Quarterly Bulletin Q3 2013

Developments in the International
and Euro Area Economy
Quarterly Bulletin 03 / July 13
63
United Kingdom
According to the Office of National Statistics, the
UK economy expanded by 0.3 per cent during
the first quarter of 2013. The increase in economic
output during this period was due to higher levels
of household consumption along with changes in
inventories. Meanwhile, net exports, government
consumption, and business investment acted as
a drag on economic growth. Recent sentiment
data point to a further expansion in output during
the second quarter of 2013. The services PMI
remains above 50 and has displayed further
positive momentum during the second quarter.
The manufacturing PMI has reversed most of the
decline witnessed in February and March and at
53.8 is just short of the 21 month-high reached
in January. Retail sales increased by 1.9 per cent
on an annualised basis in May and were up by
2.1 per cent compared with April. The OECD’s
May Economic Outlook projects that GDP growth
in 2013 will be 0.8 per cent (Table 1), while the
European Commission has a slightly lower outturn
for this year at 0.6 per cent. Both see stronger
prospects for 2014 at 1.5 and 1.7 per cent
growth, respectively.
The Consumer Price Index recorded an annual
increase of 2.7 per cent in May, up from 2.4 per
cent in April. Since October last year, annual
inflation has remained between 2.7 and 2.8 per
cent with the exception of the temporary dip
recorded in April. The largest contribution to the
latest increase in inflation came from transportation
and this was partially offset by developments in
food prices. The Bank of England’s May Inflation
Report projects that inflation should fall below
2 per cent towards the end of 2015 as external
price pressures wane and a revival of productivity
growth is experienced.
No changes have been made by the Bank of
England’s Monetary Policy Committee (MPC) to
the bank rate – which remains at 0.5 per cent – or
to the asset purchases programme since the start
of the year. Net lending by banks participating
in the Bank of England’s Funding for Lending
Scheme remained negative during the first quarter
of 2013 at -£300 million but less than the figure of
-£2.4 billion recorded during the fourth quarter of
2012. During the March budget, the Chancellor
reaffirmed that monetary policy should be set
to meet the 2 per cent inflation target but in a
65.0
60.0
55.0
50.0
45.0
40.0
35.0
30.0
Chart 9: PMI Indicators for the UK
Jan
Mar
May
July
Sep
Nov
Jan
Mar
May
July
Sep
Nov
Jan
Mar
May
July
Sep
Nov
Jan
Mar
May
July
Sep
Nov
Jan
Mar
May
UK Manufacturing PMI
Source: Markit.
way that avoided undesirable volatility in output.
The new remit also confirmed that the MPC
should promote understanding of the trade-offs
inherent in setting monetary policy to meet a
forward looking inflation target while giving due
consideration to output volatility.
The UK economy still faces a number of
challenges at it attempts to re-balance economic
activity away from consumer spending and
towards investment and exports. The persistent
weakness in economic activity across the euro
area – the UK’s largest trading partner – limits the
scope for export growth. Total unemployment at
7.8 per cent has fallen to its lowest in two years.
Numbers in employment rose to a new high in
April while pay growth has picked up modestly
and job vacancies have shown the largest
increase since late-2010, hitting the highest
since December 2008. At the same time, youth
unemployment (those aged 16-24) remained high
at 20.7 per cent during the first quarter. Finally,
the on-going fiscal consolidation acts as a drag on
short term growth.
Japan
UK Services PMI
July
Sep
Nov
Jan
Mar
May
2008 2009 2010 2011 2012 2013
Note: For PMI indicators, above 50 represents expansion, below
50 represents contraction.
Real GDP grew by 1.0 per cent in Japan
during the first quarter of 2013, up from 0.3 per