Yellen and arguing - Economics weekly

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Yellen and arguing - Economics weekly

Janet Yellen has been nominated as the next Chair of the US Federal Reserve. If confirmed, she will be the first female Chair in US history.

Economic Analysis

14 October 2013

Yellen is widely credited with being the architect of the Fed’s forward guidance policy, so her succession will likely mean continuity in US monetary policy. Meanwhile the Government shutdown and the debt ceiling argument in the US is taking its toll on consumer confidence. Talks continue and most people expect a deal to be done before the deadline. But time is running out to avoid a default. For more on the debt ceiling and how a US default would affect the UK and global economies, please see our special report US debt ceiling: deal or no deal?

Fed minutes show QE is here to stay

The September decision not to slow quantitative easing looked like a close-run affair. The minutes of the Fed's meeting show that most members thought it would be appropriate to start slowing asset purchases before the end of 2013. The last two weeks will have changed that expectation dramatically.

The Government shutdown and the battle over the debt ceiling is draining confidence from the US economy, and from its monetary policy-makers. Even if the fiscal situation gets resolved soon, the Fed will want to wait and see what damage has been done. They'll be in no hurry to slow QE down and it will probably be next year before we see taper talk return.

US confidence takes a hit

The University of Michigan's consumer confidence index for early October sank to a nine month low. This was mainly a result of events in Washington. But before we get too carried away with things, we should recall that at the time of the last debt ceiling stand-off in 2011, the index sank to an all time low and consumption expenditure slowed only very marginally. Still, this is not the start to October that we wanted.

UK growth forecast improved

In its most recent World Economic Outlook, the International Monetary Fund (IMF) revised up its UK growth forecasts by more than for any other advanced economy. Growth is now expected to be 1.4% this year and 1.9% next year making the UK the third strongest economy in the G7 during 2014 behind the US and Canada. That didn’t mean a totally clean bill of health however. The IMF’s key proposal for the UK remains that "bank balance sheets should be repaired expeditiously".

UK housing market accelerating

September's RICS survey of estate agents confirmed what everybody already knew - that the UK housing market is moving up a gear. Sentiment about prices among estate agents is the highest it's been for a decade. Incredibly, agents' expectations about sales over the next three months are a record high - a series that began in 1998.

Once you've stopped shaking your head in astonishment, it's important to note that this doesn't mean agents expect the highest number of sales in recorded history. After all, transactions are still 40% below their peak. Rather, they expect higher sales growth compared to the recent past. It measures acceleration, not speed.

Surprise fall in UK manufacturing

Following two consecutive monthly rises in output and continuing positive survey data, the manufacturing sector surprised in August with a 1.2%m/m fall. Though seven of the 13 subsectors grew, it was not enough to offset large declines in pharmaceutical, electronic and optical products and food and drinks industries. The fall in manufacturing output also contributed to a decline in overall UK industrial production (-1.1%m/m). Industrial production is still up for the three months to August, but this latest fall provides a bit of a reality check on the health of the UK recovery.

UK trade: good news, bad news

On the positive side, there was a slight improvement to the UK's trade deficit in August: -£3.3bn against -£3.4bn in July. This was helped by a 1.1%m/m rise in exports and a 0.1%m/m fall in imports. In addition, exports to non-EU countries rose while those destined to the EU fell.

But while August's data might look okay on the surface, the efforts of the UK to boost growth and rebalance via trade have met with little success. For the three months to August, exports were 1.2% down on the three preceding months, while imports rose to their highest level on record.

OBR evaluates its forecasts

Too confident on the economy, not confident enough on the public finances. This was the main conclusion of the Office for Budget Responsibility's recent evaluation of its Budget 2012 predictions. The OBR attributed its errors on the public finances to significantly less departmental spending. On the economy, it was businesses that invested less than it expected, whilst households were broadly on track.



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.


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