Business Picks Up

Good news has been accumulating for several months. Growth accelerated in Q2, and surveys show a real improvement in future prospects. Less uncertainty over the euro zone economy has apparently contributed to this rally. Even so, the recovery will remain mild as the world economy struggles to grow and UK companies strive to restore competitiveness. Moreover the government doesn’t seem ready to abandon its policy of fiscal consolidation.

Encouraging signs
The UK economy has shown real signs of rallying in recent months. Supported by all components of demand, GDP growth accelerated in Q2, up 0.7% q/q after 0.3% in Q1. The healthy job market continued to boost household confidence and spending (+0.3% q/q). In the eurozone, one of the UK’s main trading partners, accounting for nearly 45% of total merchandise exports, ongoing signs of improvement apparently contributed to a surge in exports (+3.6% q/q vs. -0.1% q/q in Q1 2013) and an upturn in investment (+1.7% q/q).

This strong performance is likely to be repeated in the months ahead. The UK economy will apparently benefit from a more stable environment and a somewhat more favourable economic environment for its main trading partners. Surveys point to a net improvement in growth prospects in all sectors, especially manufacturing and construction, whose weak performances undermined activity last year. According to the Markit survey, the composite economic index peaked at 60.8 in August (vs. 59.8 in July), the highest level since 1998. Economic data published so far are also encouraging. In July, construction activity increased 2% year-on-year, while in August retail sales rose 1.7% month-on-month (3-month moving average).

Yet this good news must be kept in perspective. Growth is still moderate compared to pre-crisis levels, and the output gap remains negative. From 0.2% in 2012, GDP growth is expected to near 1.2% this year. Although growth has rebounded in the euro zone countries, it will remain sluggish. Moreover, there is little room to boost private consumption, the main engine of UK growth in recent quarters.

BY Catherine STEPHAN

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