A breather - Economics weekly

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A breather - Economics weekly

While most developed economies continue to grow, there are signs that the pace of expanding activity has stabilised. The majority of purchasing managers in the UK still report rising orders, it’s just their voices are less dominant than they were.

Economic Analysis

07 April 2014

There are signs that the pace of expanding activity has stabilised.

Even the housing market may have paused for breath. A breather is no bad thing and there's no indication there's more to it than that. There is more concern that consumer prices could start to fall in the eurozone. And so the spectre of Japan's deflationary struggles looms ever larger across the continent. The odds that eurozone policymakers will follow Japan (and the UK and US) and start QE have just narrowed.

Pausing for breath

Few doubt that the UK housing market has recovered. According to the Nationwide House Price Index, prices have risen each month since for the start of 2013 and the annual rise is running at 9.5% nationally and 18% in London and Manchester. Yet momentum may be easing. The number of mortgage approvals fell in February, while prices fell in March, according to the Halifax House Price Index. However, monthly movements need to be viewed with caution and the index shows the annual rate of increase was 8.7%. Nonetheless, members of the Financial Policy Committee will welcome a pause in momentum as they have promised to remain vigilant for signs of overheating in the housing market.


The purchasing managers' index (PMI) suggests the pace of UK business activity also eased a little in March. The manufacturing PMI fell to 55.3, from 56.2 in February and the services equivalent was down to 57.6, from 58.2. The readings still indicate output was expanding, and at a decent clip, it just wasn’t accelerating. Managers remain optimistic about the outlook for business, profits, employment and spending. So there’s few signs that the UK’s economic recovery will stall anytime soon.

Building the recovery

A revived economy and housing market is supporting construction. Although the sector’s PMI reading remained virtually unchanged at 62.5 in March, that’s a high reading. So building activity is likely to be expanding rapidly. Residential property is a key element in this expansion. But commercial construction also rose. And like their manufacturing and service sector peers, construction firms remain confident about prospects over the coming year.

Low and falling

Inflation in the eurozone dropped to 0.5%y/y in March, down from an already anemic 0.7%y/y in February. With unemployment across the single currency area remaining stubbornly high at 11.9% and bank lending continuing to contract, it’s hardly surprising that economic output is also subdued.

Just say no

President of the European Central Bank (ECB) Mario Draghi claimed the Governing Council is unanimously committed in the fight against low inflation. It’s not hard to see why. The longer they wait the more entrenched the belief that inflation will stay low becomes. The ECB discussed deploying an “arsenal” of unconventional policy instruments, jargon for measures to boost the money supply, lending and, hopefully, growth. There’s a number of options but the possibility of the ECB engaging in QE, or purchasing assets with newly created money, obviously caught the most attention.

US labour market: steady as she goes

The US economy added 192k jobs in March, slightly higher than the 183k averaged over the past 12 months, and the sort of good-but-not-great growth that will bring the unemployment rate down gradually. The unemployment rate was 6.7% in March, the same as in February, but down from 7.5% a year ago. The US Federal Reserve had previously intimated it would consider raising rates when unemployment fell to 6.5%, but has since switched its policy of forward guidance to a broader, more qualitative (read flexible) set of economic conditions.

A timely fillip

Since the turn of the year US data have painted a mixed picture of performance. The Fed, among many, hasn't been sure whether bad weather was distorting matters or whether growth might have slowed. According to purchasing managers, growth accelerated in March. The spurt was especially strong in services, where the Purchasing Managers Index rose 1.5m/m to 53.1. In manufacturing the reading advanced 0.5 to 53.7. A stronger flow of new orders in both sectors provides confidence that last month’s improvement will endure.



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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