- UK growth estimates revised upwards as construction sector performs better than expected.
- An increased rate of growth is expected for Q2 2015
- Inflation expected to remain close to zero over the coming months
- A rise in real earnings and strengthening labour market are expected to support UK economic outlook in the near term
- Current account deficit improves but still at significant multiple of historic average
- FTSE All-Share index suffers sharp decline amid Greek debt concerns
UK Economic Review
Official estimates reveal that the UK economy grew by 3% during 2014 and by 0.4% in Q1 2015. Both these figures have been revised upwards slightly from previous estimates following new data. These upward revisions have been driven largely by a better than expected performance from the construction sector.
The service sector, which accounts for over three-quarters of UK economic output, grew by 0.2% in April. Industrial output, which accounts for a further 15% of output, increased by 0.4% over the same period. A pick up in growth is likely for Q2.
Inflation is back in positive territory rising from -0.1% to +0.1% in May. The largest upwards contribution has come from an increase in air fares and transport services in general, although intentions to raise prices further remain weak. Inflation is therefore expected to stay close to zero over the coming months.
In the three months to April 2015 unemployment has fallen and wages increased by 2.7% on an annualised basis, which is the fastest rate of growth since 2011. A combination of low inflation and rising wages means that people are better off in real terms. A rise in real earnings, which is helping to boost spending power as well as a strengthening labour market is expected to support the UK’s short term economic outlook.
The UK’s current account deficit, the gap between what the UK earns and what is spends, stood at 5.8% of GDP in Q1 2015, a decline on the previous quarter. Despite this improvement the UKs deficit is still more than five times the historic average of 1.1%. The scale of the deficit makes the UK more susceptible to external shocks and confirms that the task of rebalancing the UK economy remains difficult.
FTSE All-Share index has suffered a sharp decline amid Greek debt concerns, with Small-Caps outperforming Large-Caps.
Global Investment Outlook
Consumer spending, which accounts for more than two thirds of US GDP grew at an annual rate of 2.1% in Q1 2015. US growth is expected to pick up in the coming quarters with faster wage growth and strong employment.
The escalating Greek debt crisis has negatively impacted on the US equity market.
Eurozone growth has been revised upwards slightly at 0.4% in Q1 2015 (in line with the UK), fuelled by an increase in consumer spending and investment. In contract, trade was a drag on growth with exports slowing by 0.2% and imports rising by 0.4%.
European equity market has dropped amid Greek debt concerns.
China’s equity market is beginning to correct following a strong rally as China and South Korea reduce interest rates further. Despite volatility in macro economic indicators Japan’s outlook for economic growth arguably remains positive.