The good, the bad and the ugly in the latest economic data

By Conor Lambe, Chief Economist at Danske Bank

The last few weeks has been a pretty busy period for those of us who pay close attention to economic data. The Office for National Statistics published the first release of GDP numbers for the third quarter of the year, providing the latest estimate of how the UK economy is performing. We also had the monthly inflation numbers, as well as an assessment of the labour market, both at a UK and Northern Ireland level.

Looking across all these numbers, there are some things that we can take encouragement from, a few points of concern, and a couple of things that stand out as big disappointments. In short, the data of the last few weeks is best portrayed as a case of the good, the bad and the ugly.

Let’s start with the good. Real GDP in the UK increased by 0.6 per cent between the second and third quarters of the year. This represented the fastest rate of growth experienced by the UK economy since the end of 2016. The good news extended across all the headline sectors. After output fell in both the first and second quarters of the year, manufacturing activity bounced back with positive growth in the July – September period. The construction sector continued its recovery from a disappointing start to the year, when activity took a hit from the bad weather. And while not as fast as in the second quarter, the services sector also experienced a positive rate of output growth in quarter three.

There was also some good news for UK consumers. Annual pay growth in the three months to September came in at 3.2 per cent, the highest rate in almost a decade. This faster rate of wage growth is being driven by the strength of the UK labour market. Given employment is high and unemployment is low, businesses are having to pay more to attract workers into the labour force, to recruit them from other businesses and to keep their existing staff. The inflation rate didn’t change between September and October, but at 2.4 per cent, real wage growth (wage growth minus the inflation rate) is firmly in positive territory. However, the rate of real wage growth remains low by historical standards, so while the direction of travel is encouraging for consumers, the squeeze on household budgets is not over just yet.

Turning to the bad news, unfortunately it doesn’t look as if the strong growth in the third quarter is the start of a turnaround in fortunes for the UK economy. The Office for National Statistics now publishes a monthly estimate of GDP growth and that data shows that economic output increased between June and July but was flat between July and August and between August and September. The stronger growth in the first part of the quarter can be partly attributed to consumer spending driven by the warm weather and the World Cup. But despite the strong headline third quarter growth rate, the underlying trends still point to an economy experiencing only modest rates of average economic growth.

More bad news was to be found in the labour market data for Northern Ireland. While not as strong as in the wider UK, the local labour market has proved quite resilient to the political and economic uncertainty of the last couple of years. But the latest data didn’t deliver much by way of positive news. In the July – September period, the employment rate fell by 0.8 percentage points compared with the previous quarter and the unemployment rate increased by 0.3 percentage points. We should always be careful not to place too much emphasis on one data release, but nevertheless, both the employment and unemployment rate went in the wrong direction in the third quarter of this year.  

Sticking with the Northern Ireland labour market data, we now encounter the ugly. Between the second and the third quarters of the year, the local economic inactivity rate increased by 0.6 percentage points to 28.5 per cent. The high rate of economic inactivity is a long-term challenge that has been a drag on the Northern Ireland economy for years. That being the case, the ugly here is less about the quarterly increase shown in this data, and more about the fact that this particular challenge is one that we haven’t really had any success in addressing.

Finally, there was also some ugly news contained in the UK GDP numbers. For three quarters in a row now, business investment in the UK has declined. Investment by firms is crucial when it comes to improving productivity (a key driver of wage growth in the long-term) and in making businesses fit for the future, something which is particularly important now given how automation, robotics and digital developments are changing the business environment. This disappointing trend in business investment is mainly a consequence of Brexit. And with uncertainty persisting around whether the draft withdrawal agreement reached last week will be approved by Parliament, and around the terms of the UK’s long-term relationship with the EU, businesses are likely to remain reluctant to spend money on big strategic investments at this time.

To sum up, the data releases of the last few weeks represent a bit of a mixed bag. There are some things to draw optimism from, but also quite a lot to be pessimistic about. In terms of where the economic data goes from here, a lot will depend on events at Westminster over the next few weeks. I suggest you all watch closely. I know I will.

This article was published in the News Letter on 20th November 2018.

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