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Economy in Brief

by Carol Stone UK GDP: the Harry Potter Economy? July 20, 2007

As we suggested the other day, the UK economy is strengthening. The Office for National Statistics (ONS) today reports it estimate that GDP there grew 0.8% in Q2, better than Q1's 0.6% and also higher than one forecast survey's 0.7% consensus figure. The year-over-year growth was 3.0%, the same as in Q1. The UK is the first Western nation to report its Q2 GDP; yesterday China reported its year-to-year GDP growth was 11.9%.

The increase in the overall UK growth rate from Q1 resulted from an upturn in manufacturing and larger gains in mining, construction and business services and finance. The manufacturing sector had contracted by 0.4% in Q1, but expanded 0.7% in Q2. Several industry sectors contributed, according to industrial production data through May, particularly publishing, wood and paper products and motor vehicles and other transportation equipment. The gain in publishing was strongest for sound recordings and book publishing was up sharply as well. We can't account for the UK recording industry, but we can guess what pushed book publishing in the first half of 2007.

The ONS's new "Index of Services" helps quantify the gains in that sector. These data are detailed monthly indexes of value added in various service industries and are now released on the same day as GDP. The May data show total services up 0.6% from April, which had fallen 0.3% from March. The ONS estimates the entire sector was up 0.8% for Q2 over Q1. The ONS presentation of the GDP data highlights that this is slower than the Q1 growth of 0.9%, but that is a mix of various developments among its divisions. Air transport in particular was up 3.7% in May from February, and transport support services gained 2.9%. Finance and business services have been strong, too, particularly for computing and "other". Financial services show slower growth in the last couple of months, but that's only because Q1 saw unusual growth of financial intermediation by 5.3% and other financial services, 7.6%.

Construction activity was also stronger in Q2, growing 1.1% versus 0.7% in Q1. Mining activity reflects further growth from the newly on-stream Buzzard oil field; the sector experienced rising output in both Q1 and Q2, the first noticeable increases since late 2002. As we complained here Wednesday, press reports about these data indicate some concern, since they may prompt interest rate increases from the Bank of England. Perhaps. And if the economy really is stronger, then real interest rates would be expected to increase. But the more significant news to us is the better performance of the UK and other countries' economies. We saw here Wednesday that this has meant expansion of employment opportunities in the UK, a positive consequence. At this point, the question probably is whether these gains can be sustained in coming months with the passing of the Harry Potter phenomenon, the reduction of the initial surge from the new oil production and other real sector developments.

UK GDP, SA % Chg 2006 2005 2004
2Q2007 1Q2007 2Q2007 1Q2007
Total 0.8 0.6 3.0 3.0 2.8 1.8 3.3
Mining* 1.2 1.1 -2.3 -7.1 -8.1 -9.2 -7.9
Manufacturing 0.7 -0.4 1.0 1.1 1.3 -1.2 2.0
Services 0.8 1.0 3.6 3.8 3.6 2.9 3.9
Transportation & Communication 1.4 1.7 5.5 5.3 3.8 4.3 2.5
Business Services & Finance 1.3 1.0 4.8 5.0 5.2 4.5 5.0
*Includes oil & gas extraction              
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