Growth of 1.1% is better than expected.
The UK economy grew by a startling 1.1% in the second quarter (Q2) of 2010, up sharply from the increase of 0.3% seen in the previous quarter.
It's an increase that has openly shocked economists and analysts, most of whom were expecting an increase of around 0.5%.
"Unusually, the GDP data have left me almost lost for words," says Howard Archer, chief economist at analysts IHS Global Insight. "This is an absolutely incredible growth number -- way above all expectations, and the best performance since the first quarter of 2006."
What's more, the increase has been seen right across the economy, with services, construction and production all recording strong gains, although the largest contribution to the growth in the quarter came from business services and finance.
And in contrast to the widely-published doubts that surrounded the accuracy of the Q3 2009 GDP figures, today's release comes against the backdrop of a two-week delay in the publication of the Q1 2010 revised estimate, in order to make doubly sure the figures were correct.
In short, a significant subsequent downwards revision seems most unlikely.
Jobs, inflation, and public sector borrowing
There's reasonable news elsewhere in the economy, too -- although it's admittedly patchy, and not always consistent.
Inflation, for instance, is heading in the right direction, falling for a second month running in June to 3.2%, down from 3.4% at the end of Q1, and 3.7% in April.
Even so, coming out of the worst recession for sixty years, it's still a level of inflation that is prompting at least one member of the Bank of England's Monetary Policy Committee to argue for a rise in Bank Rate, which yet again has been held at 0.5% -- its level since March 2009, and the lowest it has been since 1694. With a GDP figure like today's, though, it's possible that more voices will come out in support of an early rate rise.
Like GDP, unemployment, too, is heading in the right direction -- just -- with the number of unemployed people falling by 34,000 over the quarter to reach 2.47 million. This takes the unemployment rate to 7.8%, down 0.2 percentage points on the quarter.
Yet while the number of people unemployed for up to six months is falling, long-term unemployment remains a problem: the number of people unemployed for more than twelve months increased by 61,000 over the quarter to reach 787,000, the highest figure since the three months to March 1997.
And elsewhere, too, the economic news was less welcome. Public sector net debt as a percentage of GDP reached 63.9% at the end of June, for instance, up from 62% in Q1, and up from 57.3% a year ago. Overall, public sector net debt now stands at £927 billion, compared to £798 billion in June 2009.
Trade, too, gives cause for concern, as despite the weak pound, exports have been slow to pick up. Last quarter's initially reported current account trade deficit of £1.7 billion was subsequently revised to a rare surplus of £0.5 billion -- the first in years. But this quarter, trade reversed sharply, recording a deficit of £9.6 billion. Put another way, that's equivalent to -2.7% of GDP, as opposed to 0.1% of GDP in Q1.
| Macroeconomic indicators | Q2 2010 | Q1 2010 |
|---|
| GDP | 1.1% | 0.3% |
| Consumer price index (CPI) | 3.2% | 3.4% |
| Public sector net debt | £927bn | £890bn |
| Net debt as % of GDP | 63.9% | 62.0% |
| Unemployment | 2.47m | 2.5m |
| Unemployment % | 7.8% | 8.0% |
| Balance of Payments | -£9.6bn | £0.5bn |
Household finances
And there were mixed signs on the household finance front, too.
Consumer confidence fell for the second month running, and now stands at 63 points, a similar level to 12 months ago, and 21 points below February's peak. Chief among consumers' worries were the jobs market, the housing market, and the state of the economy. Just 6% of consumers believe the economic situation to be good, with 72% openly describing it as 'bad'.
Not surprisingly, then, despite bank rate being held at 0.5%, the savings ratio -- negative during the boom days of 2007 -- remains healthily positive at 6.9%, albeit a shade down over the quarter. Personal debt was down fractionally, too, with statistics showing that home owners continue to pay down mortgages and increase the equity in their homes.
And speaking of homes, while house prices again rose in the quarter -- taking the price of an average home to within a whisker of £169,000 -- the rate of increase in prices appears to be slowing, with prices edging up just 0.1% month-on-month in June, according to the Nationwide building society, following increases of 0.5% in May and 1.1% in April.
More housing market gloom came in the form of the quarterly gross mortgage lending figures. Gross lending in Q2 was an estimated £35 billion, up 17% from the first Q1 and up 7% from Q2 2009. But overall, lending in the first half of 2010 remained unchanged from the first half of 2009 at £65 billion -- hardly a sign of housing market resurgence.
| Household finances | Q2 2010 | Q1 2010 |
|---|
| Bank rate | 0.5% | 0.5% |
| Savings ratio | 6.9% | 7.0% |
| UK personal debt | £1,460bn | £1,464bn |
| Average house price | £168,719 | £162,887 |
| Annual % change | 9.5% | 8.8% |
| Quarterly % change | 1.9% | 1.6% |
| Quarterly gross mortgage lending | £35.0bn | £29.5bn |
| Consumer confidence | 63 | 72 |
The stock market
And what of the stock market? By chance, the quarter ends came close to corresponding to most of the recent 17% fall in the value of the market, with the FTSE 100 and FTSE All Share indices down a hefty 13% over the period.
On a P/E of 16.4 at the end of March, London's premier market was priced at an attractive 12.4 at the end of June, yielding 3.5%.
| The UK stock market | Q2 2010 | Q1 2010 |
|---|
| FTSE 100 | 4,917 | 5,680 |
| FTSE 100 yield | 3.5% | 3.3% |
| FTSE 100 P/E | 12.4 | 16.4 |
| FTSE All Share | 2,544 | 2,910 |
| FTSE All Share yield | 3.3% | 3.2% |
| FTSE All Share P/E | 13.1 | 17.5 |
Bargain territory? Yes -- but while the mood has lightened in recent days, and will lighten further after today's news on economic growth, the impact of next year's fiscal tightening is hard to predict. Are the present economic uncertainties are fully reflected in an index value that begins with a '4', and not a '5' -- or even a '6'? Time will tell.
More from Malcolm Wheatley:
> The figures above represent comparisons between the quarterly or monthly period ending 30 June 2010 and 31 March 2010 where the relevant data is available (otherwise the latest published figure is used).
