The official estimate of fourth-quarter GDP growth has been maintained at 0.7%, although revisions to earlier quarters have resulted in the annual increase falling from 2.8% to 2.7%. As expected here, services output undershot the 0.4% December rise assumed in the preliminary GDP estimate (increasing by 0.2%); the impact on the quarterly GDP rise, however, was offset by upward revisions to earlier months.

The key takeaway from the details of today’s report is that recent solid growth has been broadly based and balanced, increasing confidence in its sustainability. Consumer spending rose by less than GDP in the year to the fourth quarter – 2.4% versus 2.7%. Investment, meanwhile, soared by 8.7%; business fixed capital formation grew by 8.5%, with a stronger rise in housing investment*. Net exports were little changed over the four quarters – import penetration**, encouragingly, fell. The only negative in the expenditure breakdown was relatively high stockbuilding during the second half of 2013; the stockbuilding numbers, however, incorporate a balancing adjustment and are often revised significantly.

Solid growth is occurring across sectors and most activities: output of services, industry and construction rose by 2.7%, 2.3% and 4.3% respectively in the year to the fourth quarter. Services strength does not reflect finance – output of “financial and insurance activities” actually fell by 1.8% in the latest four quarters, subtracting 0.2 percentage points from GDP growth.

The income breakdown shows a 3.9% nominal rise in total employee compensation – including employers’ social (pension) contributions – in the year to the fourth quarter. The number of employees increased by 1.1% over the same period, according to last week’s labour force survey. So average compensation grew by 2.8% – more than CPI inflation of 2.1% in the fourth quarter***.

Adding in profits and other income, nominal GDP rose by an annual 4.4% in the fourth quarter. With potential output probably growing by less than 2% per annum, this rate of increase is incompatible with achievement of the 2% inflation target over the medium term.

*The difference between total and business investment suggests that the housing component grew by about 12%.
**The import share of domestic demand.
***A fourth-quarter breakdown between wages / salaries and employers’ social contributions is not yet available.