Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Monday, 27 October 2014

UK GDP increases by 3 percent

Economy bigger than 2007 peak

Britain's economic journalists are proving to be quite a contrarian indicator, first failing to predict a bust (though providing plenty of after-the-event sermonising) and then turning relentlessly gloomy just as the economy began to come galloping back.

Preliminary estimates of GDP, which only collate less than half of the final data, recorded GDP growth of 0.7 percent for the third quarter of 2014 and 3 percent over the past year.

The economy has now comfortably overtaken its pre-crisis peak.

Unbalanced recovery

Plenty have observed that the economic recovery is "unbalanced".

Certainly real wages growth has been shockingly weak.

And, of course, some sectors of the economy have fared better than others, but in that sense, I doubt whether is even such a thing as a "balanced recovery", since some sectors must always lead the road back.

GDP by sector

Out of interest I charted the GDP indices by sector since Q1 2011, which showed that the business and financial services sector is absolutely flying, expanding by well over 10 percent in less than three years, while distribution, hotels and restaurants have also recorded very strong growth of 10 percent.

The transport sector has been strong too.

Of course, some sectors are in decline, as is well known about.

Agriculture was crushed during the brutal and prolonged winter through 2012/13, while mining and quarrying continues its long, slow decline. 

Fortuntaely, Britain's economic health is not tied to mining or quarrying and as the blue line shows the national economy is growing nicely at a 3 percent pace.

A couple of years ago gloomy economic journalists helpfully began to explain to us how a sustained recovery in Britain was impossible and we'd be in the doldrums for years to come.

Naturally enough they pre-empted seven consecutive quarters wherein the economy has grown by 0.5 percent or more, while construction, services and production are all tracking at 3(+) percent per annum pace (a phenomenon which hasn't happened since the turn of the century).

Agriculture is still feeling its way back from the big freeze.

Fastest growing economy

The Q3 preliminary result makes Britain the fastest growing economy of all of the large developed countries.

It's true that the recovery is top heavy financial services, but that's exactly what we expected.

It's the same reason we have always recommended investing in property in cities like London and Cambridge which benefit directly from London's eminence as a financial centre (and not, for example, in traditional manufacturing heartlands).

The British House Price Index continues to show London's massive out-performance over the long run.

Periodically regional markets seem to have a good run (and Northern Ireland created one of the most spectacular developed economy property bubbles on record, before promptly collapsing by more than 50 percent) but over the long run the strongest performance of London is clear.

Even within London, the tremendous dominance of Prime Central suburbs over outer locations (see the blue line for "Outer Met" below) remains obvious.

Not dissimilarly in Autralia we've have a strong leaning towards financial centres such as Sydney (and the inner suburbs, thereof) and generally away from traditional manufacturing economies such as Adelaide or parts of regional Victoria.

Over certain periods of time other regions and outer suburbs will record stronger growth, but if you are a long term investor, follow the macroeconomic trends and where the greatest domestic wealth is being created, which is financial services.

Tesco's Chairman to stand down

In other news, Britain largest grocery retailer Tesco has seen its woes continue. 

Not only has the company seen its share price sliced in half, Chairman Richard Broadbent has announced that he is to step down as the accounting irregularities bad news continues to flow.

On Thursday it was announced that the accounting black hole found in the company's books was even larger than had previously been thought, leading the share price to tank by yet another 8.5 percent to an 11 year low.

Tesco saw another £1.2 billion wiped from its share price while Sainsbury's and Morrisons saw their share prices tanking in sympathy, with each seeing several hundred million pounds wiped from their market valuations.

I recently discussed the almighty mess that is the British supermarket sector and the reasons behind the collapse here.