Recent economic performance

Gross Domestic Product— Britain managed to avoid a recession despite weakness elsewhere in the global economy. Economic growth has come from a strong and thriving services sector that has more than offset a weak manufacturing sector. One reason for manufacturing’s weakness up until now has been the strong value of the pound especially against the euro and the dollar. This makes British manufactured products expensive in the eurozone, the nation's primary export market. Manufacturers have begun to show signs of life. As in the U.S., the consumer and housing have provided the backbone of growth.

The UK economy continues to grow above trend levels. Third quarter GDP growth was estimated to be up 0.7 percent when compared with the previous quarter and 3.2 percent when compared with the same quarter a year ago. The service sector continues to perform well and now the manufacturing sector is also contributing to improved growth.

Industrial Production — Industrial production has been a drag on the economy for some time now, even though it only accounts for about 16 percent of the economy. The strong pound sterling has made British manufactured goods expensive in its two primary markets — the EMU and the U.S. Despite September’s weak showing, third quarter industrial production was up 0.4 percent on the year. Manufacturing output was up 0.4 percent as well.

Inflation

Inflationary pressures have been vulnerable to soaring energy prices. Although the boom in housing prices has ended, upward pressures from gasoline prices and the weaker pound sterling (which increases the price of imported energy products) continue to exert upward price pressure. The graph below compares two measures of consumer inflation. The retail price index excluding mortgage interest payments was the Bank of England’s inflation measure until January 2004 when it was replaced with the consumer price index. The CPI uses Eurostat’s harmonized index of consumer price methodology and is comparable across the European Union. The RPIX is used for a variety of domestic purposes including cost of living adjustments.

Producer prices are measured two ways — input prices and output or factory gate prices. Whether input or output, the PPI has been influenced by soaring input prices for raw materials such as steel and crude, which have eased of late. While input prices soared, manufacturers found it difficult to pass increases onto customers.

Unemployment — Two unemployment measures are used to evaluate labor market conditions. The first is the claimant unemployment rate, which is currently 2.6 percent. The second is the International Labour Organisation unemployment rate, which excludes jobseekers that did any work during the month. That unemployment rate has remained at 5.4 percent since April. Some analysts say that immigration into the UK is helping to ease tight labour conditions. Previously unemployment had fallen consistently since peaking in 1992.

Merchandise trade — Ever since statistics on exports and imports of goods were first collected in 1697 trade has been one of the country’s key economic indicators. Britain’s merchandise trade balance has historically been negative. Like the U.S., Britain must rely on healthy investment income from abroad and service exports to fund its appetite for imported goods. The greatest volume of trade takes place with other EU countries, thus the exchange rate between the pound sterling and the euro plays a crucial role.