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In a last gasp deal, the US narrowly avoided hitting the self-destruct button.

Economic Analysis

21 October 2013


UK house prices hit new heights

Growth of 3.8% in the 12 months to August pushed the average price of a house in the UK to new heights. At £245,000, the average UK house cost 0.3% more than it did in January 2008, according to the ONS. But the UK's market is far from national.

In the last twelve months growth has been much stronger in London than in the rest of the UK – 8.7% vs 2.2%, respectively. But while we may have a two-speed housing market, at least the rest of the UK is no longer in reverse gear: house prices are higher than they were at the start of the year in every nation and region.

Labour market shows regional differences

The UK unemployment rate remained at 7.7% for the three months to August. Although this is slightly lower than the Bank of England expected it to be at this stage, it'll be a while yet before it reaches the 7% threshold at which the Bank of England will think again about the level of Bank rate. Overall, the UK labour market continues to improve.

More people are working than ever before, with the number of full-time jobs up by more than 100,000 over the three months to August. We're also working slightly longer hours too. There are, however, growing regional differences. The unemployment rate in the North West rose to 8.6%, while it fell in the East of England to 5.9%.

Squeeze on incomes continues…

At 2.7%y/y, UK CPI inflation in September was unchanged from August. This will be of little comfort to consumers as wage growth continues to lag well behind, growing by just 0.7%y/y for the three months to August. Moreover, core inflation, which excludes energy and food costs, rose to 2.2%, from 2.0% a month earlier.

…but UK retail sales end Q3 in style

Despite the continued squeeze on real wages, retail sales rose 0.6%m/m in September. The improving housing market looks to be making its presence felt. Strong furniture sales saw overall household goods sales register their first year-on-year growth since February.

Higher employment and growing confidence have provided some momentum for retailers. Sales growth has strengthened in each quarter this year, with Q3 retail sales posting the fastest quarterly rise since the start of the financial crisis. But rising energy bills could leave retailers feeling an additional chill this winter.

Eurozone: some good; some not so good

Eurozone industrial production rose by 1% in August from -1% in July. The most encouraging news came from peripheral countries such as Portugal and Greece, where industrial production rose by 8.2% and 1% respectively. A strong 1.8% expansion in Germany and a small but promising 0.2% increase in France will add to signs of a gradual pick-up in economic activity across the Eurozone.

While the ECB remains reluctant to cut rates as recent data continue to point to a recovery, they will be concerned by September’s fall in inflation. At 1.1%, down from 1.3% in August, this is the third consecutive monthly fall, reflecting weak domestic demand and high unemployment.

China's growth improves

China's economy picked up the pace in Q3, expanding 2.2%q/q - the fastest pace in two years. On a year-on-year basis, the pace rose to 7.8% from 7.5%. The data shows fixed investment, industrial production and retail sales all turned in good performances. And while credit growth remains worryingly high, it will keep the economy humming along. Attention now turns to next month's key meeting of Communist Party officials.

The expectation is that China's new leaders will announce various reform measures to push the economy towards its next stage of development and reduce the economy's reliance on investment. But at the moment the signs are a bit mixed – it could well be a case of making all the right noises, with the detail left for later.

And finally

The Nobel Prize in economics has been awarded to Professors Shiller, Fama and Hansen. Shiller is best known for his part in devising the Case-Shiller index of US house prices. But perhaps confirming some readers’ suspicions, Shiller and Fama received the award for reaching opposing conclusions on how efficiently financial markets function.


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



While Congress reached an agreement to increase the debt ceiling and allow government employees to head back to work, they failed to find a solution. Last week’s deal provides only short-term relief: government funding until 15 January and borrowing authority until 7 February. A Congressional committee will try to agree a long-term solution by 13 December. If it fails we could be watching the sequel to a now depressingly familiar movie in the early part of next year. One outcome of this fiscal uncertainty is that the Fed is unlikely to reduce its quantitative easing programme anytime soon.

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