The UK economy is booming but what about the trade deficit and house prices?

Tucked away in the official statistics on the UK economy on Friday was further evidence that the UK mini-boom remains at full steam ahead. This came from an update on the largest sector of the UK economy which is services.

The Index of Services increased by 3.2% in January 2014 compared with January 2013.

If we look at a shorter time comparison, the numbers indicated an acceleration in what was already a substantial rate of growth.

The latest Index of Services estimates show that output increased by 0.4% between December 2013 and January 2014, following an increase of 0.3% between November 2013 and December 2013.

If we look into the detail we see that the improvement has been broad based with all of the four main categories rising. The strongest category is highlighted below.

The index of distribution, hotels & restaurants increased by 5.8% in January 2014 compared with January 2013. (The strongest sector here was): wholesale, retail trade & repair of motor vehicles & motorcycles, which rose by 14.3%;

If we move to the underlying picture for the services sector which represents some 77.8% of the official output of the UK economy we see that it is at 106.6 where 2010=100. It has also retraced all the losses of the credit crunch era.

Growth in the Index of Services since 2010 has reversed the decline seen in 2008 and 2009; in August 2013, the Index of Services surpassed its previous peak level recorded in February 2008.

So in short the services sector of the UK economy is in tune with the season springing forwards and is powering ahead.

Details details

As ever we note that austerity does confuse the concepts of up and down.

government & other services increased by 1.7%; (annually)……; government & other services increased by 0.3%; (monthly)

Also in the latest two months you will not be surprised to read that real estate activities rose by 0.8% in December and by 0.3% in January hinting at a possible charge.

The terrible twins

In the UK’s economic history such dashes for growth have invariably come a cropper when faced with the development of a house price bubble and overheating and/or a problem with the balance of payments. These twin deficit imbalances then involve the brakes having to be slammed on to prevent a crisis. Usually this involved sharp rises in interest rates which would be a complete contrast to the current near zero official interest rate policy or ZIRP.

UK house prices

The Hometrack survey has told us this morning that prices rose by 0.6% in March leaving them some 5.7% higher than a year before. This comes on the back of Friday’s release from the UK Land Registry which provides the most authoritative if delayed data on house prices.

The February data shows a monthly price change of 0.7 per cent. The annual price change now stands at 5.3 per cent, bringing the average house price in England and Wales to £170,000.

Whilst the house price rises are spreading ever wider in the country there is one spot which is plainly overheating.

At 13.8 per cent, the annual change for London is considerably higher than other regions.

The exception is the North-East England where prices fell by 1.4% in February which meant that it also fell in annual terms. I would be interested to hear readers thoughts on why it is different?


If we move to the volume side of the ledger we see that that taps appear to be open. From the Bank of England this morning.

Total lending to individuals increased by £2.3 billion in February, compared to the average monthly increase of £2.0 billion over the previous six months.

Lending secured on dwellings increased by £1.7 billion in February, compared to the average monthly increase of £1.3 billion over the previous six months.

Also I note that net lending on mortgages has turned substantially positive as before recent efforts whilst there was plenty of lending there were often greater repayments.

Gross lending secured on dwellings was £17.8 billion and repayments were £15.6 billion.

If we look ahead we see that future demand looks firm if not quite as strong as January.

The number of loan approvals for house purchase was 70,309 in February, compared to the average of 69,563 over the previous six months.

Consumer credit is pushing forwards too and the emphasis is mine.

Consumer credit increased by £0.6 billion in February, compared to the average monthly increase of £0.7 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.5% and 4.8% respectively.

Here we have a nuance which is that these numbers are in net terms lower than those which preceded the credit crunch bust. The catch is that those numbers by definition were too high and should not be treated as normal.

Business lending

By contrast banks have not spread such largesse to our business sector especially smaller ones or SMEs (Small and Medium Enterprises).

Net lending to SMEs was £0.0 billion in February.

I suppose this is at least better than the falls we have been seeing but one might hope for more of an upturn. The banks did lend an extra £200 million but it was matched by repayments of past loans. If we look for some perspective the pattern has been grim for a while now for loans to SMEs.

The twelve-month growth rate was -2.5%.

If we move to larger businesses then the February picture was not exactly bright either.

 Net lending – defined as gross lending minus repayments – to large businesses was -£1.1 billion in February.

So the UK growth spurt does not seem to have inspired UK businesses to look for bank credit as a way of financing it. Let us hope it has found another source. I am doing my (little) bit with some peer to peer lending to smaller businesses and I will let you know how that develops over time.

This appears to be a ZIRLP or Zero Interest Rate Lending Policy for businesses by UK banks and by zero I mean official interest-rates which disconnected long ago from actual ones.

Someone is getting lower interest-rates

Savers will rue another month of lower interest-rates for them.

The effective rate paid on households’ outstanding time deposits decreased by 15bps to 2.21% in February and the rate for households’ new time deposits decreased by 3bps to 1.52%.

Over the credit crunch era the reduction in savings interest-rates must have taken a fair bit of demand out of the UK economy. This rarely gets the attention it deserves as it has been a factor in our struggle to recover.

(Im)Balance of Payments

As I mentioned on Friday the update on UK trade would be a shocker if it had not been sadly familiar. So much for those who have trumpeted “re-balancing” after the 2007-08 depreciation of the value of the pound as we observe this.

The United Kingdom’s (UK) current account deficit was £22.4 billion in Quarter 4 2013, down from a revised deficit of £22.8 billion in Quarter 3 2013. The deficit in Quarter 4 2013 equated to 5.4% of GDP at current market prices, down from 5.6% in Quarter 3 2013.

In 2013, the UK’s current account deficit was £71.1 billion.

You may note how we start with a “down” as we see that we are perhaps the victims of an up is the new down  news spinning operation. If we convert to percentages we get more of an idea about the problem.

In 2013, the current account deficit equated to 4.4% of GDP at current market prices, compared with 3.8% in 2012.

So as we observe that it is high and rising can we argue that it is an exception? Nope…

The UK has run a combined current and capital account deficit in every year since 1983 and every quarter since Quarter 1 2008.

Whilst trade flows are very inaccurately measured I think that a thirty year set of data is impossible to argue against! We seem to be heading for a burst of deja vu so we should cross our fingers for more of this.

The trade in services surplus was £21.1 billion in Quarter 4 2013, an increase of £1.4 billion from Quarter 3 2013. Exports were £1.0 billion higher than Quarter 3 2013 at £51.2 billion,


There is much about the numbers above which signal what has become a traditional pre-election boom for the UK. We have rising house prices and credit pushed by official policy and we have the “old familiar” of a balance of payments problem. Sadly lending to small businesses is nothing like as healthy and savers are facing very low interest rates. So the danger is that bust follows the boom after the election in a familiar pattern.

We are supposed to have guardians against this but the Monetary Policy Committee has been driving it and the Financial Policy Committee decided on what Sir Humphrey Appleby called “masterly inaction” last week as they sang along to Diana Ross.

Ah, if there’s a cure for this I don’t want it Don’t want it If there’s a remedy I’ll run from it, from it

Although some may consider this part of the statement to be the most relevant and indicative.

The Record of the Committee’s meeting will be published on 1 April.


This article is cross-posted from the website of Mindful Money, for which Shaun Richards is independent economist.