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Good, but - Economics weekly

There is no doubt that the UK economy is expanding at a decent lick. What’s more, the recovery is better balanced than it has been and we have growth without much inflation. But niggles remain about its sustainability. Households are running down their savings to fund consumption and the UK spent more than it earned last year.

Economic Analysis

31 March 2014

UK consumers continue to give the recovery momentum

Seeking sustainability

The Office for National Statistics confirmed that the UK grew by 0.7% in the final quarter of 2013 and by 1.7% over the year as a whole. Net trade and investment both expanded, along with consumption. However, the household saving ratio fell to 5.0% compared with 6.1% a year earlier and the current account deficit – the gap between what the UK earns and spends – reached 4.4% of national income in 2013.

Open all hours

Wallets and internet browsers were open in February as UK consumers continued to give the recovery momentum. Retail sales (ex. fuel) rose 1.8%m/m, reversing January's post-Christmas fall. Supermarkets and food stores saw a 2.1%m/m jump in sales, but despite the housing market revival, sales of household goods fell. The amount we spent online was up 12.4%y/y, with 22p of every £1 spent "in" department stores coming from the internet. Maybe there is something about being open all hours.


Mortgage lending in February was an eye-watering 43% higher than year earlier. According to the Council of Mortgage Lenders, the government’s Help to Buy scheme is lowering the share of the purchase price that buyers have to put down as a deposit. Loan to value (LTV) ratios are creeping up as is the number of higher LTV products on the market. Whereas first time buyers had been leading the way, house movers have now joined the party, too.

Monitoring the temperature

The Bank of England's Financial Policy Committee (FPC) is keeping a close watch on housing. The FPC can take steps to cool the market if it fears risks to financial stability. At its recent meeting, the FPC noted that while a number of housing market indicators remain below long-run averages, it is vigilant to emerging vulnerabilities and said it will take further proportionate and graduated action if warranted.

Inflation: nothing to see here

Prices rose by 1.7%y/y in February, down from 1.9% in January and comfortably below the 2% target. Petrol and diesel were the biggest contributors to the fall, which left inflation fractionally ahead of wage rises. The news will cheer the Monetary Policy Committee. It thinks that unemployment can fall further before price pressures start to build. There was good news for business, too, with the rising value of sterling helping producers’ input costs fall by 5.7%y/y.

Austerity and growth

The US economy grew by an annualised 2.6% in the final quarter of last year, down from 4.1% in Q3. Consumers, exports and business investment all expanded. But government was a drag on performance. October’s shutdown contributed to a 13.8% fall in federal government output. Austerity has cut public sector output by almost 8% since its 2009 peak. Over the same period total GDP has risen by nearly 11%.

US confidence rebounds

US consumer confidence bounced back strongly in March to its highest level in six years. However, housing hasn’t yet shaken off the winter blues. New home sales fell 3.3%m/m in February, partly due to higher interest rates. According to Freddie Mac, a mortgage provider, rates on 30-year loans are up 0.75%y/y. That’s not yet fully fed through to house prices. Case Shiller reported y/y price growth of 13.2% in January, although the rate of inflation is moderating, with a third m/m fall in a row, if only of 0.1%.

Signs of recovery

The euro zone Purchasing Managers’ Index came in at 53.2 in March, marginally below February’s 32-month high. Manufacturing and services expanded again as new orders growth accelerated. Hiring ticked-up as confidence over future demand strengthened. France returned to growth for the first time since last October. Germany and peripheral countries continued to expand, suggesting an acceleration of GDP growth in Q1. Taken altogether it is a reassuring picture. But further moderation in price growth suggests that deflationary pressures remain a concern.



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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