Underneath - Economics Weekly

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Underneath - Economics Weekly

When it comes to growth the UK economy has shown in recent years that it can deliver. But underneath there are concerns – a gaping current account, very strong credit growth and house prices (and rents) that seem to rise relentlessly. Some might even say they’re wearingly familiar.

Economic Analysis

03 October 2016

Bank of England headquarters London

Economic outlook

Onwards and upwards.

A decent performance from the UK economy and it’s more than skin deep. Economic activity grew by 0.7% between April and June this year, a little faster than first thought and slighter higher than the 0.6% post-war average. Growth in the year to June is higher than over the same period in 2015 and, looking beyond Q2, July’s data also look good, with output in services up 0.4% on the month. There are clouds. The trade balance is appalling, we’re borrowing too much from the rest of the world and households should probably be saving more. But wasn’t it was almost always thus? 



The UK current account remained historically very high at 5.9% of GPD in Q2. The knee-jerk reaction is to blame a lack of exports. But that isn’t the main reason. The money we receive on our foreign direct investment is not generating the cash it once used to – it’s been steadily reducing since 2011. And at the same time the money we send abroad for investments made into this country has risen. The fall in sterling might help things in the coming quarters, but the UK will remain reliant on what Mark Carney describes as the “the kindness of strangers” to finance its current account deficit. 


Keep on rolling.

A lot changed over the summer from an economic perspective, but one thing remained resolutely constant: British households’ desire to borrow money. Consumer credit continues to expand at around 10%, pushed along by strong demand for credit cards and car finance. The growth of mortgage lending was also unchanged at 3.2%, exactly the rate it has been for the last four months. But changes may yet be afoot. Mortgage approvals for house purchase fell for the third month in a row and are now 16% lower than last year. That should feed through to slower lending shortly.



House prices rose 5.3%y/y in September according to Nationwide. That’s a fractionally slower rate of growth than last month’s 5.6% and points to a slight slowdown in the market. Once again there are big regional differences with London, the South East and East Anglia all growing at between 7 and 9%, whereas many Northern regions are rising at 4% or less. At least supply is responding to some extent. London saw the biggest increase in housing stock of any region in the last three years, presumably because rising prices had made building more profitable.


Rent due.

If ever higher house prices weren’t enough to make home ownership an increasingly challenging ambition, higher rents certainly don’t help. Average private housing rents across Great Britain have risen 13% since 2011. But in that time average weekly earnings have risen only 9%. Unsurprisingly the problem is most acute in London where average rents rose by around 20% between 2011 and 2015 while weekly earnings stagnated. At least in Scotland there’s a bit of relief. Rents were unchanged between August this year and 2015. A bit of breathing room for incomes north of the border.     


A divided land.

Between 2009 and 2015 the number of employees in the UK increased by 7%. But it’s not been prizes all round. London saw growth of 18% whereas the South West and Scotland chalked up less than 1%. Not surprisingly, jobs have been lost in public administration (-15%) and finance (-3%). The winners have been high-end services such as professional, scientific and technical industries (25%) and business administration and support services (22%). With jobs in manufacturing and construction falling, the inexorable drift towards the further dominance of services continued.


Pleasant surprises.

US consumer confidence rose by 2.3 points in September to 104.1. That's its highest reading since 2007. The preliminary reading of the service sector Purchasing Managers' Index increased, too, by 0.9 to 51.9. That suggests growth that's modest rather than strong. Taken together, these surveys are welcome news following some pedestrian US data. If sustained, they would lay the ground for another rate rise. But on their own they are not sufficient.   


Bit sticky.

Need evidence that inflation is low in euroland? It doubled between August and September yet is still just 0.4%. Energy remains the biggest drag on prices. But even exclude energy and annual inflation would still be only 0.8%. This is a headache for the European Central Bank. If inflation was higher, interest rates could be too, and that might ease some pressure on European banks. Another headache is unemployment, now stuck at 10.1% across the region for the forth consecutive month in August. The UK rate is currently 4.9%.

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