Tuesday, 24 September 2013

UK: are the growth rebound drivers solid?

Standing at 1,5%, the GDP growth that the UK posted on the 2nd quarter of 2013 was remarkable (inserting irony here is optional). What’s more it was the 4th highest in the EU27 and by far the highest among its high income members.

source: Eurostat

source: Eurostat

But which were the catalysts driving it? In the next chart, as I sometimes do, I’ve plotted GDP components’ year over year changes in 2005 constant prices so that we can get a sense of each one’s contribution in overall growth.

source: Eurostat, own calculations

Household final consumption along with Gen. Government final consumption, Exports and Imports contributed so the growth figure was reached. A few points stand out in my humble opinion.

First, gross capital formation has not made a positive contribution since 2012Q1.

Second, household consumption is one of the bigger growth drivers for the post five quarters. That would surely be positive in an international environment where households cannot find their footing (to put it mildly) were it not for one fact.

source: Eurostat

For Q42012 and Q12013 the gross household saving rate has been falling pretty fast compared to what it was a year ago. This means that part of the growth in household final consumption is driven by that fact.

Third, the past two quarters imports declined and at the same time household final consumption grew. This could mean that either additional spending was directed at non-tradable goods and services or that some degree of imports substitution took place.

To wrap this up, higher UK growth is underpinned up to a point by the fall in household saving rate. What is even more troubling is the absence of fixed investment. It would be positive if resumed export growth observed in Q2 continued in the coming quarters and I would be very interested to see if we will see more of the weird couple (falling imports and rising household final consumption).


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