UK Economic OverviewPreliminary estimates suggest that the economy grew by 0.5% in the fourth quarter of 2014 compared with the previous quarter. This rounds off an impressive year with output up by 2.6% - the fastest growth of any G7 economy. We expect 2015 to show a modest improvement on the previous year before growth begins to moderate in 2016 as comparatives become tougher and interest rates begin to rise. However, the global backdrop has become choppier in recent months with emerging market economies having deteriorated, the euro area remaining weak and the geopolitical tensions in Russia, Ukraine and the Middle East compounding uncertainty. Euro AreaThe recent announcement of the European Central Bank’s (ECB) intention to embark on a programme of quantitative easing (QE) is welcome news but we don’t believe this will have a significant impact on economic performance in the UK. However, the weakening of the Euro/Sterling rate, down over 1% since the announcement, won’t help the UK export sector – the euro area being our largest trading partner. UK Consumer Sector and Retail SalesThe UK economy has turned the corner with the longest streak of sustained and uninterrupted growth rates since 2008. The services sector, including retail, has been the main driver of growth to date with output 7.2% higher than in its pre-crisis peak. However, construction and manufacturing remain 8.2% and 4.0% below their peaks respectively.
Retail Sales (3m vs. prev 3m) and consumer spending Source: ONS, GfK
Retail sales have performed robustly over the past two years. Comparing the performance of retail sales over the last three months against the previous three month period suggests 22 consecutive periods of growth. In the final quarter of 2014, retail sales grew at the fastest rate for 12 years. Prospects for the retail sector in 2015 appear favourable, underpinned by strong employment growth, low inflation, improving credit conditions and high levels of confidence. A rise in real incomes will boost levels of spending, particularly important for income sensitive sectors such as consumer electronics. Labour Market
The recovery in the labour market continues at a healthy pace. The latest data from the ONS showed employment levels increasing by 38,000 in the three months to November while the unemployment rate fell to a six year low at 5.8%. This time last year the unemployment rate was 7.2% - the labour market recovery has exceeded all expectations. Other surveys, CIPS, also suggest employment plans are strong.
Chart 2: Unmployment rate has fallen fast Source: ONSHousing Market
The UK housing market ended 2014 slowing sharply. Mortgage approvals hit a 16-month low in November and house price rises, 7.2% in December, were the lowest in over a year. While there may be further downside in the coming months we do not believe that weakness will persist. Stamp Duty reforms (announced in the Autumn Statement) and pension reforms, which allow pension pots to be cashed-in from April, should boost activity in the housing market and support both housing transactions and house prices over the coming months. Further, mortgage rates remain at competitive levels.