Mass x velocity - Economics weekly

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Mass x velocity - Economics weekly

It’s all about momentum. The US and the UK have it, the Eurozone does not. Last week saw more positive economic news, with UK and US manufacturing growing despite political brinkmanship in the US. House prices in both countries grew and there were signs that UK companies are beginning to borrow again. But in the Eurozone, unemployment remained unchanged at a record level and there was a nasty surprise as prices edged towards deflationary territory. Newton’s first law says that an object is either at rest or moves at a constant velocity, unless acted upon by an external force. The Eurozone could really use a bump.

Economic Analysis

04 November 2013

UK manufacturers maintain momentum. The Purchasing Managers' Index (PMI) suggests that UK manufacturers entered the fourth quarter with momentum behind them. October’s PMI came in at 56, as production and new orders continue to rise above their long-term averages. The strengthening UK economy was a key source of demand, while it seems the political stand-off in the US didn't dent confidence too much.

Up, up and away? The price of an average UK property grew by 5%y/y in September, continuing an acceleration in house price growth that started in February this year. The pick up has been more pronounced for first time buyers than for home movers. According to Nationwide, the average price of a place to live grew to £172k. No surprises which region led the charge. Prices in London were up 10%y/y, while they barely grew at all in the North East.

Credit creeping back. Households borrowed more in September. This applied equally to mortgages, credit cards and loans. The number of approvals for house purchase rose again to 67k while new lending grew at a healthy 37%y/y. But repyaments are still coming in almost as fast as the money is going out the door, meaning total debt barely changed. Meanwhile lending to the UK corporate sector rose for the first time since the end of 2009. The 0.2% q/q increase recorded in the third quarter of the year was marginal, but it is nonetheless encouraging as it broke a fall that lasted four years.

Are risks to the US economy diminishing? The Federal Reserve certainly thinks so. In its latest statement the rate setting committee said it saw fewer downside risks to the labour market and growth than a year ago. It also noted the underlying strength in the US economy, shown by its ability to grow through a period of extensive federal spending cuts and tax rises.  But this wasn't quite enough for the Fed to change its stance on quantitative easing. The committee wants to see more improvement, particularly in the labour market, before reducing its asset purchases. And with consumer prices rising just 1.2% y/y in September, we don’t expect this to happen until next year.

A harmless fiscal spat. In contrast with the 'flash' estimate that contained around 85% of the final submissions and which concluded that manufacturing growth slowed in October, the final ISM reported a modest acceleration. Compared with September, the reading advanced by 0.2 points to 56.2, the highest level in two-and-a-half years. Remember that manufacturing is a small part of the economy and the shutdown could have damaged other sectors more. However, this result gives hope that the underlying momentum of the recovery was not damaged too much by Washington.

Higher and higher. US house prices increased by 12.8% in the three months to August, their fastest rise since February 2006 according to the Case-Shiller 20 cities index. Adjusted for inflation, prices are back to where they were in 2002. Is this sustainable, or a bubble? The Fed supplied part of the answer last week. Housing is being made affordable because interest rates are very low. Will the Fed be moved to intervene in the mortgage market before rates return to 'normal' levels?

Eurozone still isn’t working. Unemployment in the Eurozone was still stuck at its record-high of 12.2% in September, despite the economy emerging from recession earlier in the year. And the Jekyll and Hyde nature of the European labour market was once again there for all to see. Unemployment reached 26.6% in Spain and 12.5% in Italy (worst since 1977). Yet in Germany it fell to 5.2%. Clearly, more than just stabilisation is sorely needed.

What’s the ECB inflation target again? Inflation in the euro area dropped from 1.1% in September to 0.7% in October on the back of a sharp reduction in energy and food prices. Inflation has been below the European Central Bank’s 2% target for nine consecutive months, and October marked the third consecutive decline in the inflation rate. Economists have a name for this: disinflation. So far the ECB has decided against cutting rates, but it has another opportunity this Thursday.



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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