including Nigeria, to do the same
Budgetary rigor demanded by international lenders may be the proximate cause of Portugal's political crisis, but Lisbon is also paying the price for not whipping its economy into shape in better times.
The survival of Prime Minister Pedro Passos Coelho's centre-right coalition was hanging by a thread as the rightist CDS-PP party debated whether to withdraw its support and leave the government without a majority.
Like ordinary Portuguese, the CDS-PP is resisting further spending cuts needed to keep Portugal on track to meet the debt-reduction goals laid out in its 78 billion euro (66 billion pounds) bailout program with the European Union and International Monetary Fund.
Patrick Artus, chief economist with French bank Natixis fears Portugal is battling a lost cause, for as its economy keeps contracting so does the tax base needed to put the public finances on a stable footing. The result is a recessionary spiral - as Greece has already discovered.
"This is one of the biggest problems we have in the euro area: in the peripheral countries, how do you repay the old debts if the macroeconomic base of the country is shrinking?" Artus asked.
Despite an extension of maturities on loans from Europe, Lisbon is very far from stabilizing its ratio of public debt to GDP, Artus said. "If you measure it against the usual definition of solvency, Portugal is clearly not solvent."
Portugal needs to grow out of its debt, but its potential growth rate is less than 0.5% a year, according to the Organization for Economic Cooperation and Development (OECD).
Yet economic performance was poor even in the years after the launch of the euro in 1999 when credit was flowing freely.
Real gross domestic product growth averaged just 1.3% a year between 1999 and 2008 as productivity slowed substantially and competitiveness deteriorated. Per capita GDP growth was flat between 2001 and 2011.
Artus traces the stagnation to the very structure of the economy. Portugal has lost over 15% of its manufacturing capacity since the launch of the euro as competition from Eastern Europe and China crushed low-end industries.
And with a poorly skilled workforce, two out of three Portuguese left school at 15 or 16 - trend labor productivity growth has averaged around just 1% a year.
Rigid goods and services markets, which have kept the price level high in Portugal despite a drop in wages, thus throttling domestic demand, compound the gloomy picture.
"Comprehensive structural reforms to revive productivity and competitiveness are critical to rebalancing the economy and restoring sustained growth," the OECD said in a recent report.
Optimists point out that Portuguese exports have performed well. But Eileen Zhang, director of European sovereign ratings at Standard and Poor's, said the outlook for further improvement was weak given a failure to lure significant foreign direct investment.
"The hope for Portugal is that the structural reforms that were introduced during the first two years of the program can be implemented to increase the flexibility of the economy to attract FDI in order for economic potential to pick up again," she said.
Evidence of stabilization in neighboring Spain, Portugal's biggest market, is also encouraging. Manufacturing held steady in June after a two-year slide, according to the latest purchasing managers' index, while services contracted at the slowest pace in two years.
Edward Hugh, an independent economist based outside Barcelona, said Spain was enjoying some cyclical relief, linked in part to a relaxation of deficit reduction targets this year, but it was premature to call it a recovery.
"We're seeing little signs that things are getting better, but it doesn't mean there's a great game-changer in Spain. Property prices continue to go down and domestic demand continues to decline. The boost is really coming from exports," he said.
Hugh said Portugal's case was not that different from that of Greece in that both countries needed a debt restructuring from the outset.
Instead, Portugal plumped for overly rapid fiscal adjustment that generated a deeper-than-necessary depression and, by sparking a wave of emigration, was putting the country's long-term future at risk.
Just as the IMF had acknowledged making excessively optimistic economic projections in the case of Greece, Hugh expects a similar ‘mea culpa' from the Fund in relation to Portugal.
This was likely to be followed by tense negotiations with European governments after September's German elections on how to make up funding shortfalls in both countries.
The crumbling of political support in Portugal for continued austerity reduces the chance of a smooth exit from the current bailout program in mid-2014 and makes a second rescue package more likely, according to Citi.
"This also increases the probability that some form of government debt restructuring may eventually be needed - following the footsteps of Greece and Cyprus," the bank's economists said in a note.
Portugal's political strains also invite comparisons with Italy, where former prime minister Mario Monti has threatened to withdraw support from the coalition of his successor, Enrico Letta.
There are worrying economic parallels, too, starting with a woeful track record since the launch of the euro. Italy is the only one of the OECD's 34 member states whose GDP per capita fell between 2000 and 2011.
Like Portugal, Italy has lost around 10% of its output since the financial crisis and this will reduce the economy's capacity to stabilize its debt-GDP ratio, Artus said.
"In a regular recession GDP goes down and then recovers back to the level of potential GDP. In this crisis, potential GDP is converging down to the level of GDP, so there's a permanent loss of potential output. And with smaller economies it's hard to service large old debts. Italy and Portugal are very similar in that respect," he said.
Qatar's gross domestic product (GDP) in the first quarter of 2013 at constant prices (price inflation adjusted GDP) is estimated at QR88.41bn which shows an increase of 6.2% compared to the estimate of Q1 of 2012 at QR83.23bn. However, compared to the previous quarter (Q4 of 2012) estimate of QR87.07bn, there has been a growth of 1.6%, a press release by the Ministry of Development Planning and Statistics said.
The constant price GVA of Mining and Quarrying sector in Q1, 2013 has been estimated at QR37.55bn, which shows an increase of 0.8% over the estimate of Q1, 2012 which was at QR37.25.
The GVA estimate of non-mining and quarrying sectors in Q1, 2013, totaled QR50.86bn, which shows an increase of 10.6% over the estimate of Q1, 2012 placed at QR45.99bn.
An analysis by industry group, comparing the performance in Q1 of 2013 with the corresponding quarter in 2012 [Year-on-Year Basis] and with the fourth quarter (Q4) of 2012 is given in the following paragraphs.
The GVA of Manufacturing sector is estimated at QR8.31bn in Q1, 2013 showing an increase of 12.5% over the corresponding quarter of 2012 (QR7.38bn). Compared to the previous quarter (Q4 of 2012), the growth of 1.6% has been seen in the GVA of this sector.
The growth in this activity has resulted from the double digit rise in the production of petrochemicals and gas-to-liquids (GTLs) products.
The GVA of the Construction sector at QR10.36bn in Q1 of 2013 shows an increase of 11.7% when compared to the corresponding quarter of 2012 (QR9.28bn).
The construction activity in Q1, 2013 shows a rise of 6.3% when compared to the estimate in Q4, 2012.
The GVA of the Trade, Hotel and Restaurants sector is estimated at QR6.36bn in Q1 of 2013 registering an increase of 10.5% over the corresponding quarter of 2012 (QR5.76bn). However, there has been a decline of 11% in the GVA of this group when compared with the previous quarter (Q4 of 2012) estimate of QR7.15bn.
This fall is caused mainly by seasonality seen in the sales of goods. Besides this, the impact of high activity seen in the hotel and restaurant sector in Q4, 2012, while hosting major international conferences, shows a fall in GVA of Q1, 2013 when compared to previous quarter.
The Transport and Communication sector generated a value added of QR6.10bn in Q1, 2013 against QR5.66bn in Q1, 2012 showing a rise of 7.9%. However, compared to the previous quarter (Q4 of 2012) the GVA estimate is up by 2.5%.
For Finance, Insurance, Real Estate & Business Services, the GVA is estimated at QR10.1bn in Q1 of 2013, showing an increase of 10.5% when compared to the corresponding quarter (Q1) estimate of QR9.13bn in 2012. Compared to the previous quarter (Q4 of 2012), there is an increase of 5.8% in the first quarter of 2013.
The contribution of the Government Services which includes the provision of public health, education and other miscellaneous services is estimated at QR9.56bn in Q1 of 2013, which is 9.4% higher than the estimate of Q1 of 2012.
The quarterly GDP in the Q1 of 2013 at current prices is estimated at QR185.30bn. This represents an increase of 6.1% compared to the estimate of Q1 of 2012 placed at QR174.65bn. When compared to previous quarter estimates of QR180.87bn, the increase is 2.4%.
Britain's powerhouse services sector grew at the fastest pace in two years in June, completing an economic hat trick after upbeat manufacturing and construction data reports and putting the country “well on the road to recovery”.
Strong services data could signal the end on calls for more quantitative easing.
Economists estimated that the UK grew by “at least 0.5%” in the three months to June, building on the 0.3% growth in the first quarter, with more to come.
“Finally the services sector appears to have rediscovered its mojo and it is generating a momentum which looks less and less likely to be derailed,” Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said.
The purchasing managers index (PMI) for services, which rose to 56.9 last month – two points above the consensus forecast and higher than at any point since March 2011, came as Bank of England figures pointed to a long-awaited revival in lending.
Its credit conditions survey found that mortgages were both cheaper and more available in the second quarter, and that lending to small businesses had “increased slightly”.
Matthew Fell, director for competitive markets at employers group the CBI, said: “The increase in demand for finance shows that overall confidence is improving. But with small firms still cautious, the news that the availability of credit is increasing to meet their needs should give them a further boost to invest.”
The data underlined the improving fortunes of the UK economy. Manufacturing and construction are growing again after collapsing last year, and exports of services rose to a record high in the second quarter, the British Chambers of Commerce revealed this week.
Reinforcing hopes, the detail of yesterday’s services data suggested that the sector, which accounts for three quarters of UK output, was gathering self-sustaining momentum. The rise in activity, from 54.9 in May where any reading above 50 indicates growth, was driven by the sharpest surge in new business since June 2007 and confidence levels at a 14-month high.
With optimism improving, companies also hired staff at the fastest rate since August 2007, the survey found. "I mean it is incredibly strong. We're up to levels some way above the series average, not that far shy of the peak of the previous boom," said Ross Walker, UK economist at Royal Bank of Scotland.
Chris Williamson, economist at Markit, who conducted the survey, added: The buoyant picture for June means the economy is on course to expand by at least 0.5% in the second quarter, with more growth to come.”
Britain’s sudden resurgence has taken forecasters by surprise, with several claiming the prospect of more quantitative easing was now “almost zero”.
Interest rates and QE are expected to remain unchanged, with most economists predicting a big announcement in August once Mark Carney, the Bank’s new Governor, has had time to make a fuller assessment of the UK’s particular challenges.
Simon Wells, at HSBC, said: “It is worth noting that the last time the services PMI was at current levels [in March 2011] three MPC members were voting for a rate rise... Having seen previous green shoots die off, the MPC will be more cautious about signaling tightening and killing off a recovery. But the improvement in survey data does weaken the case for radical monetary action.”
Mr. Goodwin added, “This is the latest in a string of encouraging data releases which confirm that the UK is well on the road to recovery. A pessimist could say that we’ve been here before [and] the recovery fizzled out. But this time it looks different, with the surveys also reporting much stronger order books, which suggests the pick-up in activity has genuine legs.”
Separate figures from the Office for National Statistics showed that corporate profitability picked up in the first three months of the year to 12%, higher than the trend rate over the previous four years but below the pre-crisis trend of 14 percent.
Howard Archer, UK economist at IHS Global Insight, said: “The rise in corporate profitability is a boost to growth hopes. Hopefully, improved profitability will encourage businesses to invest more.” UK companies have hoarded a cash pile of £750bn, and again reduced investment in the first three months of the year – by 1.9 percent.
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