Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

 

From the desk of Ruth Lea

Economic insight and financial comment related to the ever-changing financial landscape and the economic world at large.

Economic Perspectives

3rd December 2018

Economic Insight - 3 December 2018

The world economy is slowing and growth forecasts are revised down
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest forecasts from three major institutions:
Press Release

The world economy is slowing and growth forecasts are revised down

Date: 3rd December 2018

The world economy is slowing and growth forecasts are revised down
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest forecasts from three major institutions:
  • The OECD’s and the European Commission’s latest forecasts were released in November, whilst the IMF’s latest forecast was released in October.
  • In all three cases, world economic growth is seen to be slowing, amidst trade tensions and tighter fiscal and monetary policy. The OECD, for example, sees world GDP growth slowing from 3.7% in 2017 and 2018 to 3.5% in 2019 and 2020.
  • Moreover, all three institutions have revised their growth forecasts down from their previous forecasts. In their previous forecasts, the general view was that global growth was picking up.
  • All three institutions agree that growth will slow in the Eurozone, the US and China over the forecast period.
  • They all project lacklustre growth for the UK. The OECD, for example, projects 1.3% for 2018, 1.4% in 2019 and 1.1% in 2020.
Another development:
  • Oil prices have fallen sharply since the beginning of October, when Brent Crude peaked at over $86pb, reflecting overproduction and the consequent build-up of inventories. Brent Crude was under $60pb at the end of November.
There were major developments on Brexit:
  • The Withdrawal Agreement (599 pages) and the Political Declaration on the future EU-UK relationship (26 pages) were agreed at an extraordinary European Summit on 25 November.
  • The Government released long-term analyses (to around 2035) of the economy for several scenarios on 28 November. Their White Paper model was the best performing scenario and their No Deal was the worst.
  • The Bank of England also released its scenario analysis on 28 November, concluding “the FPC judges that the UK banking system is strong enough to serve UK households and businesses even in a disorderly Brexit”.
  • The Bank’s “close Economic Partnership” scenario was the best performing scenario whilst the “disorderly No Deal” scenario was the worst.

Ruth Lea said, “The forecasting consensus has grown more pessimistic in recent months with forecasting institutions generally downgrading their growth projections. This partly reflects the uncertainties created by the US-China trade tensions. Growth is now expected to slow over the next 2-3 years. And, moreover, it is expected to slow in the three largest economies: the Eurozone, the US and China.”
For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
Download full article

19th November 2018

Economic Insight - 19 November 2018

UK economy: growth firm in 2018Q3 but set to slow in 2018Q4
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest economic data:
Press Release

UK economy: growth firm in 2018Q3 but set to slow in 2018Q4

Date: 19th November 2018

UK economy: growth firm in 2018Q3 but set to slow in 2018Q4
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest economic data:
  • GDP growth was a better-than-expected 0.6% (QOQ) in 2018Q3, supported by a pick-up in consumer spending (helped by the hot weather) and an improved trade balance. Business investment slipped 1.2% in the quarter.
  • The latest Markit surveys, however, suggest some slowing of activity going into 2018Q4.
  • The underlying labour market continues to tighten, despite an uptick of unemployment in 2018Q3. Employment growth continues, the unemployment rate is just 4.1% (2018Q3) and vacancies are strong.
  • The number of EU nationals in employment fell 132,000 (YOY) in 2018Q3, contributing to the tightening labour market, whilst the number of non-EU nationals in employment remains broadly flat.
  • Annual average earnings growth is picking up. Regular earnings rose 3.2% (YOY) and total pay rose 3.0% (YOY) in 2018Q3.
  • CPI inflation was unchanged at 2.4% (YOY) in October. Higher oil prices have pushed up producer prices, but inflationary pressures generally remain modest.
  • UK house prices increased by 3.5% (YOY) in September. House price growth has slowed over the past two years, led by weaker house prices in London (more specifically, inner London).
  • There are signs that global growth is moderating. Eurozone GDP increased just 0.2% (QOQ) in 2018Q3, within which German GDP fell 0.2%, French GDP increased 0.4% and Italian GDP was flat. US GDP growth moderated to 3.5% (annualised) in 2018Q3, but remained robust. Japanese GDP fell 0.3% in the third quarter, whilst China’s growth eased to 6.5% (YOY).
There were major developments on Brexit:
  • The draft Withdrawal Agreement (585 pages) and the “outline of the political declaration on the future EU-UK relationship” (7 pages), as agreed by the negotiators, were released on 14 November.
  • The Withdrawal Agreement included the financial settlement, the terms of the implementation (transition) period (to 31 December 2020) and the “backstop”.
  • If the future EU-UK relationship (to be negotiated after 31 March 2019) cannot be applied at the end of the transition period, there are two options. Firstly, the “backstop” will be applied or, secondly, the transition period may be extended.
  • The key features of the “backstop” are a single customs territory, wide-ranging regulatory alignment with the EU (to ensure a “level playing field”) and extra alignment conditions and checks for Northern Ireland.
  • The key features of the future EU-UK relationship include a free trade agreement (FTA), customs arrangements built on the single customs territory (as in the Withdrawal Agreement), and wide-ranging regulatory alignment built on the “level playing field arrangements” (as in the Withdrawal Agreement).
  • An extraordinary European Council summit to “finalise and formalise” the Brexit “deal” is planned for 25 November.
  • In addition, the European Commission published its contingency measures if a “No Deal” Brexit on 13 November 2018.

Ruth Lea said, “GDP growth in the third quarter was encouraging, but activity is expected to slow in the fourth quarter. Nevertheless growth continues. Real earnings growth should support the growth of household spending going forward, which will support GDP growth, even if there is some weakness in business investment.”
For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk
Download full article

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Comment, at a glance

Unemployment rate was 4.1% in three months to October, annual earnings growth 3.3%
11 December 2018
Employment rose by 79,000 (QOQ) in the three months to October, and was a robust 306,000 higher than a year earlier. Within the total, full-time men rose by 221,000 (YOY) and full-time women increased by 207,000, whilst part-time men rose 45,000 (YOY) but part-time women fell 77,000. The increase in full-time employment was therefore 428,000 (YOY), whilst part-time employment fell 32,000.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.7%, higher than a year earlier (75.1%), and the joint-highest estimate since comparable estimates began in 1971. The employment rates for men and women were 80.3% and 71.2% respectively. The recent increase in the employment rate for women is partly due to ongoing changes to the State Pension age for women resulting in fewer women retiring between the ages of 60 and 65.

Unemployment was 1.38mn in the three months to October, 20,000 higher than the previous quarter but 49,000 down YOY. The unemployment rate (the proportion of the labour force [those in work plus those unemployed] that were unemployed) was 4.1%, unchanged from the previous 3 months but lower than a year earlier (4.3%). The inactivity rate (the proportion of people aged 16-64 who were economically inactive) was 21.0%, lower than for a year earlier (21.5%) and the joint-lowest estimate since comparable estimates began in 1971.

Job vacancies remain strong. There were 848,000 job vacancies in the three months to November 2018 (sic), around the highest since comparable records began in 2001. The number was up 10,000 (QOQ) and 40,000 higher (YOY).

Average weekly earnings for employees (GB) in nominal terms increased by 3.3% for both regular pay (excluding bonuses) and total pay (including bonuses) in the three months to October (YOY). Earnings growth is picking up. The ONS said that “…latest estimates show that average weekly earnings for employees in GB in real terms (adjusted for price inflation) increased by 1.0% excluding bonuses, and by 1.1% including bonuses, compared with a year earlier”. 

All in all, this report suggests the labour market remains fairly robust, despite the modest uptick in unemployment.

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Trade (goods & services) deficit widened in 3 months to October 2018
10 December 2018
The total trade (goods & services) deficit widened in the 3 months to October 2018Q3 by £3.1bn to £10.3bn, as both the goods and services accounts deteriorated. Within the total:

  • The goods deficit widened by £1.7bn to £35.5bn, as exports rose by £1.9bn (2.1%) whilst imports were £3.6bn (3.0%) higher. Trade in unspecified goods (including non-monetary gold) and chemicals had the largest widening effect on the goods deficit, which was partially offset by trade in cars in the three months to October 2018.
  • The goods deficit narrowed by £1.4bn to £22.8bn with EU countries, but widened by £3.1bn to £12.8bn with non-EU countries.
  • The services surplus fell by £1.3bn to £25.2bn, as exports fell by £1.0bn (1.4%) whilst imports were £0.3bn (0.8%) higher. 

 The total trade deficit in volume terms widened by £3.0bn to £8.9bn in the 3 months to October, which acted as a drag on GDP growth.

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GDP rose 0.1% in October
10 December 2018

GDP rose just 0.1% (MOM) in October, after being flat in August and September, to be 1.5% (YOY) higher (table GVA3). Within GDP:
·       The dominant services sector picked up by 0.2% (MOM), to be 1.8% higher (YOY). The professional, scientific and technical activities sector made the largest contribution to the MOM growth.
·       Production output was down 0.6% (MOM), to be 0.8% lower (YOY). Within production, manufacturing fell 0.9% (MOM), and was 1.0% lower (YOY), due mainly to MOM weakness from transport equipment and pharmaceutical products. The fall in manufacturing was partially offset by a 1.8% (MOM) increase in mining and quarrying.
·       Construction output slipped 0.2% (MOM), but was still 3.8% higher (YOY). The decrease in October 2018 was driven by declines in infrastructure, public new housing and total repair and maintenance; the largest contributor offsetting these decreases was private new housing, which grew by 2.4%.

The monthly growth rate for gross domestic product (GDP) is volatile and therefore it should be used with caution and alongside other measures such as the three-month growth rate when looking for an indicator of the longer-term trend of the economy. However, it is useful in highlighting one-off changes that can be masked by three-month growth rates.

Turning to the three-month estimate, GDP rose 0.4% (QOQ) in the three-months to October, compared with a 0.6% (QOQ) increase in 2018Q3, to be 1.5% higher YOY. Production was 0.3% (QOQ) higher (within which manufacturing was flat), construction was 1.2% (QOQ) higher and services grew 0.3% (QOQ). Within services, there was however a fall in the wholesale, retail and motor trade sector. Motor trade businesses reported a significant impact over the latest three months due to the world-wide harmonised light vehicle test procedure (WLTP). This was applied to all new car registrations starting from September 2018. These tests are part of new regulations that are used to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions.

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Markit Surveys for November mixed
5 December 2018
The much-followed Markit/CIPS surveys were mixed in November. Manufacturing recovered and construction held firm, but services fell significantly.   

·       The Markit/CIPS manufacturing PMI picked up in November to 53.1, after the dip to 51.1 in October. The domestic market remained the prime source of new contract wins, whilst new export business dropped for the second straight month. (Data released on 3 December 2018.)

·       The Markit/CIPS construction PMI reached a 4-month high. It was 53.4 in November, slightly above October’s 53.2. Moreover, business activity was the strongest since July. Residential building was the fastest growing sector, whilst there was continuing growth in civil engineering and commercial construction. (Data released on 4 December 2018.) 

·       The Markit/CIPS services PMI eased to a 28-month low in November. It was 50.4 in November, compared with 52.2 in October, and only slightly above the 50 no-change level. Survey respondents noted that subdued business and consumer spending had held back growth in November. A number of firms noted that heightened Brexit uncertainty had led to delays with clients’ business decisions. (Data released on 5 December 2018.)

·       Markit estimated that “…the surveys are so far consistent with 0.1% growth in 2018Q4, thanks to the expansion seem in October, but growth momentum has since been lost and risks are clearly tilted to the downside”.  

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October’s consumer credit growth eases further
29 November 2018
 Concerning lending to individuals the Bank of England announced: 
·       The amount outstanding on unsecured consumer credit rose to £215.6bn in October, an increase of 7.5% (YOY), down on September’s 7.9%, though still relatively buoyant (Money & Credit release, table B). The amount outstanding now exceeds the £208bn peak of September 2008, prior to the Great Recession. The Bank noted that the growth slowdown reflected “…the weaker lending flows seen in recent months. This (7.5%) was the lowest since May 2015, and well below the peak of 10.9% in November 2016.
·       The amount outstanding on lending secured on dwellings increased to £1,397.0bn in October, to be up 3.3% (YOY), little changed from September’s 3.2% (table D). The Bank noted annual growth “…has been around 3% since late 2016, and remains modest compared to the pre-crisis period.”
·       The number of mortgage approvals for house purchase rose to 67,086 in October, compared with September’s 65,726 (table E). They were also higher than the previous six months average (65,340) though well down on the recent peak of nearly 75,000 (January 2014). They were also well down on the monthly data recorded in the years prior to the recession, when mortgage approvals averaged 104,000 (2007), 119,000 (2006) and 100,000 (2005).

Net bank lending to non-financial businesses (which includes lending to businesses in the public sector) rose by £1.6bn in October (table G). The rise was driven by lending to large businesses, which increased £2.1bn in October, whilst bank lending to SMEs decreased by £0.4bn. The growth rate of lending to large businesses rose to 2.5% (YOY) compared with September’s 2.2%, while the growth rate for SMEs fell 0.2% (YOY), remaining close to zero for the 10th consecutive month.

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Public sector net deficit £8.8bn in October 2018
21 November 2018

Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a worse-than-expected deficit of £8.8bn in October 2018, compared with a deficit of £7.2bn in October 2017 (figure 1). This was the highest October borrowing for 3 years (since 2015). Receipts in October 2018 increased by just 1.2% (YOY), to £59.9bn, while total expenditure increased by 7.7% to £65.4bn. Much of the annual growth in receipts came from Value Added Tax (VAT), Income Tax and tobacco duties, while interest and dividend receipts (largely dividend transfers from the Bank of England Asset Purchase Facility Fund (BEAPFF)) fell on October 2017.

The PSNB so far for FY2018 (April to October) was £26.7bn, compared with £37.9bn for the first seven of FY2017 (figure 3). This was the lowest year-to-date net borrowing for 13 years (since 2005). Of this £26.7bn, £8.9bn related to the cost of the “day-to-day” activities of the public sector (the current budget deficit), while £17.8bn was capital spending (or net investment), such as on infrastructure. The OBR forecast public borrowing of £25.5bn for FY2018 for the Autumn (October) Budget.

Looking at the back data, the PSNB for FY2017 (12 months) was £40.1bn, compared with £45.5bn for FY2016. This was the lowest annual net borrowing for 11 years (FY2006).

Public Sector Net Debt (PSND-ex, excluding public sector banks) was £1,791.6bn at the end of October 2018 (84.0% of GDP), compared with £1,789.7bn (86.7% of GDP) at end-October 2017. The debt/GDP ratio is now falling.

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Retail sales increased 0.4% in three months to October
15 November 2018

Retail sales rose 0.4% (QOQ) in the three months to October, to be 3.0% up (YOY), a slowdown to growth when compared with the strong summer sales, which reached a high of 2.3% in the three months to July.

Retail sales slipped by 0.5% (MOM) in the month of October, to be 2.2% up (YOY). There was a strong MOM decline of 3.0% in household goods stores following a particularly strong August and September. Feedback from clothing retailers suggested that the monthly fall of 1.0% could be attributed to the mild October weather, which had seen consumers reluctant to purchase winter ranges.

Online sales as a proportion of all retailing increased 18.0% in October 2018 from the 17.7% reported in September 2018. Textile, clothing and footwear stores continued a record proportion of online sales at 18.2%; this was despite a fall in total retail spending in this sector.

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House prices inflation was 3.5% in September
14 November 2018

According to official data, UK house prices increased by 3.5% (YOY) in September, up from August’s 3.1% (revised marginally down). The ONS commented that “over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England. The lowest annual growth was in London, where prices decreased by 0.3% (YOY), up from a fall of 0.6% (revised) in the year to August 2018.”  On a seasonally adjusted basis, average house prices in the UK rose by 0.3% (MOM) in September 2018. 

The UK’s four countries continued to show different inflation rates in September: England (3.0% (YOY), compared with August’s 2.8%), Wales (5.8%), Scotland (5.8%) and Northern Ireland (4.8% (2018Q3)).

In England, there was, as always, a significant range across the regions (figure 4): West Midlands (6.1%), East Midlands (6.0%), South West (4.3%), North East (3.5%), North West (3.3%), Yorkshire & Humberside (2.6%), East (2.0%), South East (1.7%) and London (-0.3%).

Recent negative house price growth in London is driven primarily by inner London, for which annual house price growth has been consistently negative since January 2018. Annual house price growth for outer London has remained low but positive for the whole period. In September, prices fell 2.3% (YOY) in inner London, but increased by a modest 0.7% (YOY) in outer London. 

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CPIH inflation steady at 2.2% in October, CPI inflation steady at 2.4%
14 November 2018

CPIH inflation was unchanged at 2.2% in October. (CPIH is the Consumer Prices Index including owner-occupiers’ housing costs and is the ONS’s preferred measure of consumer prices inflation.) The ONS said the large downward contributions to the change in the 12-month rate from food and non-alcoholic beverages, clothing and footwear, and some transport elements, were offset by upward contributions from rising petrol, diesel and domestic gas prices. More specifically, the ONS noted that the largest upward contribution to the YOY CPIH inflation rate continued to come from transport, with prices rising by 5.3% (YOY) in October, with the largest contribution within the transport group continuing to come from motor fuels.

The CPI rate was also unchanged in October, at 2.4%. The inflation rates for goods and services in October were 2.3% (2.5% in September) and 2.1% (2.0% in September) respectively. The core rate of inflation (excluding energy, food, alcoholic beverages & tobacco) was unchanged at 1.8%.

Turning to the producer price index (PPI), the output PPI inflation rate rose to 3.3% in October, compared with September’s 3.1% (table 1). Petroleum products provided the largest upward contribution of 1.09 percentage points to the annual rate, driven by an increase in prices of 15.0% (YOY) in October. This growth was driven mainly by prices for diesel and gas oil, which increased to 15.8% (YOY), compared with September’s 12.9%.

The input PPI inflation rate, however, slipped to 10.0% (YOY) in October, compared with 10.5% (revised) in September (table 3). The annual rate was predominantly driven by crude oil prices, which increased by 5.8% (MOM) and by 41.8% (YOY) in October 2018, maintaining 27 months of positive inflation for crude oil (table 5).

The annual rate of inflation for imported materials and fuels was 8.8% in October, compared with September’s 8.9% (YOY) (Table 4). Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight. The sterling effective exchange rate index (ERI) rose 0.5% (MOM) in October 2018 (Table 4), to be 1.7% higher (YOY), the second consecutive monthly increase after four months of negative monthly growth.

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Labour productivity (output per hour) fell 0.4% in 2018Q3
13 November 2018

The ONS reported that the flash estimate of output per hour (their main measure of labour productivity, “productivity hours”) decreased 0.4% (QOQ) in 2018Q2, after a 0.5% increase in 2018Q2, and was just 0.1% higher than a year earlier. The quarterly increase reflected a 0.6% rise in GDP, which only partly offset a 1.0% increase in total hours worked. The increase in total hours was driven by an increase in average hours worked for both full-time and part-time workers, and a small increase in employment. 

In contrast, output per worker increased 0.5% (QOQ) in 2018Q3, reflecting a 0.6% increase in GDP, partly offset by a 0.1% (QOQ) rise in employment (jobs).

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