Economics Weekly - Statement of intent

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Economics Weekly - Statement of intent

The Autumn Statement was a game of two halves. The Office for Budget Responsibility’s (OBR) forecasts added to confidence that the UK economy will continue to motor along nicely. But the job of mending the public finances is far from done and the projections show just how big the challenge to cut spending in the next parliament will be.

Economic Analysis

08 December 2014

Pockets relieved

The OBR provides independent forecasts of the economy and the public finances. Despite some downgrades to growth from 2016 onwards, the OBR envisages an economy humming along nicely at above 2% next year and beyond. It's a solid outlook but rests on one key assumption: real wage growth moves firmly into positive territory over the coming year providing a big relief for household finances.

But government squeezed

The OBR’s message on the government’s budget deficit was a familiar one: eliminating it remains difficult and time-consuming. The deficit is forecast to fall by just £6.3bn this year to £91.3bn. That’s half the decline that was expected in March. Lower tax receipts are to blame. So ensuring the public finances move into surplus by 2018/19 rests on two things. Firstly, the departmental squeeze on spending will be tightened further from 2016/17. Second, lower government bond yields mean lower debt interest payments.


Completing the deficit reduction journey also rests on higher productivity. To that end, the Chancellor looked to provide a helping hand with support to small firms (extending Small Business Rate Relief and the Funding for Lending Scheme), investments in roads (£15bn in road infrastructure improvements, already announced) and skills (£10k loans for post-graduate studies).

Stamp of approval

The headline-grabbing announcement of the Autumn Statement was a reform to stamp duty. Each stamp duty rate will now be paid only on the particular slice of the selling price to which it applies, not the whole value of the property as per the current system. 98% of people who buy stand to benefit. 

Still slowing

Both the Halifax and Nationwide are in agreement. UK average house prices are slowing, though slowing from a pretty punchy 8.2%y/y and 8.5%y/y growth, respectively. So prices continue to grow faster than incomes. And there is a chance that the recently announced reforms to stamp duty will inject a little further life into the market. But all indications remain that the UK's housing market is coming off the boil. The question is will it slow to a simmer, or start to run cold?

Family fortunes

The typical household spent £517 a week in 2013, or just under £27,000 a year. That's less than the £28,000 they spent in 2001-02 (adjusted to 2013 prices). At £4,602, the single biggest outgoing for a typical household in 2013 was income tax.

If our spending habits reflect our preferences, which they broadly should, then the hierarchy of wants in 21st century Britain runs something like this: pay for housing first, then food shopping, followed by eating out, paying the bills, filling the car, going on holiday, saving for a pension and buying new clothes. Spending on the typical mortgage fell by 4.6% between 2011 and 2013, but the average spent on rent rose by 27%. The renter / owner divide continues to grow.

Full steam ahead 

The UK is heading towards the year's end in fine fettle, according to the Purchasing Managers' Indices (PMI). Growth in service sector activity accelerated in November, the index rising from 56.2 to 58.6. Firms are hiring more people to meet demand. In manufacturing, the index increased from 53.3 to 53.5 on the back of stronger domestic demand.  Export markets remain weak. Although the construction index slipped from 61.4 to 59.4, it remained firmly in growth territory.


In contrast, the euro area continues to struggle. Activity growth slowed last month, the PMI falling from 52.2 to 51.2. That's growth, Jim, but not as we know it. Although Germany's performance improved, France, Ireland, Italy, and Spain all weakened. Employment growth remains slow and firms' selling prices fell, which bodes ill for deflation risk. It's time to press the "QE" button at European Central Bank HQ.

The great American jobs machine 

US employers created a staggering 321,000 jobs in November and the statisticians raised their estimates for the previous two months by 44,000 jobs. There are also signs that wage growth is accelerating, although nowhere near a pace that would raise concerns about inflation. With unemployment at 5.8%, down from 7% this time last year, the Fed will be watching closely to work out when to raise rates.

It’s by no means a perfect guide, but the last time the US started a rate hiking cycle, in 2004, it did so when unemployment fell to 5.6%, not very far from where we are now. But this strong employment growth contrasts with the PMI surveys which suggested that growth is slowing. If they are correct, the US could be heading for its own productivity puzzle.


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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