Global Economics Weekly Brief
UK and US Growth
The UK economy turned in its best result in six years in 2013, growing by 1.9%. While hardly a stellar performance it was welcome confirmation that a decent recovery is underway.
The US, too, grew by 1.9%.
Interest rates remain at `crisis` settings in both countries and their central banks confirmed last week that they would stay there for some time to come. Still many challenges ahead to gain growth!
Solid growth in final quarter of 2013. The UK economy grew by 0.7% in the three months to December, down a touch from 0.8% in the three months to September. This lifted growth for the whole of 2013 to 1.9% - the fastest since 2007. Most sectors are getting in on the act, though 'Distribution, Hotels & Restaurants' stands out, notching up a rapid 4.7%y/y and confirming the starring role of the consumer in the recovery. On its current trajectory, the UK economy will eclipse its pre-crisis peak in Q2 2014, which would be a major milestone. Excellent news for the UK, although many milestones and challenges ahead!
Approved. Mortgage approvals hit 71.6k in December, up a whopping 29% on the year and the largest number since the start of 2008. Gross mortgage lending grew rapidly, too, up 39%y/y, but this surge was matched by increased repayments. So overall, balances only grew 0.9%y/y. Meanwhile, the consumer credit recovery continued apace (high credit card movements again on the increase), with 2013 seeing consistent growth in credit card borrowing, overdrafts and personal loans we hope this is not boom and bust again, again and again!
Taking with one hand… New borrowing by UK businesses increased significantly in Q4 2014, by 19% for SMEs and 18% for large corporates. However, the total amount of loans outstanding fell by 1.8%q/q as companies paid back more than they borrowed. The increase in new lending reflects the continued improvement in credit conditions more generally, as reported by the recent BoE’s credit conditions survey and the Deloitte’s survey of CFOs. Banks still charging too high for borrowing!
The Office of National Statistics (ONS) UK latest reports show us that there are now 30.1m people in the working population in the UK. If you look closely at their figures you’ll see that (do we believe these figures?):- The Self Drive Worker Sector has grown at a faster pace than the Full Time Employment Sector. Against last week’s triumphalism rhetoric from Government about employment levels going up and unemployment going down, an equally as truthful – but equally as important - interpretation of the ONS figures announced in late January 2014 says something strikingly different.
If you separate out purely full time employees on a payroll from everyone else – who we call “Self Drive Workers” – and compare them with the same ONS figures at 31.3.13, what has happened is that the percentage of the total UK working population represented by purely full time workers on a payroll has actually `gone down` from 53.7% to 53.3% and the percentage of the total UK working population represented by “Self Drive Workers” has actually gone up from 46.5% to 46.7%.
(Self Drive Workers are those who need, either wholly or in part, to find their own work, their own “clients” – their own things to do – with their infinitely variable and often uncertain levels of reward. This part of the UK labour market – about half and, we submit, rising - is not recognised, not understood and certainly not supported. It has immense implications for the future economic prospects, even viability, of the UK and also for those `senior` business people opting for this working lifestyle.) For those who would like to examine the ONS figures supporting my view (available on the ONS website – EMP01) and read more about it click here - http://tinyurl.com/qg482c8
Where are all the immigrants? Behind the headlines for the UK - The hard facts on jobseekers from Romania and Bulgaria.
A recent study by the Romania Institute for Migration and Strategy found the UK was the most sought after work destination among young Romanians. Romania has lost 30% of its doctors to emigration in the past two years - around 6,000 with 14,000 having left in the last five years. Kent County Council expect 9,000 Romanians and Bulgarians to settle there within the next 12 months. UK roles are being advertised in Romania and Bulgaria by the UK government and businesses to attract people to the UK whereby the wages will be probably at a lower figure than for UK residents! There are about 5,000 UK vacancies being advertised on Tjobs, Romanians largest jobs board and just under half are in health or care work. Plus, there are many other jobs for cooks, housekeeping, taxi drivers, doctors and architects etc. Why are not the UK unemployed not applying for these jobs? Because in many cases the wages are the minimum and /or zero hours contracts.
The American way. US GDP grew at an annualised rate of 3.2% in the fourth quarter of 2013, down from 4.1% in Q3. Export growth was 11.4%q/q while residential investment bucked its recent strong run (-9.8%q/q) and the government shutdown knocked almost 1% off GDP. The US economy is 6.5% bigger than before the crisis and it has rebalanced, too. Exports are up more than 20% but imports by less than 5%. Property investment is down sharply but investment in intangible assets like intellectual property is almost 15% higher. Government is 2% smaller than in 2007. The US rise to the challenge again!
Farewell. Ben Bernanke checked out of the Fed last week, chairing his final Federal Open Market Committee meeting. It was steady as she goes, with a further $10 billion per month reduction in the quantitative easing programme and a reiteration that interest rates will be low for some time yet. Inflation remains subdued, with the measure that focuses on personal consumption rising only 1.1%y/y in December. There is certainly inflation in the housing market. Prices grew 0.9% m/m in the three months to November according to Case Shiller and the 14%y/y rise was the fastest since February 2006. Ride on to further growth through 2014 and the global economy will grow!
ECB's task made harder by falling inflation. Prices rose by just 0.7% in the euro zone last year, well under the European Central Bank's (ECB) target of below, but close to 2%. With 12% unemployment and inflation weak we would normally expect policymakers to cut rates aggressively, but these are far from normal times. Under President Mario Draghi the ECB has already cut rates to 0.25%. Whilst further rate cuts are possible the ECB might be tempted to intervene directly in bank funding markets and by doing so help ease financial conditions in periphery countries. Either way it will be hoping that the Q4 GDP data show a stronger euro zone recovery in two weeks time. The Eurozone continues its struggle to survive and France/Italy/Spain/Greece all continue to see further rising unemployment at a rapid pace!
A bumpy ride. Emerging market volatility continues with South Africa, India and Turkey being forced to raise interest rates to stem slides in their currencies. Fears over the impact of tighter US monetary lie behind the latest stress. But country specific factors are also at play, with various combinations of political strains and economic mismanagement. The actions taken this week may have brought a little stability but it's likely to remain uncomfortable for a number of countries for some time. A bumpy road ahead for these countries in 2014!
Why have UK real wages have fallen almost continuously since 2008, the longest sustained fall since at least 1964? Inflation has played a part as has the shift towards more part-time jobs, which tend to pay less. Items other than wages – like pension contributions – take up a higher share of employment costs. But an important cause has been the shift from manufacturing to services. That’s technology for you. It’s a trend that started long before 2008 and it’s not going away. Again, the manufacturing sector of the UK is still in decline and will continue to be that way as long as goods purchased globally are far cheaper to buy! The UK needs to wake up to the future and make sure UK manufacturing can compete globally or there will be a significant change in the UK in the next few years when foreign goods become more expensive to purchase!
It’s time for a check-up - Emerging market vulnerabilities in a world of rising US interest rates
Which emerging markets are vulnerable in a world of rising US interest rates?
Ø Emerging markets have entered a new world. The US appears to be on a path of higher interest rates as the economy gradually recovers (recent debt ceiling issues aside).
Ø And because US monetary policy sets the tone for much of the world, some emerging markets are going to find life a bit more difficult. We have undertaken an economic health-check of 22 emerging markets to see which are most vulnerable to rising US rates.
Ø There are a number of high profile emerging markets in our most vulnerable grouping, including South Africa, India, Indonesia and Turkey.
Ø Investors should consider the risks that their portfolios are exposed to in this new world. Businesses should understand the consequences of slower growth for their plans and whether their cash flows require new hedging strategies.
Watch 2014 globally very closely!
Global Economics - UK and US Growth