More 'zag' than 'zig' - Economics weekly

More 'zag' than 'zig' - Economics weekly

Some weeks the economic news seems almost uniformly negative. Last week was one of those weeks.

Economic Analysis

19 November 2012

Inflation rose to a five-month high, once again causing real wages to fall. October’s retail sales were unsurprisingly shaky, but it’s hardly helpful in the run up to Christmas. The Bank of England also downgraded its UK growth forecast. There was some good news. Unemployment fell again. As the Bank of England governor said, we’re in the “zigzag” economy. To paraphrase his words further, although last week was more a ‘zag’ than a ‘zig’, the underlying story remains the same. It’s a long hard road to recovery.


Bank of England dampens expectations

The Bank of England set out another pessimistic forecast for the UK economy in its quarterly inflation report. Having previously expected growth in Q4 of next year to be 2.2%y/y, it now expects a figure of around 1.7%y/y. The upshot is output won’t reach its pre-crisis peak until 2015. In the near-term, Governor King indicated the possibility of a negative Q4 GDP reading after Q3’s 1%y/y welcome surprise. As for consumer prices, the Bank expects inflation to remain above the 2% target until 2014, despite the weak economy. But shouldn’t weaker growth mean a lower pace of inflation? Not necessarily. According to the Bank of England, poor productivity performance means that the economy’s supply-side has also been hit. As inflation depends on both demand and supply, if supply is weaker then inflation can remain high.

September’s inflation reading underlines the Bank’s concerns regarding prices

The consumer price index (CPI) rose 0.5% between September and October as higher university tuition fees kicked in. This pushed the annual rate of inflation from 2.2% to 2.7% - the highest rate since May. The rise in inflation was also underpinned by higher food and motor fuel prices, adding to the strain on household budgets. Furthermore, recent announcements of higher energy prices by some of the main utility companies are yet to hit. The squeeze on incomes looks set to continue for some time.

The UK unemployment rate fell to 7.8% in the three months to September – the lowest rate in over a year

Despite unemployment falling, the share of the unemployed who have been without a job for more than 12 months climbed again to almost 36%, a level last reached in mid-1997. More positively, the employment rate also rose, to 71.2%, which was last seen in early 2009. And the total number of people in employment is as high as it has ever been. Less encouraging is that much of the rise in employment is being driven by part-time jobs. And wages increased by just 1.8%y/y in the three months to September – again failing to keep pace with inflation. But it does pay to be working in some sectors, including the public sector and the wholesale and retail sector where earnings rose by at least as much as consumer prices.

UK retail sales make a shaky start to Q4

The value of retail sales fell slightly in October (-0.4%). Most areas were weak, but clothing & footwear retailers had an especially bad month. The overall decline was even sharper in volume terms, which lends weight to Mervyn King's suggestion that GDP might contract again in Q4. The report will doubtless fuel concerns about weak trading over the festive season (only 36 days do go!), though it is worth pointing out that sales have had a good run in recent months, so we shouldn't attach too much weight to one data point. Christmas isn't cancelled - yet.

The eurozone economy slipped back into recession in Q3

The eurozone economy shrank 0.1%q/q in Q3 following a decline of 0.2% in the previous quarter. The troubled periphery economies are the culpable parties with Spain’s GDP falling 0.2%q/q, Italy -0.3% and Portugal -0.8%. But it was a slump of 1.1%q/q in the Netherlands (the eurozone’s 5th largest economy) that did the damage. France escaped recession by unexpectedly expanding 0.2%q/q, while Germany slowed a touch from 0.3%q/q in Q2 to 0.2%q/q in Q3, as the economic malaise spreads across the region. With so much bad news from the Eurozone it’s surprising that the growth figures were not worse.

Fed Chairman Bernanke sounds a warning about US housing

There have been reasons for modest optimism about US housing recently as activity and prices ticked up. But in a speech last week, Bernanke accentuated the negative. 20% of borrowers are in negative equity. 7% of mortgages are either more than 90 days overdue or the house is being repossessed. Meanwhile, new mortgage lending is at its lowest level since 1995. In other words, a number of headwinds remain and even a modest trip over the fiscal cliff could take the fragile housing market recovery with it.



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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