2015.08: August Economic Review

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  • UK delivers longest period of sustained growth since before the financial crisis, with GDP now at 5.2% above the 2008 pre-recession peak
  • Growth largely driven by the services sector
  • Inflation likely to remain at zero over the next few months
  • IMF predicts the UK will be the fastest growing G7 economy throughout 2015, followed closely by UK
  • BCC do not expect interest rates to rise until Q2 2016

UK Economic Review

First official estimates of economic growth (GDP) reveal the UK economy grew by 0.7% in Q2 2015, greater than the previous quarter. This represents the longest period of sustained growth since before the financial crisis, with UK economic output 5.2% above its 2008 pre-recession peak. Growth has largely been driven by the services sector, which accounts for over three-quarters of the UK’s economic output, as well as a rise in oil and gas production.

CPI inflation has fallen back to zero. Falls in clothing and food prices were the main contributors to the change, along with smaller rises in air fares compared to a year ago. These figures reinforce views than inflation is likely to remain at around 0% for the next few months, providing a boost for households. The British Chambers of Commerce takes the view that, although earnings are growing faster than inflation it would be a mistake to interpret this as an argument for interest rate rises, and does not expect rates to increase to 0.75% until Q2 2016.

Unemployment has risen in the three months to May 2015, the first decline in UK employment since 2013. The decline is driven by a fall in the number of part-time workers that has been only partially offset by a rise in full-time workers.

The IMF has downgraded its outlook for UK growth in 2015, as well as for global growth overall. The IMF predicts that the US will be the fastest-growing economy in the G7 this year, followed closely by the UK (see table below):

IMF GDP Forecast

G7 2015
US +2.5%
UK +2.4%
Germany +1.6%
Canada +1.5%
France +1.2%
Japan +0.8%
Italy +0.7%

Global Investment Outlook

With Greece seeming close to agreeing a third bail-out deal, a Greek exit from the Eurozone looks a little less likely, at least in the short term. However, the measures that Greece has to implement to qualify for the bailout will be a major burden on the Greek economy. Furthermore cutting the deficit in Greece remains a considerable challenge.

Stock prices in China have fallen by 30% since mid June 2015. This followed a 54% rise in the first half of then year, which was largely driven by small-scale investors borrowing to buy shares. The subsequent collapse partly reflects indebted investors having to sell shares to meet their debts. There are also concerns that the state of the Chinese economy is being overstated by the official data. A weakening China, the world’s second-biggest economy, would be a major drag on global economic growth.

In the US, the S&P 500 index returned +2.3% in Q2 2015 amid speculation of an interest rate rise. The surge in mergers and acquisitions within the healthcare sector continues.

Volatile trading conditions in China add to Emerging Market equity woes.

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