Steady on - Economics weekly
29th October 2012
The UK economy grew 1% in the third quarter, easily surpassing expectations and the first time UK output has expanded since September 2011. A 1% quarterly growth rate equates to about 4% a year. Not bad. But before we start believing the UK is the world's newest emerging market, Q3 growth was flattered by a couple of ‘special factors', particularly Olympic ticket sales. The hard graft of recovery continues and steady, not spectacular, growth is the goal. This will not be helped by further deterioration in output in the Eurozone. Absent the ‘fiscal-cliff', there is evidence that the US recovery is on a much firmer footing, as the presidential election enters the final straight.
UK grows for first time in a year. UK Q3 GDP grew by 1%q/q, according to the preliminary estimate. This is the first quarter of growth since Q3 2011 and the strongest since Q3 2007 (not, perhaps, the most reassuring date for comparison). The largest individual sector contribution came from ‘government and other services', but this received a large boost from Olympic ticket sales. Another one-off effect came with the ‘bounce' in activity from Q2, which was held-back by extra bank holidays and the Jubilee. However, there are signs that growth slowed at the end of the quarter as output in September was estimated to have fallen in services, production and construction.
Bank of England governor contemplates the limits of monetary policy. In contrast to the GDP figures, Sir Mervyn King warned last week of a darkening economic sky and said that the UK faces a long period of economic adjustment. Despite the bleak outlook, he sees monetary policy as approaching its limit and poured cold water on suggestions that the Bank should be contemplating more dramatic policies, such as giving away new money. The governor thinks this would lead to a loss of control of the money supply and is uncomfortable about stepping into the realms of fiscal policy. With Governor King stepping down next year, it will be interesting to see whether his successor holds similar views.
The Bank also displays confidence in the UK corporate bond market. A long time ago in a country not far away, the Bank of England began quantitative easing. At that time, the Bank bought UK corporate bonds as well as government ones. What's less well known is those assets, which peaked at about £3bn, have practically all been sold. The reason is because the corporate bond market has performed a lot better than the wider economy. UK corporate bond issuance in 2012 has already surpassed that achieved in any of the last three years. And the premium investors charge for corporate over public debt has been falling recently as well. As a result, the Bank of England thinks this is a market that doesn't need central bank help and is very close to removing all of its interventions. That is good news.
Eurozone private sector off to a poor start in Q4. The composite Purchasing Managers' Index (PMI) for the Eurozone, covering manufacturing and services, continues to make gloomy reading. The index dropped from 46.1 in September to 45.8 in October, the worst reading since June 2009, confounding expectations that activity might have improved. Manufacturing was the main culprit, falling to 45.3 from 46.1. The weakness in the so-called core countries, particularly France, appears to be intensifying. It all raises more questions over pursuing aggressive austerity in the face of a recession that now looks to be engulfing the single-currency area.
American consumers power US growth. The US economy grew 0.5%q/q in Q3. This is half the UK pace but they didn't have an ‘Olympic-effect'. In fact, US growth looks more sustainable. Household spending was the most important source of growth as consumers had a bit more money in their pockets. Personal income was 3.6% higher than a year ago. The other strong point was government spending, which grew in real terms for the first time in over two years. Yet the export engine ran out of steam, contracting for the first time since Q1 2009. This was unsurprising as data from the Dutch Bureau of Economic Policy Analysis revealed that world trade volume fell by 0.4%m/m in July and August. This is not good news.
China's economy seems to be stabilising - if so, the rest of Asia will be happy. The initial reading for China's manufacturing PMI for October provided evidence that China's economy seems to be stabilising. The index rose to 49.1, the highest reading since April. Encouragingly the inventories component fell again after reaching an historic high in August. In other words, manufacturers are finally beginning to run down excess stock, paving the way for an increase in production. If so, the rest of Asia would cheer. South Korea's economy grew at the slowest pace in three years in Q3, while Japan's exports fell 10%y/y in September on waning global demand. Help from China would be welcome.
This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised and regulated by the Financial Services Authority. © Copyright 2012 The Royal Bank of Scotland plc. All rights reserved