Burn baby burn! Economics weekly

Burn baby burn! Economics weekly

It's bonfire night and we all love fireworks. Attention is focused on the US political pyrotechnics, where voters are set to elect the next President.

Economic Analysis

05 November 2012

Over recent weeks data suggests that the winning candidate will inherit an economy that is burning brighter. But while this warmth is encouraging, the fiscal cliff threatens to rain on any nascent recovery. In China there has also been evidence that the economy is no longer cooling and the new leadership of the Communist Party will be eager to add fuel to the embers. Elsewhere, there are fewer fireworks to celebrate. Despite a bounce in activity last quarter, the UK may struggle to keep this bright spark lit in Q4. Meanwhile, finding even an initial spark remains the challenge for Eurozone policymakers, who continue to see conditions dampen.

Steady recovery in the US housing market continues

House prices were up 0.5% over August, taking the total increase over the past 12 months to 2.0% according to the 20-City Case-Shiller Index. This seventh successive monthly increase is the first time since 2006 that prices have risen consistently without support from government initiatives (such as tax breaks on house purchase). Prices are still 31% below their peak, about the same as they were in 2003. However, in the future we may look to Q1 of 2012 as the time when the market turned.

Another strong month for US payrolls

October saw 171k jobs created in the US, while September's number was revised up to 148k. This marks the fourth straight month above 100k and there are almost two million more jobs in America than this time last year. This job creation has pushed the unemployment rate down to 7.9%, a full percentage point below last October's figure. The Federal Reserve has committed to pursue Quantitative Easing (QE) until it sees "substantial" improvements in the labour market. Whilst the recent trend has been positive, it is likely to take at least another 18 months of these increases before the Fed is satisfied.

Would UK manufacturing please turn around

The UK manufacturing Purchasing Managers' Index (PMI) fell to 47.5 in October, from 48.1 in September. The PMI reading in September corresponded to a 0.8%m/m decline in production. While the relationship between survey data and actual output has weakened in recent times, a further drop in October does not bode well. But to conclude on a more up-beat note, output in consumer goods bounced back strongly, providing additional evidence that the pressures on UK consumers may be easing a little.

Nationwide's house price index grew 0.6%m/m in October

While growth of any sort is good news, this is only the fourth month this year in which prices have risen. The average house price has remained about the same since January 2010 and is currently 11% below the October 2007 peak. However, accounting for inflation the real average house price is 25% below peak. With September mortgage approvals unchanged, and little growth in mortgage lending, the market is treading water. The Funding for Lending Scheme (FLS) may not be battling a housing market crash, but it has its work cut out nonetheless.

Corporate lending falling

Loans to UK non-financial corporations fell by £2.7bn in Q3 with outstanding loans having now declined steadily for three years. UK corporates have significantly improved their financial position following a sustained period of deleveraging. This should bode well for future investment but firms remain understandably cautious about the economic outlook. Again it remains to be seen if cheaper credit from the FLS will persuade corporates to take the plunge.

China's manufacturing sector improved in October

China's manufacturing output expanded for the first time in three months according to the Government's PMI survey, which increased to 50.2 in October, from 49.8 a month earlier. A separate survey by Markit showed the strongest activity in the sector in eight months. Both reported an increase in domestic orders as recent monetary policy helps to boost demand at home. Export orders however were down, as China's manufacturing sector continues to feel the pinch from the Eurozone crisis and weak demand in other advanced economies. 

Eurozone economy continues to deteriorate

Eurozone manufacturing PMI fell in October to 45.4, with stress in the periphery having a clear effect on core economies. There was however some good news for Ireland, which was the only member state to register growth in manufacturing, helped by rising employment in the sector. Overall unemployment however continues to tick higher on the Emerald Isle, reaching 15.1% in September. Indeed this is a trend seen across the currency union with aggregate unemployment now at a record 11.6%, up from 7.6% in happier days before the crisis.




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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