RBS Weekly Economic Update: Monday 5th July GDP gaffes and goal-line technology

GDP gaffes and goal-line technology

  • Gaffes featured heavily last week, for both GDP releases and goal-line technology. The ONS announced that the final release of Q4 GDP figures, scheduled for the 29th June, will be delayed until July 12th. This highly unusual move was due to concerns over the reliability of some of the figures – so it wasn’t just England's football fans wishing for better technology to correct human error.
  • The rebalancing of household finances continues, albeit at glacial pace. Lending figures from the Bank of England show total household debt remained unchanged at £1.46tn in May, where is has been since the end of 2008. Simply not increasing debt marks quite a change in household behaviour - it rose by 10% every year from 2000-2007. UK households have been more active in reducing unsecured debt. The amount households owe on loans such as credit cards, overdrafts and personal loans dropped below £220bn for the first time since 2007. New borrowing against housing was stronger, rising by £1.2bn in May.
  • Recent momentum in the UK housing market is showing signs of stalling. Mortgage approvals for house purchase in May dipped marginally compared with April, while house prices were flat m/m in June, according to the Nationwide. This despite the cost of borrowing on new mortgages falling to an all time low, at least for those with some equity. The average market rate for a two-year fixed-rate mortgage with a 25% deposit fell to just 3.78% in May. Monetary policy may now be 'pushing on a string', at least in the housing market. In other words, the impact of lower interest rates may have been exhausted. Figures from the Bank of England also pointed to a slowdown in the supply of credit for buying houses due to concerns about lower availability of wholesale funding, on which bank lending depends.
  • Indeed, there were jitters in global financial markets more generally last week, as the gigantic package of twelvemonth loans provided by the European Central Bank to European Banks in 2009 expired. The ECB refused to roll over the loans as policymakers were concerned that the financial sector could become overly reliant on central bank liquidity, although banks could still borrow unlimited amounts from the ECB over shorter periods.
  • Domestic demand boosted UK manufacturing activity in June. Despite expectations that exports would provide the central plank supporting the UK's economic recovery, new exports slowed sharply. The purchasing managers index (PMI) for manufacturing reached 57.5 in June, well above the 50-mark that separates expansion from contraction. The reading for manufacturing employment increased at the fastest pace since 1995, providing some reassuring news for prospective employees, as well as HM Treasury. Even the once-embattled UK construction industry posted another strong PMI reading of 58.4 in June, broadly unchanged on the month.
  • In contrast, US manufacturing confidence fell sharply in June. The purchasing managers’ index was 56.2, down from 59.7 in May. This is still comfortably above the 50 level, but markets were expecting it to moderate by around 1 point, not 3.5 points. In response, the S&P 500 was down 1.4% by mid-morning, although it recouped some losses later in the day. A PMI reading of 56.2 is consistent with real GDP growth of 4.8%, a very respectable rate. The concern is that the PMI could continue to head lower into the second half of the year as firms report falling new orders.
  • Softness in the labour market continues to cast a shadow over US recovery prospects. Non-farm payrolls fell by 125,000 in June. A decline had been expected, as around 225,000 workers that had previously been hired temporarily to help with the census were laid off. But the underlying detail of the employment report was disconcertingly soft. Private sector employment increased by just 83,000, well below the c150,000 average monthly advance usually needed just to keep pace with the natural growth in the labour force. On top of the modest payroll advance, hours worked slipped in June, with the average workweek falling from 34.2 hours to 34.1 hours.
  • Even the decline in the US unemployment rate from 9.7% to 9.5% didn’t signal a genuine improvement in conditions. The decline was driven by a sharp decline in the number of people looking for work (-652,000). The economy remains heavily reliant on consumers to keep spending – the longer the recovery remains jobless, the less likely it is to be sustained. There are currently 1.3m more people employed now than they were at the start of the year, yet there are still 6.8m fewer jobs in the US economy now than there was two years ago. No wonder average wages slipped on the month.

Paul W Turton
Business Development Director
NatWest Real Estate Finance