Food for Thought - Economics Weekly

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Food for Thought - Economics Weekly

Last week provided a little food for thought on the UK economy. House prices are heating up but housing transactions are cooling. Productivity growth remains poor, giving little scope for wage rises. Meanwhile there was a reminder of the global economy’s over-reliance on debt to fuel growth.

Economic Analysis

07 July 2014

Good times for the UK economy - but for how long?

The only way is up?

UK house prices continued their charge in May, rising by an average 11.8%y/y, according to Nationwide. London not only continued to lead the way, but saw average prices jump by 25.8%y/y, growth unseen since 1987. House prices relative to earnings in the capital are now the highest on record. But low rates continue to mean that mortgage payments relative to average incomes are still below where they were in 2007. Only in Scotland, Yorkshire and the North are house prices growing at a slower rate than their historical averages. This is now more than a one region show.

The MMR bump

Mortgage approvals fell 1.7%m/m in May, the first month following the implementation of the new Mortgage Market Review (MMR) rules. It is too early to tell whether the MMR will be a speed bump – slowing mortgage market activity – or something more significant. But what is clear is that there are fewer mortgaged house purchases happening. Approvals have fallen every month this year while the value of new lending in May fell by the most in two years. And fixed mortgage rates have also been edging up. House prices are still increasing, but without growth in transactions, this cannot go on for much longer...can it?

Bumper jobs

The Purchasing Managers' Indices (PMIs) painted a healthy picture of the UK economy. The services PMI fell marginally but at 57.7 it points to robust growth. The new business component recorded its highest level this year while firms are hiring at their fastest rate in 18 years. Meanwhile, an influx of new orders is driving the manufacturing sector's recovery. And finally the construction PMI is fired up on the back of house-building. Here too the employment component is at a record high. The strong start to the year is continuing.

More for less

For an advanced economy, increasing productivity, the amount produced in an hour's work, is the only sustainable source of growth. And higher productivity is the best justification for higher wages. So it’s a problem that we seem to getting less efficient at producing goods and services. Productivity in 2013 was just 1.8% higher than it was in 2009 - the worst 4-year performance since measurements began in the 1940s. And twice as bad as the previous low point in the four years to 1980 when the UK was recovering from the second oil price shock. Turning this performance around is the real barometer of a lasting recovery.

The long view

The Bank for International Settlements (BIS) is known for providing an economic and financial reality-check. And so it was again last week. The heart of their concern is that the global economy remains at risk of financial boom and bust. Growth is too dependent on debt. In response, policy-makers need to start taking a longer-term view when setting interest rates. For countries that have experienced a financial bust, like the UK, it's about raising productivity. This would reduce the heavy burden that is currently placed on monetary policy to stimulate growth. But cheap and easy policies to boost productivity are in short supply.

A long, hard, look at pay

Globalisation and technological progress have transformed the workplace over the last forty years, and wages have been no exception. The average full-time employee is now paid double that of his 1975 counterpart, after adjusting for inflation. Higher earners have seen their wages rise faster, with the top 5% enjoying a 150% rise in real terms. For those below average it has been between 80-100%. We can't do much about technological progress but policy matters. The national minimum wage has driven a rise of between 90%-150% for the bottom 5% of earners.

Jobs for all

The US economy added 288k new jobs in June. The increase was broad-based, with large gains across a host of sectors, including professional and business services, retail trade, food services and health care. All told, the US added 1.4m jobs in the first six months of 2014, which represents the best half-year since 1999. And it’s helped drive the unemployment rate down to a six-year low of 6.1%.

Pressing on

The Institute of Supply Management reported slightly weaker growth in US manufacturing and services in June but continued expansion nonetheless. Employment growth remained strong, accelerating in services, while new orders advanced again. It's all further evidence that falling output in Q1 was a temporary blip. Like the UK, strong growth and low unemployment should spark more debate on when interest rates should begin to rise. 


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.

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