More of the same please - Economics weekly

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More of the same please - Economics weekly

As the developed world has continued to grapple with the aftermath of the financial crisis, this briefing in recent years has had plenty of bad news to report. But the news over the past week has been almost uniformly positive.

Economic Analysis

22 October 2012

UK inflation, retail sales, public finances and the labour market all gave good readings. US housing continued to recover while China’s data gave reason to believe its economy has finally bottomed. There were a couple of blots on the copybook. The main one being that EU leaders appeared to confirm that the cost of bank recapitalisations in Ireland and Spain will continue to be incurred by their respective governments and not the eurozone’s rescue fund. Still, weeks with so much good news seem to be a rarity these days. We need a good few more like it.

Eurozone banking union timetable progressed, but a big concern lingers

European leaders agreed a timetable for one element of the much-needed banking sector union. A ‘common banking supervisor’ will become operational over the course of 2013. But this modest progress was overshadowed by other statements which appeared to affirm that the eurozone’s rescue facility will not be used retroactively to recapitalise banks in Ireland and Spain. The cost of these bailouts will be borne entirely by those governments, making their route back to financial health all the more difficult.

Good news in September UK public finance statistics

Public sector borrowing came in at £12.8bn over the month, a £0.7bn reduction on September last year. Moreover, borrowing over the current tax year has been revised down by a full £6.7bn – the fiscal equivalent of finding a fiver down the back of the couch! Despite this windfall it looks likely that the Government will still miss its fiscal targets. Spending is broadly in line with target, but a weak economic backdrop means that receipts have been disappointing over the current fiscal year. Given this George Osborne will have some tough decisions to make ahead of his Autumn Statement on 5th December.

UK inflation continues to cool

Consumer Price Inflation (CPI) fell again in September to 2.2%y/y from 2.5% in August. This is the lowest rate of price growth in almost three years and a significant drop from the 5.2% peak in September 2011. Part of the slowdown in September can be explained by more modest rises in utility bills this year compared to last. Inflation is likely to continue to fall further, but some upward pressure from fuel and commodity prices could slow this process.

UK unemployment rate fell to 7.9% in three months to August

The UK labour market continues to surprise pleasantly. Fuelling the continuing downward trend in unemployment were the 510,000 jobs that the economy has created over the past 12 months, of which 69% were part-time. Some of the unemployment is becoming ever more entrenched, making it ever more difficult to reverse. The share of those unemployed for more than 12 months climbed to 35.5%, a share last seen in mid-1997. Wages are still failing to keep pace with inflation after only rising 1.7%y/y.

Retail sector rounds off Q3 in style

Despite falling household incomes in real terms, UK retailers enjoyed strong trading conditions in September, with the value of sales increasing 1.1% m/m. Clothing & footwear was the standout performer, though all sub-sectors registered growth (for the first time in six months). In y/y terms, sales were 3.2% higher than in September 2011. That shrinks to 2.5% when we strip out price increases but the bottom line is that demand is holding up relatively well in the retail sector. Are payment protection insurance payments helping to buoy retail sales?

US housing continues to recover and industrial production moves higher

Housing starts in September reached an annualised pace of 872,000 – the highest since July 2008. Meanwhile, building permits – a proxy for future construction - reached a four-year high and a confidence measure of US housebuilders reached a six-year high. Meanwhile, industrial production improved with growth of 2.8%y/y in September. And although manufacturers are using more of the available capacity, output is still 3% below the pre-crisis peak in 2007.

China may be bottoming

China GDP rose 7.4%y/y in Q3 after a 7.6% rise in Q2. On the face of it this is a very strong figure but it’s actually the lowest since the depths of the immediate post-crisis period in 2009. However, there are signs that China may at long last have bottomed. GDP rose 2.2%q/q after a 2% rise in Q2. Additionally, the September y/y readings for industrial production, fixed investment and retail sales all rose. Those forecasting a big China crash continue to be disappointed. But those seeking a strong re-acceleration of growth will too. It will likely be a muted recovery.




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. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.


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