Osborne gets his man
Despite previously ruling himself out of the job, current Governor of the Bank of Canada, Mark Carney will take up the reins at the Bank of England in July next year. Dr Carney has a reputation as an outstanding central banker. His governorship of the Bank of Canada is credited as one of the reasons behind the strong performance of the Canadian economy in the post-crisis period. And his experience in the private sector and role as Chairman of the Financial Stability Board should set him in good stead to take on the new regulatory responsibilities at the Bank.
The old lady sings…and stings
The latest Financial Stability Report from the Bank of England highlighted worrying parallels between the advanced economies today and Japan since the 1990s. Commonly known as Japan's 'lost decade', it's actually two decades now and rising. The report also recommended some muscular medicine for UK banks. There's life in the old lady yet.
A flicker of life in the UK mortgage market
It’s too early to judge the effectiveness of the Bank of England’s Funding for Lending (FLS) scheme. But the number of mortgage approvals for house purchase reached the highest level since January. Lending figures, on the other hand, continue to disappoint. Mortgage lending rose £0.2bn between September and October, little changed from what we have seen thus far in 2012. And mortgage rates have barely changed since August. But it takes a few months for higher approvals to feed into higher lending figures, so higher approvals may be the forerunner of improved lending in the coming months. And hopefully, in turn, this leads to some support for house prices, which continued to drift downwards according to Nationwide.
UK Q3 growth confirmed as 1%q/q
The second estimate of Q3 revealed a bit more detail. The biggest contribution to the q/q figure came from net trade as the UK exported more and imported less. A few more quarters like that would be hugely encouraging for the rebalancing story. The second biggest contributer was household spending which grew 0.6%q/q, the fastest pace since Q2 of 2010. Meanwhile, the Bank of England estimates that the Olympics contributed as much as 0.4 percentage points of the 1%/qq figure. Unfortunately data for Q4 so far have brought the economy-watchers back down to earth. According to Bank of England deputy governor Charlie Bean, the economy is probably growing "weakly at best."
US growth revised up and foundations of the housing recovery strengthen
US growth in Q3 was revised up from a 2% annual pace to 2.7%. Most of the upward revision came from firms boosting their stock levels. So, absent a burst of demand, the apparent improvement is likely temporary. At least there were more signs of life in house prices, which rose 1.1%q/q and 3.6%y/y in Q3 according to Case-Shiller. And a different report showed a 3.6%y/y rise in September. Prices are increasing in most parts of the country. Better is not good, however. Allowing for inflation, prices are at the same level as when Bill Clinton was President. But with fewer people falling behind on their mortgages and the pace of house building activity quickening, the housing recovery is strengthening and deepening.
Asia is stirring but Japan and India struggle
India’s economy expanded 5.3%y/y in Q3. At first glance this is a very strong figure but it’s India’s lowest in over three years. And prospects for a sharp acceleration remain dim. In Japan, further signs emerged of yet another recession. A key survey of manufacturing reached the lowest reading since last year’s earthquake disrupted production. Meanwhile, retail sales fell 1.2%y/y in October. In response, the government announced a stimulus package totalling £6.6bn - the second in just over a month. As Japan’s industrial sector suffers, South Korea’s strengthens, with production rising 0.8%m/m in October – the second consecutive monthly gain. This was reinforced by the Chinese government’s Purchasing Managers’ Index (PMI) reaching a seven-month high of 50.6 in November. The reawakening of Asia’s manufacturers in recent months is one less thing Mark Carney will have to worry about.
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.
With almost perfect timing following the appointment, the Bank of England’s Financial Stability Report laid out much of what will be on Mark Carney’s agenda. For the first time the Bank drew worrying parallels between advanced economies today and Japan since the 1990s. Add in the new regulatory responsibilities the Bank has and it’s already a formidable list. Despite the size of the task, Mark Carney will be looking to replicate the success he had as governor of the Bank of Canada, where he helped steer the economy through choppy waters. The key question is ‘Carney’ do it?