Changing of the guard - Economics weekly

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Changing of the guard - Economics weekly

Governor Mervyn King chaired his final meeting of the Bank of England’s MPC last week.

Economic Analysis

10 June 2013

In helping to establish this committee, and in serving on it for 16 years, he has been an incredibly important actor in UK economic policy. He still has plenty of work to do in his final three weeks, but attention is already switching to his successor, Mark Carney. The big question now is whether Carney’s reputation for monetary activism will be able to reveal itself in the face of improving UK data. Perhaps not immediately. But recent history shows this recovery is far from secure.


The Bank of England’s (BoE) Monetary Policy Committee (MPC) voted not to cut the Bank rate or alter its quantitative easing programme in June. And with it, Governor Mervyn King's innings of 194 MPC meetings came to an end. Next week we will learn if King spent his last meeting calling for more quantitative easing, but being outvoted, as he was in the previous four meetings.

A few pieces of positive news on the UK economy meant it was unlikely that those arguing for more stimulus would attract further support this month. All eyes are now on the new boss. Incoming Governor Mark Carney will chair the July MPC meeting in his first week of office.

Spring bounce in May

The weather may not have felt very spring like for much of May, but there was a spring like bounce for the UK economy. Business survey data showed that activity expanded at the fastest rate in more than a year in both the manufacturing and services sectors. The manufacturing Purchasing Managers' Index (PMI) rose to 51.3, from 50.2 in April.

And even the construction sector grew for the first time since last October, as rising residential building offset weakness in commercial and civil projects. But the stand-out performer was services, exceeding all expectations to hit 54.9 as new business grew at its fastest pace in more than three years. May's bounce in activity means all three sectors reported expanding activity for the first time in a year. This improvement has boosted hopes of an acceleration in second quarter GDP growth.

Has the Eurozone bottomed out?

The second estimate of GDP confirmed that the euro-zone economy shrank by 0.2% in the first quarter of 2013. Declining investment and exports were the main drivers behind the currency bloc’s continued contraction. But there was some good news. May’s PMI rose to 47.7, up from 46.9, driven by an improving manufacturing sector.

Germany managed to squeeze into expansionary territory with a PMI reading of 50.2. Whilst the Spanish downturn eased slightly, its PMI of 47.2 was higher than it has been for almost two years. The service sector didn’t fare quite so well though, with output falling across all-four of the big Eurozone economies in May.

No change from the European Central Bank

After a cut of 25 bps in May, the ECB kept rates on hold at a record-low of 0.5% at its June meeting. Despite recent speculation, President Draghi held back on further stimulus for now. The ECB still expects a recovery to take place later in the year. We think more action by both the ECB and national governments will be needed if a reliable upturn is to be achieved.

US recovery remains steady but not spectacular...

The pace of service sector growth accelerated in May, with the ISM ticking-up by 1.5 points to 56.5, a whisker above its long-run average. Despite the headline improvement export growth ground to a halt and the rate of job creation eased. A fall in new orders helped drag manufacturing into contraction territory in May, with the ISM slipping 1.7 points to 49.0.

This first negative reading since November, and also the lowest since mid-2009, is likely to be more a stumble than a fall. Even so, this underlines that the US recovery, while well established, is much weaker than the upswings we have seen from the US in the past. There's little encouragement in these reports for the Fed to slow its QE programme.

…whilst the labour market follows suit

The US economy added 175,000 jobs in May, just ahead of the 163k expected. But unemployment edged up from 7.5% to 7.6% as more people re-entered the labour force and the number of discouraged workers fell to 780k, the lowest since September 2009.

In tandem with the PMIs job creation has slowed in Q2 averaging 160k across April and May compared to over 200k in Q1. This is still some distance from the “substantial” improvement that the Fed is looking for. But it remains the case that the US economy continues to weather the fiscal tightening, and for that Chairman Bernanke and his colleagues at the Fed will be very relieved.



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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