08/01/2014 UK Economic Review PAGE 1 OF 4

UK Monthly Economic Review January 2014 (Based on December 2013 data releases)

Monthly headlines:

Annual UK economic growth revised up for Q3 2013, QES indicates more growth in Q4

BCC forecasts that the UK economy in 2014 will grow at its fastest rate since 2007

UK's trade position deteriorates and the public finances remain weak

Annual UK economic growth revised up... The third official estimate of economic growth (GDP)

for Q3 2013 was unrevised at 0.8%. However, due to

upward revisions for previous quarters, the UK's

economic performance over the past year was

better than previously thought. In annual terms, the

UK economy grew by 1.9% in Q3 (see Chart 1), up

from the previous estimate of 1.5%. UK GDP is now

estimated to be 2% below its pre-recession peak in

Q1 2008, an improvement on the previous estimate

of 2.5%. We expect UK GDP to surpass its pre-

recession peak in the second half of 2014.

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Chart 1: Real GDP Growth

Quarterly growth Annual growth

...and growth recorded across the economy... The rise in UK GDP in Q3 2013 was broadly based

with three - services, production and construction -

out of the four main sector groupings recording

growth (see Chart 2). The agricultural sector (-3.2%)

recorded the only decline. The service sector, which

accounts for over three-quarters of UK economic

output, remains the key driver of growth with

output rising by 0.8% in Q3. This mirrors the positive

services balances recorded in the Quarterly

Economic Survey (QES). Construction output grew by

2.6% and industrial production rose by 0.6% in Q3.

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Chart 2: UK GDP by Sector, Q3 2013

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Chart 3: UK Manufacturing and Services Output

Manufacturing

Services (RHS)

...while improving official sector level data...

Industrial output rose by 0.4% in October, with

manufacturing production, which also increased by

0.4% in the month, the largest contributor to total

production growth. In annual terms, manufacturing

output rose by 2.7% in October, the biggest rise

since May 2011 (see Chart 3). This is in line with the

QES which also indicates an improving picture for the

sector. Output from the service sector grew by 0.1%

in October and by 2.1% in annual terms. Construction

output, which accounts for around 6% of UK

economic output, grew 2.2% in October.

Source: ONS Quarterly National Accounts, Q3 2013

Source: ONS Quarterly National Accounts, Q3 2013

Sources: ONS Production, Services and Construction Statistics, October 2013

08/01/2014 UK Economic Review PAGE 2 OF 4

+

some

...a strengthening labour market... Businesses continue to drive job creation with the

private sector accounting for 98% (246,000) of the

250,000 rise in the number of people in employment

in the three months to October 2013.The number of

people who are unemployed fell by 99,000 over the

same period and as a result the UK's unemployment

rate fell to 7.4%, the lowest since March 2009 (see

Chart 4). However, high youth unemployment and

weak pay growth remain a concern. We expect that

the Bank of England's 7% threshold before they

consider raising interest rates will be reached in Q3

2015.

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Chart 4: UK Unemployment

UK unemployment rate

Bank of England's 7% threshold

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Chart 5: Domestic Sales

Services

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...but key risks to the recovery remain... Although CPI inflation fell to 2.1% in November (see

Chart 6) utility price rises are likely to increase the

upward pressure on prices in the coming months.

This is supported by the latest QES with the intention

to raise prices rising for the second successive

quarter in Q4. With inflation outstripping earnings

growth, the squeeze on household budgets is also a

concern, particularly with the continued reliance on

consumer spending to support growth. Despite signs

of improvement, the underlying weakness in the

Eurozone remains a key risk to the UK's economic

recovery.

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Chart 6: CPI inflation

...and the QES indicates more growth in Q4... For the Q4 2013 QES, most of the key balances

across manufacturing and services reached higher

than their pre-recession levels in 2007, and some

were at all-time highs. The services sector balance

for domestic sales rose to its highest level since Q2

2004 (see Chart 5) and domestic orders rose to their

best level since Q1 1997. Although the domestic sales

balance for manufacturing fell slightly in the quarter,

it is still close to a record high, while confidence and

employment balances reached all-time highs in Q4.

Overall, the latest QES and external economic data

points to continued economic growth in Q4.

Source: BCC Quarterly Economic Survey, Q4 2013

Source: ONS Consumer Price Inflation, November 2013

Source: ONS Labour Market Statistics, December 2013

08/01/2014 UK Economic Review PAGE 3 OF 4

Bottom line: Taken together, the data releases in December support our view that the UK economy is growing at a solid pace. The BCC expects that the UK economy will grow by 2.7% this year, and this would be the fastest growth since 2007. However, the UK economy will continue to face major challenges and more must be done to help businesses drive a rebalancing of the UK economy towards exports.

For more information please contact: Suren Thiru, UK Economist. Email: s.thiru@britishchambers.org.uk. Tel: 020 7654 5801

.

For more information please contact: Suren Thiru, UK Economic Advisor. Email: s.thiru@britishchambers.org.uk

...and the public sector finances remain weak...

Despite the strengthening economy, the UK's public

finances remain weak. Public-sector borrowing,

excluding the effects of financial interventions, totalled

£16.5 billion in November, £0.9 billion higher than the

same month in 2012. As a consequence, the UK's

public sector net debt in November 2013 rose to

76.6% of GDP (see Chart 7). Although the economy is

growing, tax revenues remain subdued and while tax

revenue from 'consumer' taxes such as stamp duty and

VAT are improving, corporation tax revenues have

fallen by 5.1% over the past year.

...as does the UK's current account position...

The UK ran a current account deficit (the difference

between what we earned from other countries and

what we spent) of £20.7 billion in Q3 2013, more than

three times the deficit of £6.2 billion recorded in the

previous quarter. This deterioration was driven by the

UK's growing trade deficit - which doubled from £5

billion to £10 billion in the third quarter - and weaker

investment income from abroad. As a result, the UK's

current account deficit was equivalent to 5.1% of GDP

in Q3, the highest deficit as a percentage of GDP since

Q3 1989 (see Chart 8). These figures confirm that

rebalancing the UK economy remains a challenge.

…but there is hope of a future rebalancing. The Q4 2013 QES provided further evidence of the

potential of British businesses to rebalance the UK

economy towards exports. Within the service sector,

the balance for export sales increased in Q4 2013 to a

joint all-time high. The balance for manufacturing

export sales remained at its best level since Q4 2010

(see Chart 9). The service export orders balance rose

to a record high in the final quarter of 2013 and

although the manufacturing balance for export orders

weakened slightly in Q4, it remains nearly three times

higher than its historical average.

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Chart 7: Public Sector Debt (as a % of GDP)

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Chart 8: UK Current Account Position (as a % of

GDP)

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Chart 9: Export Sales

Services

Manufacturing

Source: ONS Public Sector Finances, November 2013

Source: BCC Quarterly Economic Survey, Q4 2013

Source: ONS Balance of Payments, Q3 2013

08/01/2014 UK Economic Review PAGE 4 OF 4

Chart 9: UK economic summary chart Deteriorating No change Improving

*Colours indicate an improvement or deterioration of each indicator and refer to monthly changes unless stated. For example, an improvement in employment refers to an increase, while an improvement in unemployment refers to a fall. Dates refer to the release dates for each indicator. **Annual changes. ***Quarterly changes. ****Latest figures are estimates.

Sector Indictors (sources) Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

Household Retail Sales (ONS)

Consumer Confidence (GfK NOP)

House Prices (Halifax)

New car sales (SMMT)**Mortgage approvals (Bank of England)

Business Business confidence (BCC)***

Business lending (Bank of England)

Service sector output (ONS)

Production output (ONS)Investment intentions (Bank of England)**

Labour market Employment (ONS)

Unemployment (ONS)

Claimant count (ONS)

Earnings (ONS)Economic Activity (ONS)

Financial FTSE100 (Bank of England)

Wholesale funding (Bank of England)

Retail funding (Bank of England)

Oil prices (Bank of England)Gold prices (Bank of England)

Government 10 year Government bonds (Bloomberg)

Public sector net borrowing (ONS)**

Public sector net debt stock (ONS)**

Tax receipts (ONS)**Current Budget (ONS)**

External UK trade balance (ONS)

Exchange rate (Bank of England)

Eurozone GDP (Eurostat)****

Export deliveries (BCC)***Export orders (BCC)***