In the spotlight - Economics Weekly

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In the spotlight - Economics Weekly

With the Bank of England linking changes in Bank Rate to the unemployment rate, the monthly labour market release assumes greater importance and last week’s modest fall in joblessness caused a flurry of excitement.

Economic Analysis

16 September 2013


UK unemployment falls to 7.7%

Under its forward guidance, the Bank of England (BoE) won’t think about raising Bank Rate until unemployment falls to 7%, unless inflation is a threat or the financial system looks unstable. Unsurprisingly then, unemployment falling from 7.8% to 7.7% in the three months to July saw a flurry of excited media reaction.

Employment rose, with full-time employees accounting for all of the increase. Although the employment rate is still 1.3% below where it was at the start of the crisis, the number of people in employment is now 1% above the pre-crisis peak. Falling public sector employment was again more than offset by job growth in the private sector.

Speed bumps please

A busy week for the Royal Institute of Chartered Surveyors (RICS). First, they released their monthly gauge of housing market activity. Like the BoE, they don’t see evidence of a national bubble but the concern is this may not be true for all parts of the UK. Their survey shows a market recovering strongly but not dangerously. Yes, it was the strongest indicator for price rises since 2006 and price expectations are at their highest since 2002.

But these are encouraging folk to sell too, so supply's on the up which should help keep a lid on price rises. Second, RICS suggested the BoE develop 'speed bumps' to help curb price rises and "create a more sustainable housing market". Expanding housing activity is boosting the construction industry. Overall construction activity rose by 2.2%m/m in July, with Q2 new housing orders recording their highest volume since the end of 2007.

Real wages continue to fall

Rising employment is helping to get a little more income circulating through the economy. Good news. But this is, to an extent, being offset by continued weak wage growth. Regular pay growth slowed from 1.1%y/y to 1%y/y in the three months to July. However, when we consider the impact of inflation the real value of workers income continues to fall. Despite the recent run of good economic data, the squeeze on incomes remains

US retail sales lose momentum

In spite of increased demand for cars and other big ticket items, US retail sales struggled in August. Up 0.2%m/m, this was the slowest rate of growth for four months and well below market expectations. With the University of Michigan consumer sentiment index falling 5.3 points to 76.8, the lowest since April, are there signs the US consumer is beginning to toil a little? This will be part of the Federal Reserve’s debate this week as it considers whether to start easing back on its quantitative easing programme.

Slowly but not that surely

Having just come out of recession in Q2, some recent economic indicators seemed to suggest that the Eurozone recovery might be gaining a little bit of momentum. However, July’s industrial production data threw a large bucket of cold water on that. Factory output across the region declined by 1.5%m/m.

Production fell in peripheral countries like Italy, Greece, Portugal and Ireland. Factories in France reduced their production by 0.6%m/m but the main surprise came form Germany where output declined by 2.3%m/m. The European Central Bank’s warning that the recovery will be only gradual and slow, with plenty of potholes on the way, looks right.

China experiencing a little pick-up…for now

Data for August confirmed that the Chinese economy is experiencing a ‘little’ rebound. Industrial production grew by 10.4%y/y - the fastest pace since early 2012. But as usual it's investment and the state-run sector that are driving growth. More encouraging would be a flourishing private sector and greater consumption.

Credit growth accelerated sharply to 25%y/y. This is a short-term positive for the economy but it is also an addiction that China is in desperate need of weaning itself off of. The bigger picture is one of a long-term slowdown in growth while financial risks continue to grow.

Lands of opportunity

Everyone seems to agree that a sustainable UK recovery involves boosting exports. But where are the best opportunities? Our new paper 'In search of export opportunities (pdf)' identifies untapped markets for British firms, with one or two surprises.


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The housing market, too, is beginning to draw glances. Not so long ago people were worried about the effect of falling house prices on the recovery. But with housing activity heating up, the debate has turned 180 degrees. Given the importance of both issues, expect them to be in the spotlight for sometime to come.

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