Economics Weekly - Good deflation

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Economics Weekly - Good deflation

Deflation has reached the US, but not to worry it’s the “good” sort that helps boost household spending. In contrast, continuing Eurozone deflation contains some of the “bad”. For the UK, lower oil prices were not all good news. Business investment fell, due primarily to a postponement of oil and gas projects.

Economic Analysis

02 March 2015

'Good' defaltion could help boost household spending.

Equal opportunities

Deflation arrived in the Eurozone in December and prices fell again in January, by 0.6%y/y. Deflation is happening in 17 of the 19 Eurozone member states, including among the strongest performers, so it's an equal opportunities phenomenon. That suggests a mix of 'good' supply-led deflation – mainly the result of a sharply lower oil price –and  'bad' deflation caused by weak demand.

Joining the party

Much of Europe is already there, Britain is flirting with it and in January the US slipped into deflation. Prices fell 0.7%m/m, with gasoline down a whopping 18.7%. It's best to think of lower energy costs as a temporary and external influence, rather than a consequence of domestic weakness. Measures of inflation that strip out volatile items rose 1.6%y/y. That's still below the Fed's inflation target and, as Janet Yellen hinted last week, rate rises are still months away.


The US economy grew at an annualised rate of 2.2% in the last three months of 2014 as consumption boosted GDP. The US job creation machine was evident as real disposable income growth was just under 4%. This spurred household spending to rise almost twice as fast as the broader economy.  Investment didn't do too badly either, growing at 5% in the final quarter. The only dark cloud over the data was on international trade, where 10% growth in imports beat the exports expansion and wiped 1% off the headline growth number.

Lopsided again

UK GDP grew by 0.5% in the final quarter of last year, or by 2.6% over the whole of 2014, neatly matching it's post-war average. Q4 growth can be summed up alliteratively as services strong and stable at 0.8%, construction contracting by 2.1% and production puny at 0.1%.

Company profits fell for the second consecutive quarter, as did business investment, due primarily to a postponement of oil and gas projects. The trade balance narrowed, but remains in deficit to the tune of £10 billion. In short the UK economy is running reasonably well. But under the bonnet it's a little unbalanced.

Can travel, will work

Net migration to the UK reached 298,000 in the year to September 2014, higher than the 210,000 recorded in the year prior and the highest figure since 2005. In gross terms (i.e. excluding those who moved out of the country) 624,000 people moved to the UK in the same period. And as has been the case in recent years the main reason is work with 44% migrating for that reason.

Small but growing

The number of zero-hour contracts (ZHCs) is estimated to be just short of 700,000. Although their use has risen by around 20% in the past year they represent only 2.3% of all people in employment. And a ZHC doesn't mean zero hours. On average someone on such a contract works 25 hours per week.

Two-thirds of people on ZHC do not want to work more hours that they do at present. That leaves about one-third of people on such contracts (230,000) wanting to work more, whether in their current job or not. But that's not a problem exclusive to ZHCs. 16% of part-time workers, around 1.3 million people, would like more hours.

Changing landscape

The British Bankers Association's latest figures showed a 1.4%y/y increase in mortgage lending. This slow growth mirrors a much longer term trend revealed in the British Housing Survey. 2013/14 was the first year since modern records began in 1980 in which homeowners who own outright outnumbered those who own with a mortgage. It also mirrors the increased share of renters – they account for 37% of all households, the highest share since the mid-1980s.

Policy advice

The OECD sees its role as promoting policies to improve people's lives and last week it turned its attention to the UK. The rich country think-tank’s recommendations on regulation were interesting. In its drive to improve infrastructure it advocates using more private finance. It wants big banks to get safer, by running lower leverage ratios. And it thinks the housing market could be boosted by shaking up the Green Belt restrictions on supply. With the main political parties putting the finishing touches to their manifestos, we'll soon see how many of these suggestions are heeded.


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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