Better health - Economics weekly

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Better health - Economics weekly

Last week saw a little more encouraging news about the health of the UK, Eurozone and US economies.

Economic Analysis

05 August 2013


Looking forward

August’s Monetary Policy Committee (MPC) meeting was a bit of a damp squib: no policy change; no statement; no nothing. Still, this week’s Inflation Report should provide plenty to get our teeth into. In particular, the Bank of England will make an announcement about the adoption of forward guidance.

Markets currently think that the MPC will start to hike rates in Q3 2015, though the MPC has suggested that this would be premature. It will be interesting to see just how premature. It’s worth noting that markets are flirting with the idea of a rate cut, to 0.25%, though not with much conviction.

Sunny July boost for manufacturing and construction

The manufacturing Purchasing Managers’ Index jumped to a 28 month high of 54.6 in July. Helped by rising output and orders, this indicates relatively robust growth. The construction survey was not to be outdone, rising to 57, a three year high. Though these sectors account for less than 20% of output, it is encouraging. The services PMI followed suit this morning, adding to signs that the UK’s economic health is on the mend.

UK lending to households up, but down for corporates 

Lending to households was up a whopping 19%y/y in Q2, no doubt in part due to the government’s Funding for Lending and Help to Buy schemes. However, repayments grew by 17%y/y, leaving overall balances just 0.5%y/y higher. On the other side of the fence, lending to UK corporates continued to fall, while corporate deposits rose. The fall in corporate lending reflects two main things: some firms substituting bank loans for other forms of finance and a focus on repayment - for every £1 companies borrowed in H1 2013, they repaid £1.10.

No interest rate changes for the Eurozone 

The European Central Bank (ECB) kept interest rates on hold at 0.5% at its July meeting. President Draghi reiterated that the ECB will keep interest rates at present or lower levels for an “extended period of time”. The ECB has surely welcomed the recent good economic news. Eurozone unemployment fell in June, for the first time since April 2011. While the 24k fall was small, and not enough to get the unemployment rate down from 12.1%, it is a step in the right direction. This comes after signs of rising activity in the manufacturing and services sectors.

Ticking along

The US economy grew 1.7%q/q annualised in Q2, faster than the 1.1% in Q1. While not spectacular it suggests the economy is managing to tick along at a decent pace despite tax rises earlier in the year and government spending cuts. Both consumer spending and fixed investment made sizeable contributions. The US labour market also continues to improve, with 162k jobs created in July. But there was a tinge of disappointment as this was less than expected. Nevertheless, unemployment now sits at 7.4%, down from 7.6% in June.

Stronger US manufacturing, but Fed tries to stay balanced

US manufacturing surged in July with the ISM survey leaping to 55.4, from 50.9 in June. Spurred on by rising new orders and stronger production, this is the highest growth rate in two years. That wasn't enough to alter then Federal Reserve's view of the world. Last week’s meeting of US rate-setters saw them reiterate their position on slowing quantitative easing later this year as long as the economy continues to improve.

Forever blowing bubbles?

US house prices rose 12.2%y/y in the three months ending May, according to the Case-Shiller 20-city index. Price rises at this speed would normally set alarm bells ringing. Is another bubble being inflated? Probably not. Adjusted for inflation house prices are back to early 2000s levels. There's also a quirk in the numbers. The calculation compares the current sale price against its last sale price. With many houses on the market today previously bought at depressed prices from banks that had repossessed them, this effect will wane as the stock of foreclosed properties falls.

Loose lips sink ships - and confidence

With rising house prices and better-than-expected Q2 growth, one might expect US consumers to be feeling a bit more confident about the future. On the contrary, concerns about business and job prospects saw consumer confidence fall in June. Perhaps Americans have been listening to the Fed's attempts at explaining where monetary policy might go next and think that tightening is coming soon. If so, it highlights the challenges facing central banks wanting to give 'forward guidance' about their plans.


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.

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The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

With slowly improving health, what will this mean for future monetary policy? We’ll get a better sense of that from the Bank of England this week when they set out their view on the use of forward guidance. But as the US Federal Reserve has shown, forward guidance can have its own headaches.

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