Balancing act - Economics weekly

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Balancing act - Economics weekly

Britain's better balance. The uneven nature of Britain's recovery has been a cause for concern, with "too much" growth coming from consumer spending.

Economic Analysis

03 March 2014

The Bank of England and Royal Exchange

So, signs of a better balance in the second GDP release for the final three months of 2013 were welcome. Net trade made a positive contribution to growth, with exports higher and imports lower. But the star performer was business investment: up 2.4%q/q and 8.5%y/y. Of course, those figures count only conventional fixed investment, things you can touch. They exclude the larger and increasingly more important intangibles, which would make the balance of growth look better still.

You are being served

Increasing by 3.2%y/y in December, the service sector closed out 2013 at its fastest pace since 2008. Strong contributions came from business services, and the retail and wholesale trades. December's outturn helped lift the sector to its best full year of growth since 2007. But at 1.9%y/y, this was less than half of the average in the ten years leading up to the crisis.

£178k and climbing

That was the message from Nationwide on average house prices. Growth in January hit 9.4%y/y, the fastest rate in almost four years. The British Bankers’ Association reported 50k mortgage approvals for house purchase in January, a 57%y/y surge and the highest number since September 2007. This will do little to quell the talk of housing market bubbles, giving the Bank of England more food for thought at its 19th March Financial Policy Committee meeting. Despite the housing market recovery, just four in ten working age households were buying their home with the help of a mortgage in 2013 compared with over half in 2003. Conversely, the proportion of working age households renting privately had risen from 13% to 23%.

Mixed messages

US house prices increased by 11.3% in 2013, the fastest rate since 2005. But growth petered-out in Q4 with prices falling 0.3%q/q. Is housing activity weakening? New starts dropped 16.0%m/m with sales of existing houses down 5.1%m/m in January. In contrast, new house sales were up 9.6%m/m. The supply of new houses is low, less than five months of sales versus the long-run average of around six months. That suggests continuing recovery in prices and scope for more building, even if rates of growth slow.

The Fed looks for clarity

And it's not just housing. GDP growth in Q4 was revised down from 3.2% annualised to 2.4%. Job growth and retail sales have recently fallen short of expectations. Fed chair, Janet Yellen, is looking for a "firmer handle" on how much is down to bad weather and what’s down to a loss of momentum in the economy. It would take evidence of the latter to shift the Fed from its path of steadily tapering its asset-purchase programme.

Japan steps up the spending

Japan’s retail sales grew 4.4%y/y in January, the fastest in almost two years, as consumer hit the shops before VAT rises in April. Consumer demand is helping boost factory output: production rose 4% in January. The jobs market is also picking up, with more jobs than applicants for the past three months for the first time since 2007. And the great escape from deflation remained on track in January as core prices rose 0.7%y/y, high by Japan's standards.

Low, but stable

Eurozone inflation was stable at 0.8% in January, the fourth consecutive sub-1% reading. Inflation has been below the European Central Bank’s (ECB) target for 12 months straight. Core inflation - which strips out volatile items such as energy, food, alcohol and tobacco - rose from 0.7% in December to 0.8% in January. That’s not much but probably enough to ease pressure on the ECB when President Draghi this week details the inflation outlook for the next three years.

UK pay: one confirmation and three surprises

According to ONS, working full time and earning £27,000 puts you in the middle of the pay distribution. (See Patterns of Pay: Estimates from the Annual Survey of Hours and Earnings, UK, 1997 to 2013 - PDF file) It's no surprise that after adjusting for price rises, your pay has fallen by 8% since 2008. Less well known is that were you one half of a couple, both working full-time on median pay, your combined earnings would place you second place in the household income distribution. A second surprise is that on one measure, pay is not becoming more unequal. The top 10% of earners gross three and half times more than the bottom 10%, a ratio that's unchanged since 1997. The last surprise is that only those aged 60+ have seen their real pay increase since 2004. For all the rest, the only way has been down.



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 Group plc. All rights reserved.


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