Economics Weekly - Cliffhanger averted

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Economics Weekly - Cliffhanger averted

Last week’s crunch meeting of European finance ministers had echoes of crisis-driven summits from 2010. But despite the Oscar-worthy build up, this time a deal was done without the need to work the weekend.

Economic Analysis

23 February 2015

Breathing space

Greece has a new deal from its lenders, but it is only a short one. The 4 month extension to its current bail-out programme gives time to negotiate a longer term solution. That solution must tackle thorny issues like how much debt Greece can afford to pay back and what further reforms it must implement. It is good news that both sides are willing to compromise, but reaching agreement won’t be easy. Expect plenty of bumps in the road as the new deadline approaches.

More good news

It is getting harder to write anything gloomy about the UK's labour market. Unemployment was 5.7% in the three months to December, down from 7.2% a year earlier. 134k full-time jobs were created in the final quarter and almost 500k over the year as a whole. Indeed, full-time jobs made up over 80% of the rise in employment in 2014. Meanwhile the percentage of part-time workers who would like a full-time job has fallen to 16%. To round things off a greater proportion of us are in work with the employment rate hitting a record high of 73.2%.


The spending power of British workers’ wages fell almost without interruption for more than six years from early 2008. Towards the end of 2014, real pay began growing and by December, it was rising at 1.2%y/y. Part of that was because wages themselves were growing faster, at around 1.7%y/y. But falling inflation was the biggest factor. That’s good news on two fronts. Despite rising employment, there are no signs yet of wages rising so quickly that higher inflation is a concern. Second, it means peoples’ wages will go a little further.

The healthy option

UK inflation hit a new low of 0.3% in January as cheaper oil and food continues to lean down on prices. Falling inflation has raised the spectre of deflation, but on current evidence the deflationary threat isn't materialising. Core prices, which strip out energy costs, are rising at 1.4% a year. That's not very fast, but it has crept up in each of the last two months. The UK’s low inflation remains exactly that, low inflation.

Short term vs long term

The Bank of England's rate setting committee believes the UK economy faces opposing forces. In the near term the MPC thinks there is a better than evens chance that inflation will dip below zero and go negative. But it will be short lived. The long-term rests on labour market slack (i.e. the unemployed and workers seeking more hours).

That slack is being used up as we speak. So the MPC will be trying to judge how far it can let that trend continue before it needs to put rates up. Until recently markets thought there was very little likelihood of that being in 2015, but now they are putting a 1 in 3 chance on a rate hike by the end of the year.

Back on track

A bountiful month for tax receipts gave the public finances their biggest January surplus for seven years. Previous changes to the top rate of income tax may have boosted self assessment receipts so it isn’t entirely that the UK’s recovery is finally better revenue for the taxman, though. The good news for the Government is that it now looks like the borrowing target of £91.3bn for the financial year, a 6% reduction on last year’s figure, will be met.

Shopping yes, dropping no

Lower food and oil prices and bumper job creation is clearly helping the UK retail sector. The volume of retail sales has grown by over 5% in the past three months. Shops (exc. food) are experiencing sales growth of around 6%y/y, a level that has not been seen for a decade. But the real action is in internet sales which are growing by over 12%y/y. Average weekly internet sales totalled £750 million in January, up from £600 million just two years earlier.

Growth for all

Growth across many of the UK’s regions appears to have been at or above their historical average in 2014, despite a slowdown at the end of the year. Top of the class was London, driven by its massive professional services and information & communications technology sectors. It was not, however, a case of a North/ South divide, as the North West and the East Midlands were the second and third respectively.

Low for even longer

The US economy is motoring along nicely, with job creation especially brisk. That’s why some members of the Federal Open Market Committee (FOMC) are concerned that leaving the Fed Funds where it is could lead to high inflation. But the majority reckon that raising rates too soon would hamper the recovery and push inflation further below target. So FOMC members left policy on hold and on balance reckon rates should stay close to zero for longer still.Double click to edit content...


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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