Economics Weekly - Gre-negotiation


Economics Weekly - Gre-negotiation

Bank closures, daily withdrawal limits, a referendum and a resignation. It was an eventful week for Greece and another lies ahead. The country remains the current top economic concern but two venerable institutions were last week warning of other risks that lurk both at home and in the global economy. Like Greece, debt plays a big part.

Economic Analysis

06 July 2015

Slow motion 

We've all had that moment, when we've knocked the glass, seen it fall slowly to the floor, but remain ignorant to the extent of the damage to come. The context, framing and wisdom of yesterday's vote is already a debate for historians. It's happened. Now we see the consequences. Politics, not economics will decide the eventual outcome for both Greece and the euro. Whatever the direction for both, something has changed irrevocably.

Mo' money mo' problems 

It’s hardly a beach read but the Bank of England’s twice-yearly assessment of risks to the UK's financial system provided plenty to think about. Top concern was the global economy and in particular the deteriorating situations in Greece and China. Household debt is judged to be the UK‘s key economic weakness and the buy-to-let mortgage market also came in for scrutiny. It’s therefore unsurprising that the Bank is seeking more powers over mortgage lending criteria and performing more demanding stress tests of UK financial resilience.

The bigger picture 

The Bank for International Settlements, dubbed the central bank of central banks, was also talking financial stability last week in its annual assessment of the global economy. It describes global economic growth as unbalanced, too reliant on debt and delivering too little by way of productivity growth. Meanwhile low interest rates leave hardly any room for central banks to move. The remedy? Policy-makers need to focus less on short-term economic tinkering and near-term inflation targets. Instead they should pursue policies that address structural issues by making labour and product markets more flexible, providing an environment conducive to entrepreneurship and getting more people into work.

Steady 

The UK economy grew by 0.4% in Q1, slightly faster than first thought but slower than the pretty rapid growth in 2014. Notable was the growth of business investment, which went alongside strong growth in companies’ profits. Interesting was the continued growth in the volume of government output: spending might be going down but we’re getting more operations, lessons taught and other public services for our money.

Not coining it in 

At 5.8% of GDP the UK current account is close to a record high and has deteriorated over the past year. The problem is that the income the UK earns from investments in businesses abroad has fallen while the inverse (i.e. what foreign businesses earn on their investment in the UK) has risen. To put it another way, the UK isn’t coining it off others as much as others are coining it off the UK.  

Confidence 

Business is good according to the latest survey of purchasing managers. In all major economies, the overall PMI indicator showed businesses are growing and in some countries growing well. The UK is a prime example. The services and construction PMIs were around 58, well above the 50 threshold that separates growth from contraction. And even though manufacturing was a mere 51.4, the sector is still growing. In the Eurozone, you would not be able to tell there is a crisis. The overall PMI, which covers manufacturing and services, was 54.2. Business is growing, just not in Greece.

Hardly news 

Unemployment in the euro area held steady at 11.1% in May. So inured are we to such dreadful numbers that they have almost lost their capacity to shock. The rate has been 10% or more in 70 of the last 71 months. In not one single month in the same period has UK unemployment reached 10%. Seven euro states have a rate above 10% while eight are below 7%. It’s not just the Greece crisis that causes the euro area existential angst: such varied job market performance illustrates that this is not a natural currency union.

Hardly surprising 

High unemployment reflects weak demand and that’s apparent, too, in still-low inflation. Prices increased by 0.2%y/y in June, down a touch since May. Even with volatile items like energy and food excluded, core inflation was only. 0.8%. Despite the ECB’s quantitative easing bazooka, that’s precisely what core inflation read a year ago. It will take considerable persistence on the part of the central bank to lift the euro area out of “low-flation”.

The way it is 

The US unemployment rate fell to 5.3% in June and the economy added 223k jobs. Average hourly earnings were up 2%y/y. It’s all good news and a sign that underneath some disappointing growth figures of late the US economy remains in decent shape. But it’s unlikely to prompt the Federal Reserve into raising rates anytime soon.

Disclaimer

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.

Latest news

Royal Bank of Scotland hosts ‘Easy Wins Live’ event

The event explored today’s ‘always on’ world and the pressure Scots face as they struggle to balance life inside and outside of work.

To win the fight against fraud and scams, it is vital to educate young people.

Primary school children in Currie, Edinburgh put on their detective hats last week to learn more about fraud and scams thanks to the Royal Bank of Scotland MoneySense programme. Les Matheson, CEO of Personal Banking, tells us why it’s so important to financially educate young people.

New NatWest debit cards now accessible for all customers

New card features are being rolled out from today with all cards having a notch and raised dots.

Set Tab for lightbox