Summer glow - Economics weekly

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Summer glow - Economics weekly

Another week, another good report card for the UK economy. With house prices up; inflation edging down; employment increasing; and the sound of shopping tills doing more business, one could be forgiven for having a warm summer glow.

Economic Analysis

19 August 2013


A more discordant era for the MPC?

Support for 'forward guidance' was not unanimous according to the minutes of August’s Monetary Policy Committee (MPC) meeting. One member, Martin Weale, supports the new approach in principle, but thinks one of the inflation "knockouts" isn’t tough enough, so voted against the policy.

The lack of unanimity serves to underline the delicate balance the MPC faces between securing the recovery and taking chances with price stability. It feels like we could be entering a more discordant era for the Committee. Apart from the vote, the other key message was that "the onus on monetary policy was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely".

Static power

The unemployment rate responded to its elevated role as a benchmark for UK monetary policy by...wait for it…standing pat. It stayed at 7.8% in the three months to June. Given its new-found importance, let's spend a moment examining its moving parts. The underlying news was broadly good. Employment rose, so there's more jobs.

The number of people unemployed and those not looking for work at all both fell. Additionally, the employment rate rose to 72% - the highest for five years. However, less positively, the chances of you moving from unemployment into work actually fell slightly. The MPC will take all of these issues into account when assessing unemployment’s role is shaping monetary policy.


Like the 2009 Pixar film, houses are on the up. According to the ONS, the price of an average UK home rose 3.1%y/y in June, meaning a typical house costs almost £11,000 more than a year ago. To buy an average house in the UK will now set you back almost a quarter of a million pounds.

In addition, surveyors saw a sharp increase in buyer demand in July and expect prices will continue rising. The general lift in demand, activity and prices, is spreading away from London and the south east to cover all UK regions and nations, with surveyors in Scotland particularly upbeat.

Inflation edges down a notch

UK CPI inflation edged down in July, to 2.8%y/y, from 2.9%y/y in June. A fall in air fares, and the lower cost of clothing, audio-visual equipment, computer games and package holidays were the main contributors to the fall.

While inflation is moving in the right direction, albeit slowly, it will be of little comfort to cash strapped consumers who are paying more for the basics - the prices of food, electricity and petrol all rose. Over the last five years, food, utility and transport costs have, on average, accounted for over half of the monthly inflation rate.

More than just window shopping

The volume of retail sales in the UK rose 3%y/y in July and were 1.1% higher than in June. With the exception of household goods stores, all retail sectors saw higher sales. A sun-filled July helped food sales record their strongest y/y growth in more than two years, despite prices being 3.4% higher than a year ago.

US consumers too were more than window shopping in July. Registering their fourth consecutive monthly rise, retail sales, were 5.4% higher than last July. An improving US labour market is undoubtedly helping consumers reach for their wallets in support of the economic recovery.

Green shoots in (parts of) the Eurozone

Following 18 months of recession, the Eurozone economy grew 0.3%q/q in Q2. This confirms signs of improvement seen in the currency union over recent months, the latest of which being a 0.7%m/m rise in industrial output in June. While this will be good news for policymakers there are a couple of caveats.

Germany and France were primarily responsible for dragging the euro area out of recession in Q2. Elsewhere conditions remain tough, with Spain and Italy still stuck in recession. With the Eurozone crisis still resolutely not resolved, it will be difficult to turn these green shoots into a pronounced recovery. 

Disappointing Japanese GDP

Japan's economy grew 0.6%q/q in Q2 - the same as the UK. The annualised pace of 2.6% was well ahead of the 1.7% in the US. But surprisingly this performance still managed to disappoint, being well below the expected 3.6%. This has sparked further debate about whether the economy can withstand the planned an increase in VAT.



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.



The Bank of England has made clear it’s in the business of fostering the recovery. But just like passing A-levels, we know there is still plenty of hard work ahead to get to where we want to be.

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