Economics Weekly - More to come

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Economics Weekly - More to come

Last week confirmed the pace of the UK’s recent economic growth, whilst evidence of a slowing housing market mounted. The slowdown in the Eurozone is altogether much more concerning, arguing for yet more action from the European Central Bank.

Economic Analysis

01 December 2014

Still consuming

The second estimate of UK GDP growth showed UK consumers still going strong in Q3, while the government also chipped in with higher spending. But there were two clouds to the silver lining. Business investment fell for the first time since Q2 of 2013, while net exports were a drag on growth, as exports fell and imports grew. The strong pound and weak external demand were clearly at play. While the pace of growth is welcome there will still be questions about the balance and sustainability of the UK's growth as we go into 2015.

Services flying, investment flagging

UK services output increased 0.8%q/q in Q3, faster than previously thought. The good news was widely shared. All four major sector groups grew, with transport, storage & communications growing 1.3%q/q and business services and finance growing 1.1% on the quarter. With transport charging along, investment in transport equipment was the fastest growing investment asset, followed by non-residential buildings. For the first time since 2012, investment in housing fell. But perhaps most notable of all is that investment in intellectual property products fell for the second consecutive quarter, something that last happened back in 2009.


There were 16% fewer mortgage approvals for house purchase in October than a year ago according to the British Bankers' Association. In a further sign of a slowing housing market, 37k mortgages were approved, a level last seen in May of 2013. Despite this, the total value of mortgages outstanding grew again, by 1.6%y/y. The number of credit card transactions hit a record high of 147mn in October and 18%y/y jump on the previous year. With earnings growth still weak, retail sales are being supported by rising employment and higher borrowing on one side and heavy discounting on the other.

Not enough hours in the (working) day

Britain wants to work longer; that's the message from the latest survey of the UK labour market. 10% of workers want to work longer hours, amounting to almost three million people. Naturally the majority of underemployed workers are in part-time jobs. But there are also a sizable 1.2 million full-time workers who want to work overtime.

With unemployment falling the Bank of England is increasingly interested in underemployed workers as they are a big component of its labour market slack measure. But on this evidence that slack is concentrated in particular areas with bar and restaurant waiting staff, cleaners and shop assistants being keenest for extra work.

A matter of life and death

The number of newly born businesses in the UK rose by 29% between 2012 and 2013. That's almost 350,000 new enterprises. Over the same period, the chance of a firm surviving beyond its fifth birthday fell from 44.6% in 2012 to 41.3% in 2013. Now, it may seem that a lower business survival rate reflects a weak economy. And sometimes it does.

But not always. A productive economy requires a healthy churn of businesses, where fresh ideas are tried and tired ones laid to rest. For example London, hardly the nation's backwater of productive development, has one of the lowest five-year business survival rates at 37.1%. So on these measures, a rise in business births, coupled with a fall in chance of survival, may well signal economic heath and not sickness.

Better still

US GDP grew faster in Q3 than first thought, by 3.9%y/y rather than 3.5%, almost certainly placing it first in the G7 growth league table. Non-housing investment was particularly strong, up 6.2%y/y. That suggests firms are confident enough about their prospects to commit to projects. And by augmenting capacity this extra investment helps keep inflation low: the prices consumers paid for goods and services rose by only 1.2%y/y in Q3. The Fed will be encouraged that growth continues and these numbers give it no reason to consider raising rates soon.

More to come

Encouragement about the US economic situation sits in stark contrast to that in Europe. Unemployment was unchanged in the Eurozone in October at 11.5%. Nevertheless there have been some improvements with Portugal, Spain and Greece registering some of the biggest falls in joblessness. More worrying though is that Italy is going the other way as unemployment pushed up to 13.2%, almost a percentage point higher than a year ago.

October also saw inflation fall to 0.3% and with the oil price continuing to drop it is likely to fall further. This puts the Eurozone perilously close to deflationary territory. The ECB has deployed many unconventional policies this year, most recently buying corporate debt, but the prospect of falling prices means there’ll be more to come. That probably means quantitative easing in 2015 and the ECB could announce it as soon as this week.


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 Economics Department, as of this date and are subject to change without notice.

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