That healing feeling - Economics Weekly

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That healing feeling - Economics Weekly

Economic indicators for the UK continued to paint a picture of a country in recovery. UK Q2 GDP was confirmed at 0.7%q/q and the service sector expanded in July.

Economic Analysis

30 September 2013


UK economy ticks the boxes

The final estimate of UK Q2 GDP confirmed that almost all the boxes necessary for a recovery were ticked. Firstly, GDP up – tick. Household consumption up, but not too much – tick. Net exports making progress – tick. Investment up – tick. House building up – tick. Indeed, households are even taking a Goldilocks approach to saving. In Q2 the saving rate rose to 5.9%, solid, but not too high, so arguably about where it should be.

Services in recovery

The UK service sector expanded by 0.2%m/m in July, bringing overall services output just 0.3% shy of where it was at its pre-crisis peak. But there have been winners and losers among sectors. Output in the strongest sectors (private healthcare, telecommunications and accommodation) is more than 10% above early 2008. But in a number of sectors like financial services, wholesale trade, warehousing and public administration, output is more than 10% lower.

Higher UK house prices not a threat

The reawakening of the housing market in the UK might be pushing prices higher, but it isn't yet a threat to the financial system. That's the view of the Bank of England’s Financial Policy Committee (FPC), whose job it is to spot risks that threaten UK financial stability. Despite the recent rise in prices, and around 10%y/y rises in London, the FPC pointed to the low cost of servicing debt as a reason for price rises not to cause alarm.

To try to ensure calm, the Chancellor has asked the committee to review the Help to Buy Scheme every September. It will have powers to adjust either the cap on house values eligible for the scheme (currently £600k) or the insurance fee charged to lenders.

US house prices rising

Higher interest rates in recent months had led to fewer Americans applying for mortgages which should have curbed demand and taken pressure off house price inflation. Yet the Case-Shiller index continued to rise strongly in July, up 1.8%m/m and 12.4%y/y on the 20-city index.

That reflects the underlying strength of demand but also a quirk in how the Case-Shiller numbers are compiled. The July price level is actually the average for May, June and July. As rates didn’t spike upwards until May any effect on prices will only be seen in the numbers later in the year.

Eurozone recovery gains momentum

The Eurozone Purchasing Managers’ Index rose from 51.5 in August to a 27-month high of 52.1 in September. Economic activity continued its slow recovery in Q3. Encouragingly, the improvement was driven by increases in new orders in both the manufacturing and the services sector. Germany was the main engine behind the recent acceleration, but the big surprise was France where the index rose above the 50 mark (which signals expansion) for the first time in 18 months.

The Chinese comeback starts here?

Confidence in emerging markets took a knock earlier in the year but there are signs that China is staging a comeback. The first activity survey for September shows manufacturing output increasing at its fastest rate since March. That strength was due to both stronger domestic demand and better export orders. Signs of more resilient growth will be particularly welcome for China's policymakers.

Their challenge this year has been to offset slower growth in the West with more stimulus, whilst not over-inflating domestic credit. If Chinese firms can keep growing even as global interest rates rise, it will make the juggling act a lot easier.

More productivity, fewer start-ups

Productivity isn't everything, but in the long run it's almost everything. So said Nobel prize winning economist Paul Krugman. And so perhaps the best longer-term news this week is that UK labour productivity, or how well we work for every hour of grind, rose for the first time since 2011 in Q2. US productivity has risen sharply, but at the cost of lost jobs.

If the UK can boost both productivity and jobs then the recovery will seem that bit more secure. The not so good long term news is that the number of new UK start-ups is 16% lower than a year ago. Most sectors have seen a decline, though construction stands out. If this is being driven by better prospects for becoming an employee, this might be a good thing. But it is happening despite a brighter economic outlook and improved credit availability. Watch this space.


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Meanwhile, confidence is spreading throughout the housing market, as prices and activity continue to rise. The Bank of England said this currently poses no threat to financial stability. To reassure doubters, the Chancellor asked it to conduct an annual review of Help to Buy, in effect to help restrain any emerging bubbles.

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