You can rewrite history….
The UK's economic history was rewritten by its statistical agency last week, and there were some headline grabbing changes. First off, the recession wasn't quite as bad as previously thought, with GDP falling by 6%, rather than a 7.2% drop. And the recovery has been slightly better too, with the pre-crisis peak in GDP being surpassed in Q3 2013, 9 months earlier than in the old data. It means the economy is now 2.7% bigger than it was before the recession.
…but the story remains the same.
So how does this change our view of the UK economy? There are big changes, particularly that business investment has been stronger than previously thought. But the biggest challenges remain. The UK's productivity performance is still very poor and the current account deficit is at record breaking levels. Finally the revelation that the economy is bigger and has been growing faster than thought actually poses some difficulties. It highlights how long it is taking to fix the public finances and how weak tax revenues have been despite better economic growth.
Off the boil but simmering.
The UK services PMI edged down to 58.7 from 60.5 in August. But new business continues to roll in at a very solid pace and service firms remain on the hunt for more labour. The construction PMI also looks healthy with both housing and commercial developments performing well. The disappointment came in manufacturing. The resurgence that started around the middle of last year has fizzled out. The culprit? Weak demand in the Eurozone. Further cooling seems likely as growth slows to more a normal pace.
High and low.
Let's start with the relatively good news. Despite the unemployment rate across the Eurozone remaining unchanged at a high-ish 11.5% in August, the actual number of people unemployed fell to the lowest it’s been in almost two years. But this isn’t helping one of the Eurozone's biggest challenges, which is to raise inflation. Higher inflation would help limit public debt ratios, but unfortunately annual inflation fell again in September, to just 0.3%. While that's not a surprise, high unemployment and low inflation tend to go together.
Low inflation is a worry for the European Central Bank (ECB) which kept rates on hold as expected last week. It provided more detail of its latest effort to help revive the Eurozone economy and push inflation back closer to its 2% target. The ECB will begin buying covered bonds (instruments banks use to raise funding) as soon as this month and Asset-Backed Securities (packaged up loans sold by banks to investors) later this year. And there's plenty to buy. The ECB indicated that the potential universe for purchases is around €1 trillion over two years. This latest plan looks like the last roll of the dice before the ECB opts for a purchase programme that includes government bonds. In other words, quantitative easing.
Help me out.
The Eurozone’s slowdown continued in September with the manufacturing PMI slipping below the all-important 50-mark in mighty Germany. With weak growth to its West, recent tensions to its East, and a slowdown in China, it is not surprising. The composite reading for France, covering both manufacturing and services, remains stuck below 50 and suggests the economy can't get moving. Meanwhile Italy’s composite reading has moved sharply lower as the summer has drawn to a close. Spain and Ireland continue to post decent readings. But that won’t be enough for the region as a whole.
A good week.
The US economy added 248,000 jobs in September, taking average monthly job growth this year to 227,000, up from 197,000 at this stage last year. Unemployment fell to 5.9%, the first time it has been below 6% since August 2008. But the US isn’t immune from events around the world. Like most other economies manufacturing and non-manufacturing ISM surveys suggested that growth slowed a little last month, but both still remained at historically high levels. With all that good news attention is turning to when the Fed might start to raise rates. Expect plenty of speculation and debate about the timing of that policy change.
Can we build it?
Last week the International Monetary Fund released a paper posing the question ‘Is it time for an infrastructure push?’ Firstly, it stated that public investment in infrastructure raises output in both the short and long-term. Second, it found that given low borrowing costs and weak demand in advanced economies, the time is right for an infrastructure push. So does the UK have a need? According to the IMF, the quality of UK infrastructure has been rising since 2009. And it scores more highly than the US and Italy. But there is still room for improvement. Canada, France, Germany and Japan all score more highly than the UK.
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