Pace and composition of growth point to balanced recovery....while deficit reduction plans should soon be back on track - EY ITEM Club comments

22 May 2014

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  • Consumers remain the lynchpin of the recovery…
  • …although business investment has continued to impress
  • April’s public finances deficit up on last year

Martin Beck, senior economic adviser to the EY ITEM Club comments on today’s GDP figures:

“The solid pace and composition of growth are clearly positive signs and point to a reasonably balanced recovery. Admittedly, consumers were the lynchpin of Q1’s rise in GDP, but that was not surprising given their dominant role in the economy. With real wages continuing to fall in the first three months of the year, growth in consumer spending may have been driven by tapping into household savings further.

“The hefty cash balances of companies and the booming housing market appear to be lifting the major categories of investment spending. The headline figure was dragged down by a sharp fall in Government investment, but business investment grew at a solid clip, achieving its longest consecutive expansion in 16 years. Investment in dwellings also saw a decent rise. Overall investment growth was slightly disappointing, with the pace of expansion slowing sharply on its rate in the last quarter of 2013.

“On a gloomier note, net trade made little contribution to growth in Q1. However, with surveys painting a brighter picture on exports than official data and showing investment intentions at strong levels, hopes that the sector will start making a bigger contribution to the recovery may not be in vain. Furthermore, a healthy jobs market and high levels of consumer confidence point to consumer spending continuing to expand. With all that in mind we are sticking to our view that GDP will expand by 2.9% in 2014, with the risks probably lying to the upside. 

Martin added on public finances:

“The public finances data for April may not be as bad as the headline number suggests. We expect that next month should see some bounce-back in the fiscal numbers. So, while it’s still early days, the Government’s deficit reduction plans should probably soon be back on track.

“While borrowing was higher than the same month last year, April 2013’s deficit was pushed down by a boost to income tax receipts as high earners shifted income to take advantage of the cut in the 50% tax rate. Following several months of strong growth, income tax receipts saw a hefty annual fall in April this year. Meanwhile, the weakness in the headline borrowing number was driven by borrowing by local Government, which tends to be very volatile.”