And it is not just the UK
House prices in the US are starting to fuel talk of a bubble. Given the focus on housing, one could easily miss the other news of the week, in which the UK consumer was shown to be a key driver of growth in Q3, Eurozone unemployment fell marginally and the Netherlands saw its credit rating downgraded from triple-A.
UK housing on a roll
According to Nationwide the average price of a house in November was £175k, an increase of £11k on a year earlier. House prices grew at their most rapid rate all year. This has coincided with October seeing more mortgage approvals for buying a house than any time since February 2008.
Gross mortgage lending was up 34%y/y in October, according to the Bank of England. But with many existing borrowers continuing to pay down debt at a healthy lick, overall outstanding mortgage debt only grew by 0.8%y/y.
A pre-emptive move by the BoE
The UK Treasury and the Bank of England decided to pull the plug on the incentive banks receive under the Funding for Lending Scheme (FLS) to support mortgage lending and personal loans.
The decision came as house price growth gathered momentum in recent months, convincing the Chancellor of the Exchequer and the Governor of the BoE that household lending no longer needed this line of support. This means that in 2014 the FLS will be fully focused on lending to businesses, particularly SMEs.
Consumers, services and UK growth
The UK economy grew by 0.8%q/q in Q3, faster than Japan and even the US. If it grows at the same rate in Q4, then by the year's end it will be about 1.5% larger than in 2012. Not bad, recalling the 0.2% growth the UK managed in 2012. However, growth could be better balanced.
The UK remains dependant on household consumption and services. Net trade knocked almost a whole percentage point off growth in Q3. But the UK is a service-led economy and has been increasingly so for decades. Boosting manufacturing, while it may be desirable, will take time.
Bubble talk in the US
US house prices continued to grow strongly, rising 11.2%y/y in the third quarter according to the Case-Shiller National Index. The separate 10 and 20-city indices each recorded 13.3%y/y rises. Case-Shiller’s authors dismiss the idea that a bubble is inflating, pointing to indicators that suggest the pace of growth is weakening.
For example, price inflation was slower in 19 out of 20 cities in September than in August. However, a useful rule of thumb in economics is that nothing grows at more than 3%y/y unless there is a very good, or very bad reason.
One step forward, one step back
The Eurozone unemployment rate fell from a record high of 12.2% in October to 12.1% in September. This was driven by declines in half of the member states, including Ireland and France. In the other half Cyprus, Greece and the Netherlands showed the biggest increases, while Spain reached 26.7%. Despite the overall improvement, youth unemployment rose to a new euro era high of 24.4%, with over 3.4 million under-25 out of work. The rate went up to 57.4% in Spain and 41.2% in Italy, another step in the wrong direction.
A sigh of relief in Europe
Inflation in the Eurozone accelerated to 0.9%y/y in November from 0.7%y/y in October. The inflation rate is still less than half the European Central Bank’s (ECB) 2% inflation target because domestic demand remains subdued. But the increase in prices was surely welcomed by the ECB, which cut rates to a historic low of 0.25% in November.
The central bank shrugged off concerns about deflation, emphasising that it has a big arsenal to deploy in case the outlook deteriorates. This could include a further rate cut, negative deposit rates for banks, and even some form of asset purchases. We do not expect any of these options to be implemented when the Governing Council meets on Thursday.
And then there were three
The Netherlands has become the latest member of the Eurozone to be stripped of its triple-A rating. Standard & Poor’s (S&P), one of the three main rating agencies, downgraded the nation’s credit rating to AA+ on the back of a worsening economic outlook. The Dutch economy has contracted year-on-year in every quarter since 2011 and S&P expects it to shrink by 1.2% this year.
As with France, which was downgraded by one notch to AA- last week, market reaction has been muted with bond yields stable slightly above the 2% mark. But the Eurozone is now left with only three triple-A economies: Germany, Finland and Luxemburg.
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