Red hot or just warm? Economics Weekly

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Red hot or just warm? Economics Weekly

We had another set of red-hot business surveys for the UK last week, but “official” data were less emphatic. This makes it difficult for the Bank of England, which left policy unchanged at its September meeting, to get a firm reading on the strength of the recovery.

Economic Analysis

09 September 2013


From strength to strength

The UK Purchasing Managers’ Index for services increased further in August, to 60.5. This represents the strongest growth in the sector since December 2006. The manufacturing equivalent wasn’t far behind, rising to a two-and-a-half year high of 57.2, with the survey indicating the strongest growth in output and new orders since 1994.

These really are impressive data and suggest Q3 growth might be even better than the 0.7% seen last quarter. Some perspective is required, however. The economy is still 3% below where it was operating in 2008 and there are 840,000 more people unemployed. In addition, other data releases were less emphatic. Even five years on, the recovery remains in its early stages.

Other UK data not quite as hot

The manufacturing PMI may be at a multi-year high, but “official” data for the sector were more circumspect. Output rose for the second month in a row, but only by 0.2%m/m in July, and only 6 of the 13 sub-sectors saw growth. This more subdued performance was in keeping with the trade data for July, which showed the largest trade deficit in goods and services this year (£3.1bn).

Signs of life in the Eurozone helped boost exports to EU countries, but this was not enough to offset a massive 16%m/m fall in goods exports to non-EU countries. Though the decline was driven by a fall in aircraft exports, exports of cars, consumer goods, intermediate and capital goods also declined. Monthly trade data are volatile, but it’s still a little disappointing given the improving performance of the global economy. Nobody said rebalancing would be easy.

No change from Threadneedle Street

There were no surprises from the Bank of England's Monetary Policy Committee (MPC) in September. Bank Rate was left at 0.5% and there was no change to the quantitative easing programme. That’s unlikely to change anytime soon, according to the MPC. Their forward guidance suggests rates are unlikely to rise until late 2016. Markets are more aggressive, however, and think rates will start to move up in early 2015. What’s unclear is whether markets are more optimistic about the pace of the recovery, the number of jobs that it will generate, or both.

Full steam ahead

America’s purchasing managers say growth quickened in August. The services index jumped to 58.6, hitting the highest level since its launch in 2008. The manufacturing index also improved. With both sectors recording strong growth in new orders, the outlook is encouraging. There is a grey cloud, however: will Washington turn the looming debt ceiling drama into a crisis? The possibility of unexpectedly tighter fiscal policy is something the Fed is likely to weigh heavily when it decides next week whether to start weaning the US off its monetary steroids.

Tough decisions for the Fed

Mixed messages from the labour (sorry, labor) market will also be clouding the Fed’s decision. Non-farm employment in the US rose by 169k in August, just short of the 180k expected. However, downward revisions to previous months’ data means the average monthly employment gain since May has been 155k - okay, but far from spectacular.

Unemployment fell to 7.3%, from 7.4%, but not for 'good' reasons as people exited the labour market, having given up trying to find work. We still expect them to start tapering in October but the August data means the decision will be a closer call than policymakers would like.

ECB holds tight

The European Central Bank (ECB) left rates unchanged at 0.5% at its September meeting. President Draghi continued to use forward guidance confirming that, to support the economic recovery, the ECB will keep interest rates at present or lower levels for an “extended period of time”.

Recent economic data have been positive, but Draghi made clear that we shouldn’t get too carried away as the recovery will be only slow and gradual. The ECB continues to expect the economy to contract this year and to expand by only 1% the next.


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.



It’s a similar story in the US. Business surveys point to strong growth, but the labour market still isn’t firing on all cylinders. Unemployment fell in August, but for the wrong reasons, as some people gave up looking for work.

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