Economics weekly - spoiled

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Economics weekly - spoiled

For over a year we’ve been spoiled by seemingly ever-improving UK economic data. That can’t last forever, so a slight cooling of some indicators, such as a slowdown in the growth of manufacturing isn’t surprising and shouldn’t cause concern. The economy for now remains in rude health.

Economic Analysis

04 August 2014


UK house prices grew by 10.6%y/y in June according to Nationwide. This is slower than May's 11.8%y/y increase and brings the average price of a property up to £189k. With survey data from the RICS showing a modest softening in activity, we should expect to see house price growth continue to moderate. But slower price growth is a healthy development if eventually it gives incomes a chance to play catch-up with the price of a house. 


It’s not just on prices that the housing market recovery is making its presence felt. Bank lending is on the up, too. There were 76,000 mortgages approved in June, making it the busiest month since November 2007. Approvals were also 10% higher in the first 6 months of this year than the same period in 2013. And it isn't just about more people buying houses. The average amount borrowed has also risen and is now pushing £165k, compared with £156k a year ago.

Still solid

UK manufacturing output slowed to 55.4 in July, according to the Purchasing Managers' Index (PMI), down from a lofty 57.2 in June. But the reading remains strong and well above both the 50-mark signalling expansion and the series average of 51.5. Firms reported that incoming orders remained strong from both foreign as well as domestic clients. However, they also fired a warning flare that both their costs and prices are rising.

On the rebound

The US economy grew at an annualised rate of 4.0% in Q2, the fastest pace since mid-2012. Much of that strength was a rebound from a weather-affected Q1 during which, revised data show, output contracted by 2.1%. So far, growth in this recovery has averaged 2.1%. That’s pretty poor by US standards and is one reason why the Fed is in no hurry to raise interest rates.

Good but not great

The US economy added 209k jobs in July, which was a big step down from 298k in June, but bang in line with the average over the past 12 months. The two stand-out sectors were professional & business services and manufacturing, adding 47k and 28k jobs, respectively. Even so, the unemployment rate actually ticked up, from 6.1% to 6.2%. This is because there weren't quite enough new jobs to match the increase in the size of the workforce. Average earnings grew by 2% over the year to July, which is in line with the rate we've seen over the past three years.

Space to grow

The Federal Open Market Committee – the US equivalent of the Monetary Policy Committee – said that the economy has made sufficient progress to allow it to continue slowing the pace of its asset purchase programme, which should now end later this year. But it reckons there remains considerable slack in the labour market and it sees no signs of inflation expectations picking up. For these reasons it reiterated that the Fed Funds rate will remain where it is for a considerable time yet.

A slow build

The Fed also noted that recovery in the housing market remains slow. On the face of it, that’s hard to square with prices rising at more than 9%y/y, according to Case Shiller. However, there are clear signs that house price inflation, which was running at close on 14% at the turn of the year, is moderating. It is the volume of building activity, still only three-quarters of its level before the mid-2000s madness broke, that concerns the Fed.

Under pressure

Inflation in the eurozone fell to just 0.4%y/y in July from 0.5%y/y the previous month. Meanwhile core inflation (which excludes fuel and food) remains close to the lowest reading in the 17 year history of the series. The figures heighten concerns that the single-currency area is headed into deflation (falling prices) territory. That will increase the pressure on the European Central Bank to announce policy measures to address the risk of outright deflation taking hold.


Asian manufacturing PMIs suggest growth remains steady rather than spectacular by the region’s standards. China’s PMI moved to the highest level since January 2013 but it’s barely above its long-run average. South Korea’s remains below the 50-mark and, with weak export orders, it suggests global trade remains sluggish. Meanwhile Japan’s consumption tax rise in April appears to have damaged business confidence. Its PMI has struggled since the spring and is currently just above 50. The best news is in India, where the country’s manufacturing sector is picking up speed at last. To ensure growth remains steady, the region’s manufacturers will hoping the US economy keep’s growing at a decent rate.


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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