Over the line? - Economics Weekly

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Over the line? - Economics Weekly

It wasn't blockbuster but GDP growth was slightly better than expected last quarter, lending a little support to members of the Bank of England's Monetary Policy Committee minded to raise rates this week. But will it be enough to get a rate hike over the line? We'll find out lunchtime on Thursday.

Economic Analysis

31 October 2017

Bank of England

Slow growth. The UK economy grew by 0.4% between July and September. That was a little faster than both what forecasters had expected and the increase between April and June. But it still fell short of the long-run average. We’re growing, which is welcome, just not very strongly. Perhaps importantly, the Bank of England had expected output to rise by 0.3%. So, last week’s numbers nudge up the chances that the Bank of England will raise Bank Rate at the Monetary Policy Committee meeting which finishes on Thursday.

Calling it the ‘March of the Makers’
would be pushing things a bit but manufacturing led the way in Q3 with output up 1%q/q. Services grew by 0.4%. Construction continued its recent contraction, falling 0.7%. There’s a hint in the data of the impact of sterling’s depreciation. It may have helped boost export demand for the likes of textiles, electrical goods and transport equipment. In contrast, the sterling-induced squeeze on incomes from higher inflation might explain the weakness of output growth in a number of leisure sectors that are especially dependent on disposable incomes.

Pay day. Using the best method of measuring these things, weekly earnings rose by 2.2% in the year to April 2017. In cash terms, we earned an average of £550 a week, but since only footballers are paid weekly, and not for £550, that’s roughly £28,500 a year. In the past, pay has tended to rise about 4%. But as Dylan mused times are a changin’ and since 2008 pay rises have averaged 1.6%. So this year’s an improvement of sorts. Still, after adjusting for inflation, pay still fell by 0.4% in real terms. It’s looking like a tough-ish Christmas for retailers, unless yet more credit fills the gap.

Outsiders and in-betweeners. Still, many have enjoyed ‘inflation busting’ pay rises. Women working full time for example (up 2.7%) and men working part time (2.9%). Loyalty pays, too, as sticking with the same employer was rewarded with a 3.5% rise. It also pays to be an outlier. Those on the lowest pay, as well as the highest, did relatively well, as did the young (under 30) and the, ahem, ‘old’ (60+). It’s those in-between, the middle aged and reasonably, but not extravagantly, paid, that are subjected to the hardest squeeze.

69.2m in 2026. Population growth has averaged 0.8% per annum in the past ten years. It doesn’t sound much but it soon adds up, amounting to 4.8m people since 2006 to give a population of 65.6m. For the next decade a slower 0.5% pace is forecast. Cumulatively to 2026 that’s 3.6m people – about the combined size of Liverpool and Glasgow city regions. Forecasters reckon the contribution from net migration and the natural increase will be roughly equal. And that includes a slowdown in the former. A timely reminder, ahead of the Budget, for more housebuilding and infrastructure.

Uber confident. The flash Eurozone PMIs for October confirmed the Eurozone maintained robust rates of growth into Q4. Private sector firms reported the strongest rise in employment in over a decade. Meanwhile manufacturers are shrugging off a strong euro. The manufacturing PMI hit an 80-month high and the pace of job creation rose at a record rate. Business conditions remain buoyant in both France and Germany. According to the influential IFO survey, German companies are more optimistic than ever before. The world’s third largest exporter is clearly benefiting from the global economic upturn.

Downsizing. Tightening monetary policy is de rigueur. Last week the European Central Bank announced its first reduction in policy support since 2011. While there will be a nine-month extension to its quantitative easing programme (‘QE’), monthly purchases will be halved to €30bn from January 2018. Significantly, Mario “whatever it takes” Draghi announced no end-date. QE could be extended or increased should conditions worsen. As such, the ECB President said the changes were not “tapering” but a “downsize”. And rates won’t rise until “well past” the end of QE. That looks like 2019 at the earliest.

Weathered. The US economy expanded by 0.7% in Q3, or 3% in annualised terms. It was a little higher than forecast, especially given the hurricanes during the period. If these events harmed the consumer it was shortlived with spending rising 2.4% at an annualised pace and contributing over half of the growth. Resilience in the pace of business investment was also encouraging, aided by increasing capacity constraints and cheap finance. One small concern is that a quarter of growth came from the build-up of stock levels (likely unsustainable). But fair to say US growth remains on a sound footing.

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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