Economics Weekly - Good news from Threadneedle Street

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Economics Weekly - Good news from Threadneedle Street

Faced with negotiations about Greek debt and in the face of more and more UK data showing a slower growth, the Bank of England’s Inflation Report was remarkably upbeat. The Bank’s forecast of strong growth, falling unemployment and subdued inflation looks like the fabled “Goldilocks scenario”: not too hot, not too cold, just right. Let’s hope that this week’s labour market data starts to offer support for their view that strong real wage growth is just a footstep away.

Economic Analysis

16 February 2015

You've never had it so good

Bank of England Governor Mark Carney did not mince his words. Launching the Monetary Policy Committee's latest inflation report, he predicted that 2015 would see the strongest growth in real take home pay in a decade. The MPC is expecting a bumper year for the British consumer, enough strength to propel the economy to growth of almost 3% this year and next. So whilst the Governor may yet have to write a few more letters to the Chancellor explaining why inflation is so low, he isn't sounding worried about the UK's growth prospects.

O inflation, where art thou?

Britain's industrial output managed to eke out growth of 0.1%q/q in final quarter of 2014, principally supported by the nation's manufacturers who posted a 0.2%q/q rise. Two themes stand out. First, the mining and quarrying sector, which includes oil and gas extraction, managed to buck both long and short term pressures by growing 0.5%q/q in Q4 2014. It's a welcome respite, but also one almost impossible to hold on to due to global oil prices. Second, yet again manufacturers reported lower cost pressures, which they were able to pass on to buyers by lowering prices.

Slowing, but growing

UK house price growth is set to slow, but prices are unlikely to fall. That is the judgement of the latest survey from the Royal Institute of Chartered Surveyors, which has a good track record of predicting house price growth up to half a year ahead of time. For those concerned that house prices are set to tumble, this should come as welcome news.

But for those in London, the news is less cheery, as expectations over the last three months have weakened further. The capital, at least, seems to be at risk of seeing some house price falls six to nine months from now.

Houses built on stone or sand?

Despite a disappointing end to the year, the UK construction industry had a good 2014. Output was up 7.4%, with house and factory building leading the charge, both growing by more than 15% compared with 2013. But there are a couple of cracks in the foundations. Property transactions (a good indicator of future building) have started to fall, meaning that growth will depend more and more on the types of properties that are built. And despite very low government borrowing rates, the amount of infrastructure building has decreased in each of the last three years.

Too slow

The Eurozone economy provided a rare piece of good news by expanding 0.3% between Q3 and Q4. There are two star pupils. Germany and Spain grew by 0.7% q/q, a faster pace than the UK. Indeed, over the past two years Spain's performance is a whisker behind Germany's. The problems lie in the stagnant economies of Italy and France. And compared to the previous year the Eurozone economy is now only 0.8% bigger. The UK by comparison grew by 2.7%. Italy and France need to get out of the car and help push the Eurozone’s recovery along.

Ireland leads

Eurozone industrial production may have grown by only 0.1%m/m in October last year, but Ireland saw production expand by a whopping 9%, led by the pharmaceuticals sector. And it was the smaller economies that stood out, with Lithuania seeing growth of 5% and Greece and Slovenia seeing growth of 2.5%. Now we just need some signs of life from the big boys. Production in France, Italy and Spain decreased, while in Germany it was unchanged from September. Clearly in the case of Germany, services were keeping the growth boat afloat at the end of last year.

Another deflation candidate?

China's consumer prices rose by just 0.8%y/y in January, the slowest pace in over five years. In echoes of Western economies, it has given rise to fears that China is headed for a period of deflation. There are certainly other reasons to be worried. The property market suffers from oversupply, there is excess capacity in parts of its industrial sector and producer prices have been in outright deflation for three years. On this basis it's reasonable to assume the Chinese authorities will continue to ease monetary policy as they have done in recent months.


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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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