It looks like the long awaited economic improvement may be over before it’s even started. Has the optimism around the UK economy been misplaced?
Home bias
The question is a pertinent one because fund managers have increasingly been skewing their portfolios towards domestic demand on the basis that the UK economy was in recovery mode. Areas such as housebuilding and some retailing names have had a strong run of form and are no longer obviously cheap. If the UK recovery does not materialise as planned, these names could be in for rough ride.
Figures from the Office for National Statistics showed that total industrial production decreased by 1.1% between July 2013 and August 2013. Within this, manufacturing decreased by 1.2% after two consecutive increases.
The weakness was broad-based with the manufacturing of pharmaceutical products and preparations; computer, electronic and optical products; and the manufacture of food products, beverages and tobacco all falling. This was significantly below expectations, which had suggested a rise of 0.4% in industrial production was more likely.
But, much though the Government would wish it otherwise, manufacturing still forms a relatively small part of the UK economy. Services are the real engine of growth (or otherwise) in the UK economy.
Services still the driving force
Here the data is better: The most recent statistics showed service sector output rising 0.2% in July over June and 1.8% from July last year.
The Markit/CIPS PMI services index data issued at the start of October showed activity in the UK service sector growing at its fastest pace since 1997 in the third quarter. It attributed the rise to growth in financial services, bolstered by the housing market and business sector. The activity index for the sector recorded 60.3 in September, marginally lower from August’s near seven-year high of 60.5. Any score above 50 indicates growth.
Even more encouraging was separate official data that showed productivity among British workers improving, with output per hour rising 0.5% in the second quarter – the first quarterly increase since the second quarter of 2011.
However, Jeremy Cook, chief economist at World First issues one caveat to this good news: "[Looking at] where the growth within the service sector will come from – banks and business-to-business services are benefiting from the housing market and corporate activity improvements respectively, however, consumer-facing companies are not progressing at the same rate."
Quality drives quantity
He adds: "The pressure on consumers is the obvious factor here and will continue as wage negotiations fall short of price increases."
There are a number of conclusions to be drawn from this picture. The first is that while it would be great if UK manufacturing were firing on all cyclinders, it is not likely to be the make-or-break factor for the UK economy.
In fact, the economy still looks in reasonable shape with the services sector and productivity all improving. However, the biggest concern should be the quality of UK growth and the fact that unemployment remains high despite yesterday’s figures showing the number of jobless claimants had come down.
If – as it appears – much of it is coming from a recovery in the housing market and consumer spending, it says little for the Government’s attempts to refocus the economy. It would certainly make it a more fragile recovery.
