Cash-back, Sir? Economics weekly

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Cash-back, Sir? Economics weekly

Most of us have used cash-back at one time or another, but even in the run-up to Christmas we don’t ask for £35bn.

Economic Analysis

12 November 2012

This is what the Treasury is set to receive from the Bank of England owing to the cash accumulated by the Bank from undertaking quantitative easing (QE). Good timing. It comes as data points to a loss of economic momentum for the UK from Q3’s strong showing. In the US, President Obama’s election win high quickly gave way to political realities with a resolution to the fiscal cliff remaining top of the agenda. The message from within the US and around the globe is the same – keep back from the cliff.

UK looks to boost the public finances

Through its purchases of UK government debt, the Bank of England has accumulated a cash pile that comes from the coupon payments on these bonds. Last Friday it was announced that this ‘excess’ cash, which is estimated to amount to £35bn by the end of March 2013, will be transferred from the Bank of England’s QE facility back to the Treasury. This ‘cash-back facility’ will be gratefully received. The first transfer will reduce the budget deficit for 2012/13 by £11bn, or around 0.7% of national income. It may not, however, be a permanent transfer, as the money could be given back to the central bank in the future depending how UK government bonds perform. Another tough month for UK industrial production. Industrial production in the UK fell by 1.7%m/m in September, as oil and gas production fell sharply owing to maintenance shutdowns. Manufacturing managed to eke out a small 0.1%m/m gain, but September's output was down 1.0% from a year ago. One bright spot for UK manufacturing continues to be vehicle production with output in the sector having risen for the past three years.

And a tougher time for service providers too

The UK services Purchasing Managers’ Index (PMI) fell to 50.6 in October, from 52.3 in September, the lowest reading in almost two years. The weak reading adds to evidence that Q3’s buoyant 1%q/q GDP figure did not herald a new dawn for growth, rather the recovery will continue to be a hard slog. Another worrying development is that the employment component has deteriorated over the past two months. While this indicator can be hit and miss, it could mean that the labour market’s decent run of late is running out of puff.

The Bank of England holds rates steady and asset purchase programme at £375bn

The Monetary Policy Committee (MPC) is waiting to get a better sense of the impact of the Funding for Lending Scheme before making a decision on more QE. But some Committee members may be starting to have doubts on the effectiveness of printing money to buy government debt. The MPC also may hope that the decent performance of the labour market in recent months gives a truer picture of the underlying health of the economy than other indicators. The minutes of the meeting, released in a couple of weeks, should shed further light on what exactly is on the minds of members. The European Central Bank also held steady last week and reiterated its readiness to activate its bond-buying programme. But only if Spain and other troubled countries ask for help first.

US election over, fiscal cliff to the fore

The immediate challenge for the re-elected Obama administration is the fiscal cliff - a series of tax hikes and spending cuts equal to almost 5% of GDP due to come into force early next year. Comments last week by key Republicans potentially indicate a greater willingness to compromise, meaning an agreement to resolve the cliff may be slightly closer than it was pre-election. However, there remain a lot of issues to overcome so expect a fraught end to the year. And it isn’t an issue confined to the US. The effects of the fiscal cliff would have a global reach. If implemented in full, it could wipe up to one quarter of a percentage point off UK output in 2013 according to the IMF.

Chinese economy continues modest improvement as new leadership takes over

October’s industrial production growth rose to 9.6%y/y and retail sales growth increased. The economy is likely to experience a modest near-term reacceleration, but the long-term picture is that it has reached a structural turning point. China’s new leaders take over with the investment and export led growth model deemed to have run its course. A rebalancing toward consumption is a necessity for sustained economic catch-up with the West. ‘Natural’ forces, including less favourable demographics, will aid this rebalancing but ‘policy’ forces are arguably more important. Tentative steps toward rebalancing have been taken recently, including a loosening of control over the banking sector. The new leaders must accelerate such reforms.





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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