UK economy grows at fastest rate in six years in 2013

Britain's economy in 2013 recorded its fastest annual growth since the financial crisis despite a slight slowdown in the last three months of the year, official data showed on Tuesday.

Supporting expectations for a bright 2014, Britain's gross domestic product rose by 0.7 percent in the fourth quarter, the Office for National Statistics said - in line with economists' forecasts for a small reduction from the third quarter's pace.

This rapid rate of growth - which is above Britain's long-run trend - is likely to increase speculation about when the Bank of England will raise record-low interest rates.

BoE Governor Mark Carney has said there is no need for rates to rise anytime soon, as Britain's total output is still well below pre-crisis levels. But unemployment has fallen far faster than the bank forecast in August, raising questions about what long-term inflation pressures might be building in the economy.

Tuesday's quarterly GDP figure took Britain's full-year growth for 2013 up to 1.9 percent from just 0.3 percent the year before. This is the highest since 2007, although total output is still 1.3 percent below the pre-financial crisis peak reached in the first three months of 2008 - a weaker situation than in almost all other big advanced economies.

A long list of economic indicators over the last few months have suggested Britain's economy is recovering faster than either policymakers or independent forecasters predicted.

Data from the Confederation of British Industry released earlier on Tuesday suggest 2013's strong growth had continued into January.

Figures last week showed British unemployment plunged to within a whisker of the Bank of England's level for considering an increase in interest rates, but the central bank stressed it would be in no rush to act.

Tuesday's figures will also be a boon for Britain's coalition government.

With growing evidence the recovery is gaining strength, opinion polls for the 2015 election suggest the Conservative-led government still lags behind the Labour opposition, which says Britons have been hurt by the rising cost of living.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by 0.8 percent in the fourth quarter, maintaining its pace from the previous months, which was the fastest in a year.

But industrial output growth slowed to 0.7 percent from 0.8 percent, as the strongest manufacturing growth since the third quarter of 2010 proved insufficient to offset falling North Sea oil and gas output.

Construction - which accounts for less than 8 percent of GDP - fell by 0.3 percent, reflecting a weak November.

A survey on Monday showed British households have a growing sense of job security and declining fears that inflation is driving prices higher.

So far, the recovery has been fuelled by consumer spending and an upturn in the housing market, although BoE policymakers over the last week have said they expect business investment to begin making a contribution later in the year.

Critics of the government's economic policies say its attempts to revive the housing market will not help bring about the long-hoped for rebalancing of Britain's economy towards more manufacturing and exports.

The ONS's preliminary estimates of GDP are among the first in the European Union, and are based partly on estimated data. On average, they are revised by 0.1-0.2 percentage points up or down by the time a third estimate is published two months later.

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Bank of England in no rush to raise rates as unemployment plunges

British unemployment plunged to within a whisker of the Bank of England's level for considering an increase in interest rates, data showed on Wednesday, but the central bank stressed it would be in no rush to act.
The unemployment rate dropped to 7.1 percent in the three months to November, a fraction above the 7 percent level which the bank has said is its threshold for thinking about raising interest rates from their current all-time low of 0.5 percent.

Sterling hit a one-year high against the euro and British government bond spreads over German debt widened to an eight-year high as investors bet that the Bank of England will raise interest rates sooner than it has been signalling.

Citi's chief UK economist Michael Saunders brought forward his estimate by six months to the fourth quarter of this year. "We expect the MPC (Monetary Policy Committee) will lift the policy rate to 2 percent ... by late-2015, still leaving policy supportive of growth," he said.

The rate of 7.1 percent was below any forecast by economists in a Reuters poll and the lowest in nearly five years. It was down from a previous level of 7.4 percent, the Office for National Statistics said on Wednesday.

The number of people in work grew by a record amount, a further sign of the economy's rapid turnaround.

BoE policymakers stressed, however, they would not be hurried into raising rates. Their case has been helped by a fall in inflation to the Bank's target for the first time in more than four years.

"Members therefore saw no immediate need to raise Bank Rate even if the 7 percent unemployment threshold were to be reached in the near future," they said in minutes of their January policy meeting, released at the same time as the jobs data.

The minutes also made clear that when an interest rate rise does eventually come, fragile prospects for growth and low inflation means moves will be gradual.

The BoE is expected to use the publication of its Quarterly Inflation Report next month to give an update on its guidance, possibly by lowering the threshold unemployment rate below 7 percent or by underscoring how the threshold is not a trigger.

Policymakers said via the minutes they now expect unemployment to hit 7 percent "materially earlier than previously expected" and that the equilibrium employment "might be lower than previously thought".

The BoE has previously said that although Britain's long-run equilibrium unemployment rate is around 5 percent, inflation pressures could start to build around 6.5 percent.

THRESHOLD APPROACHING

The jobless rate was the lowest since the first quarter of 2009. The ONS said the number of people claiming jobless benefits fell by 24,000 in December, compared with a forecast for a fall of 35,000 in the Reuters poll.

It said the number of people in work rose by 280,000 in the three months to November, an all-time record.

Wage pressures remained low. Average weekly earnings rose by 0.9 percent on the year, half the rate of inflation.

The BoE put unemployment at the heart of its monetary policy last August when it said it would not think about raising borrowing costs - which have been at the record low since 2009 - until the rate fell to 7 percent.

Since then, Britain's recovery has picked up more speed than the Bank expected and unemployment has fallen fast. The International Monetary Fund on Tuesday sharply raised its forecasts for British economic growth this year.

The IMF also urged central banks around the world to avoid raising interest rates too soon to avoid choking off the recovery in their economies.

To quell speculation that the BoE might be hurried into raising interest rates, Governor Mark Carney has repeatedly stressed that unemployment falling to 7 percent would not be an automatic trigger for a rate hike.

The details of this month's BoE policy discussion strengthened that message, making clear the Bank does not intend to raise rates soon, even if unemployment hits 7 percent soon.

Despite its rapid recovery, the British economy remains 2 percent smaller than before the financial crisis.

As more long-term unemployed people have found jobs recently, the medium-term equilibrium rate could be a bit below 6.5 percent. This caused some traders to see a greater chance that the BoE could lower its 7 percent guidance threshold as soon as its February meeting. BoE official have previously floated the possibility of a lower unemployment threshold.

Any such decision is likely to be complex given the uncertainties around the labour market. The BoE said productivity was not picking up as expected.

That could push up longer-term inflation pressures and possibly strengthen the argument for not further delaying consideration of higher interest rates.

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UK jobless falling faster than thought, to hit target early - Reuters poll

British unemployment is falling faster than previously thought and will reach the Bank of England's 7 percent threshold for considering a rate hike well before the central bank envisages, a Reuters poll found.

The poll of 50 economists, taken this week, suggests it will fall steadily in the coming quarters and reach 7 percent early next year. A December poll had pointed to this happening in the second quarter of 2015 and a November poll even later.

"Recent sharp falls in unemployment will probably continue over the next few months. It will still take a year or so to reach 7 percent but growth in the workforce should remain strong," said Samuel Tombs at Capital Economics.

The BoE has pledged not to discuss hiking interest rates from their record low of 0.5 percent until the goal is met.

Britain's economic recovery picked up pace last year and some economists say the Bank will lower its target and hold borrowing costs low until the country's turnaround broadens out.

The bank's actions will also be closely watched by the country's politicians, who are beginning to gear up for an election in May 2015 which could hinge on the economy.

Thirteen of 35 economists in the poll expect a lowering of the threshold, probably to 6.5 percent, a similar proportion to that in a Reuters poll taken earlier this month ahead of the Bank's January policy meeting when it left policy unchanged.

"The BoE needs to review whether the 7 percent unemployment threshold is appropriate for the use of forward guidance, especially as the unemployment rate is quickly approaching 7 percent," said Azad Zangana at Schroders.

"Hitting the threshold will give the impression that the BoE will then consider raising interest rates, which we think it has no intention of doing in the near term."

Some pressure on the Bank has eased - data on Tuesday showed inflation had fallen to its 2.0 percent target for the first time in four years during December, but may nudge up again as utility and transport price rises are factored in.

With growth picking up and unemployment falling, economists are now narrowly predicting a rate hike in the second quarter of 2015, albeit one of only 25 basis points. The is the first time in nearly two years that the Reuters poll has signalled a tightening of monetary policy.

Britain's economy is still 2 percent smaller than before the financial crisis began but its growth rate is far outstripping the neighbouring euro zone, its main trading partner.

The economy is expected to grow 0.6 percent per quarter through to the middle of next year, the end of the forecast horizon and the highest forecasts to date, compared to just 0.2-0.4 percent in the common currency bloc.

Recovery in the now 18-member union remains fragile, with unemployment running at a record high and an increasing threat of deflation.

"There are still significant risks from any renewed flare-up in the euro zone crisis," said John Hawksworth, chief UK economist at PwC.

Azure Global’s vision is to be widely recognized as a reputed firm of financial business advisors, achieving real growth for ambitious companies and to become the first choice for F&A outsourcing for accountancy practices and businesses alike for more info visit our site Azure Global and join us also On Facebook