Lest we forget
The UK economy has passed the pre-crisis peak in output and is growing at over 3%y/y – faster than any other G7 economy. Next year’s growth is expected to be healthy too at 2.6%. We’ve been great at creating jobs, enjoying an employment rate of 73%, which compares very favourably with the Eurozone average of 63.2% and even the 68% in the US. We’re working hard too, putting in slightly more hours on average than almost every country in Europe.
The wealth of nations
But what matters for the wealth of nations is not just how many people work, or how hard, but how. That's productivity. And that's where the UK's vulnerable. It matters because when productivity improves, wages tend to improve. For most of the long 20th century, UK productivity growth lagged its peers, especially the US. We narrowed the gap during the twenty years leading up to the financial crisis but have fallen behind since. The poor productivity performance has been the negative flip-side of exceptionally strong job growth. But this can only ever be a stop-gap. In the long run, it's how well we work that really counts. Boosting productivity growth is the UK's greatest challenge.
Now in its sixth year of growth, the US economy is 7% bigger than when recession struck in 2007. That’s better than most rich countries but poor by American standards. The job market is healing, with unemployment down from 10.0% to 6.1%. But the share of the population in work is falling. More people would work if a job was available. Plentiful labour is one reason inflation is low, just 1.7%. Boosting inflation and job creation means the Fed will keep the monetary drugs flowing. Quantitative Easing (QE) will end soon but rates will be low for years, even if small rises come next year.
In contrast to the US, the Eurozone is still searching for a sustainable post-crisis recovery. The modest recovery it managed to achieve over the past year has run out of steam. Banking sector problems have yet to be properly dealt with. Although a current health check of banks by the European Central Bank (ECB) should help speed up the resolution of lingering weaknesses. But the Eurozone can’t afford to go slow – 18.5 million are unemployed across the region. Labour is moving in response. Spain’s net migration has risen sharply, from just 43,000 in 2010 to 250,000 in 2013.
The ECB is on a different plain to the UK and US central banks – it’s debating whether to adopt full-blown QE. It’s unsurprising with inflation at just 0.4%y/y and a very poor growth outlook. But that won’t encourage further reform in peripheral Europe, nor encourage Germany to boost consumer spending – two crucial elements to generating growth. The Eurozone’s problems likely have years left to run. And with growth so weak, the region is vulnerable to an external crisis.
China’s integration into the world economy has been the most important economic development this century. But it’s a story that has much longer left to run. And like the past 15 years it won’t be a painless procedure. The country is beginning to address its debt addiction and moving the economy away from its over-reliance on investment. These reforms, which include deregulation and improving the environment for private enterprise, coupled with curtailing credit growth, are long overdue. It’s a process that is taking its toll on growth and will continue to do so for years. However, China’s adjustment may cost more than just a few digits on its GDP growth rate, and that’s the biggest risk to the global economy.
Borrowing up, debt up
That was the message from the latest public finance figures. With net debt up by £96.7bn compared with August 2013, and public sector borrowing up £0.7bn compared with a year ago, it is looking increasingly likely that the Office for Budget Responsibility's forecasts will not be met. On its current trajectory, the UK Government is set to borrow in excess of £100bn in FY 2014/15, ahead of the £86.6bn target. The main culprit is tax revenues - which have failed to keep up with growth in government spending.
Bank lending to households is up, but to companies, it continues to fall, according to the latest figures from the British Bankers Association. Mortgage lending was up 1.4% on the previous year, while consumer credit rose 2.6%y/y. The 3.2%y/y fall in lending to non-financial companies appears to have been driven by four sectors: real estate, construction, accommodation & food and transport & distribution. Borrowing actually rose in sectors like agriculture, manufacturing and wholesale & retail. However, it’s financial companies that are doing a lot less borrowing. They have paid down nine times the debt that non-financial companies have paid down in the last 6 months.
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