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. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

problem – the threat of deflation. " /> 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. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

problem – the threat of deflation. " /> 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. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

problem – the threat of deflation. "/> Here we go again - Economics weekly

Here we go again - Economics weekly


Here we go again - Economics weekly

Mario Draghi must be feeling like Sisyphus, the mythological Greek king who was condemned to forever roll a boulder up a hill, only to have it roll back down on him. The ECB last week announced a surprise 25bps rate cut in order to stave off the Eurozone’s la<h3>Disclaimer</h3> <p><span class="rte-disclaimer">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. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.</span></p> problem – the threat of deflation.

Economic Analysis

11 November 2013

That sinking feeling

The European Central Bank (ECB) lowered its policy rate by 25bps to 0.25% at its November meeting in reaction to the prior week’s reported sharp fall in October’s headline inflation rate to 0.7%y/y. Inflation has been below the ECB’s 2% target for the past 9 months. The rate cut was unexpected but prompted by the ECB’s expectation that inflation will remain low for a “prolonged” period of time. Consequently, President Draghi said that rates will stay low for a long time and could even be lowered further if needed.

Weak, uneven and fragile

That’s how Mario Draghi sees the Eurozone’s economy. The latest Purchasing Managers’ Index (PMI) reading seems to confirm his view, dropping from 52.2 in September to 51.9 in October. Yes, economic activity is still expanding, but not all countries are alike. October saw strong growth in Germany, further signs of stabilisation in France, and some strengthening in peripheral economies like Spain. Output in Ireland expanded at the fastest pace for over six-and-a-half years.

US rolling along nicely

The US economy grew at an annualised rate of 2.8%q/q in Q3, up from 2.5%q/q in Q2 and the fastest pace in a year. House building was the star pupil, growing by 14.6%q/q. There was a hint of slightly the wrong kind of growth, with a reliance on falling imports – which pushes up gross domestic product (GDP) – government spending and a build up of inventories by businesses. But the latest Institute of Supply Management’s survey of non-manufacturing firms showed the pace of activity quickening in October. Things are still looking up.

Worth the wait

The US Government shutdown affected much of the American economy, including the statistics agency's ability to publish labour market data. Last week's payrolls numbers were one week late but brought the welcome news that over 200k jobs were created in October. The shutdown appears to have had relatively little impact on the economy. There are now 2.3 million more jobs in the economy than this time last year, a very healthy rate of job creation. But unemployment will need to fall further from its 7.3% to persuade the Fed that it is safe to reduce the monetary stimulus.

UK scaling new heights

Activity in the services sector hit a record high in October, according to the Purchasing Managers' survey. At 62.5, this was up on September's 60.3 and signalled the fastest pace of growth since May 1997. The increasing level of activity was supported by record growth in new incoming business. Rising work loads also resulted in companies taking on more staff, with the rate of employment growth also the best since 1997. With the largest sector of the economy in such a buoyant mood, what does this mean for forward guidance?

Balancing and building

The UK's trade deficit in goods and services held steady at -£3.3bn in September. Disappointingly, it was left to the services sector to offset weaker goods exports. And the UK recorded its largest quarterly goods deficit with the EU. Not exactly the rebalancing story we were after! There was better news for UK construction, which posted its second consecutive quarterly growth, having contracted for much of the previous seven. New construction work has been driven by a solid pick-up in public and private housing over the last two quarters, with commercial construction also contributing in Q3.

Made in China

Chinese exports grew 5.6%y/y in October, ahead of expectations and a big improvement on September's 0.3%y/y decline. And in line with the rebound in our economy, China's exports to the UK have rebounded strongly, with average growth of 15%y/y over the past four months. That's even faster than shipments to the US and the EU. However, from China's perspective exports are still stuck in the slow lane. Export growth has been decelerating since the middle of 2010, alongside slowing global trade. Unfortunately, it will take more than a resurgent UK to change that.

 

Disclaimer

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.

 

The central bank is expecting a long uphill journey to recovery. Let’s hope that when it gets there, the European boulder stays put. Meanwhile, the US and the UK continued to see recovery and further from home China’s exports started to grow again.

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