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

8th October 2018

Economic Insight - 08 October 2018

Fiscal backdrop to the Budget: tax/GDP ratio set to be the highest for nearly 50 years
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the fiscal backdrop to the Budget:
Press Release

Fiscal backdrop to the Budget: tax/GDP ratio set to be the highest for nearly 50 years

Date: 8th October 2018

Fiscal backdrop to the Budget: tax/GDP ratio set to be the highest for nearly 50 years
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the fiscal backdrop to the Budget:
  • Public sector net borrowing (PSNB) as a % of GDP, which peaked at 9.9% in FY2009, is falling steadily.
  • Total Managed Expenditure (TME) as a % of GDP has been falling since FY2009 when it was nearly 45%, but it was still relatively high at 38.5% in FY2017.
  • The OBR forecast the tax/GDP ratio for FY2018 and FY2019 at 34.3%, the highest since FY1969 (when it was 35.0%), nearly 50 years ago.
In addition:
  • The Markit surveys were mixed for September. Markit expect GDP to rise by 0.4% (QOQ) in 2018Q3, lower than the Bank (0.5%) and NIESR (0.6%).
  • The annual increase in consumer credit slowed to 8.1% in August, well below the peak of 10.9% in November 2016.
  • GDP (2nd estimate) rose by 0.4% (QOQ, unrevised) in 2018Q2, whilst labour productivity (output per hour) increased by 0.5% (QOQ).
  • The current account of the balance of payments widened to £20.3bn (3.9% of GDP) in 2018Q2.
  • According to Z/Yen London has slipped behind New York as the top global financial centre, but it remains well ahead of its main European rivals (Zurich and Frankfurt).
  • The Federal Reserve increased the Fed Funds target range by 0.25% to 2.0-2.25% in September. Another 0.25% rise is expected by the end of 2018.
  • There have been a few Brexit-related developments in the past fortnight including another batch on “no deal” preparation papers from the Government.

Ruth Lea said, “The fact that this year’s tax/GDP ratio is set to be the highest since FY1969 should warn against accelerating public spending increases.” “Spending grew rapidly in the 2000s, easily outstripping the underlying growth in the economy. This pattern of spending was clearly not sustainable. It was not “affordable.” And the efforts by the Coalition Government (2010-2015) to control spending should be seen as the normalisation of spending after a spending splurge, rather than heralding public sector “austerity”. With public spending tipping the scales at £800bn and still around 38.5% of GDP, we do not, arguably, have “austerity” at all.”
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

24th September 2018

Economic Insight - 24 September 2018

The UK economy: firming growth, modestly rising inflation
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, analyses the latest tranche of UK economic data:
Press Release

The UK economy: firming growth, modestly rising inflation

Date: 24th September 2018

The UK economy: firming growth, modestly rising inflation
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, analyses the latest tranche of UK economic data:
  • GDP grew by 0.6% (QOQ) in the three months to July. Growth has firmed after a weak start to the year. In the 3-month period, services rose 0.6% (QOQ), whilst construction was 3.3% higher. But production slipped 0.5%.
  • Retail sales rose 0.3% (MOM) in August.
  • The labour market remains firm despite slowing employment growth. The unemployment rate in the three months to July was 4.0%, the lowest since 1975. Annual earnings growth picked up in the three months to July: it was 2.9% (YOY) excluding bonuses and 2.6% including bonuses.
  • CPIH inflation is rising modestly. It was 2.4% (YOY) in August. However, producer prices inflation (both output and input) eased in August.
  • The housing market continues to soften, reflecting a slowdown in the south and east of England and, especially, in London. Average prices in July were just 3.1% higher (YOY).
  • Public sector net borrowing was higher-than-expected in August at £6.8bn. However, borrowing for the first five months of FY2018 was well down on the equivalent period in FY2017. Moreover, assuming August’s figure was erratically poor, borrowing for FY2018 should be comfortably lower than the OBR’s March forecast.
In addition:
  • The MPC left monetary policy unchanged at their September meeting, as expected.
  • The ECB also left monetary policy unchanged at their September meeting, again as expected. They also shaved their Eurozone growth forecasts for 2018 and 2019.
  • There is a good chance the Fed will raise rates by 0.25% at their next meeting (25-26 September).
On Brexit:
  • The UK-EU Brexit negotiations experienced a setback at the Salzburg Summit (19-20 September), when Donald Tusk (European Council President) rejected central planks of the Chequers proposals.
  • The Government continues to prepare for a “no deal” Brexit, whilst preferring (and expecting) a “deal” with the EU. 28 more “no deal” documents were released in September.

Ruth Lea said, “The economy continues to hold up remarkably well, given the political uncertainties relating to the Brexit negotiations. Indeed activity has firmed in recent months and, given the upturn in real earnings growth, growth should continue. The recent uptick in inflation should be kept in perspective. Higher oil prices have contributed to a higher inflation but their impact should fall out of the annual inflation figures in forthcoming months. The Bank is most unlikely to respond to modestly higher inflationary pressures with increased interest rates.”
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

Public sector net deficit £4.1bn in September 2018
19 October 2018

Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a better-than-expected deficit of £4.1bn in September 2018, compared with a deficit of £5.0bn in September 2017 (figure 1). This was the lowest September borrowing for 11 years (since 2007).

Receipts in September 2018 increased by 3.2% (YOY), to £56.4bn, while total expenditure increased by 2.8% to £59.4bn. Much of the annual growth in receipts came from Value Added Tax (VAT), Income Tax and National Insurance contributions, while other taxes such as duties on both tobacco and Stamp Duty (on land and properties) have fallen marginally on September 2017.

The PSNB so far for FY2018 (April to September) was £19.9bn, compared with £30.6bn for the first six months of FY2017 (figure 3). This was the lowest year-to-date net borrowing for 16 years (since 2002). Of this £19.9bn, £5.5bn related to the cost of the “day-to-day” activities of the public sector (the current budget deficit), while £14.4bn was capital spending (or net investment), such as on infrastructure. The OBR forecast public borrowing of £37.1bn for FY2018 for the Spring Statement. On current trends, the OBR forecast should be undershot.   

Looking at the back data, the PSNB for FY2017 (12 months) was £39.8bn. This was the lowest annual net borrowing for 11 years (FY2006). At the time of the Spring Statement (March 2018) the OBR forecast a total PSNB for FY2017 of £45.2bn, some £5.4bn higher. This wide disparity should serve as a warning: the OBR’s forecasts, including near-term forecasts, can be highly inaccurate.

Public Sector Net Debt (PSND-ex, excluding public sector banks) was £1,789.5bn at the end of September 2018 (84.3% of GDP), compared with £1,786.1bn (86.7% of GDP) at end-September 2017. The debt/GDP ratio is now falling.

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Retail sales increased 1.2% in 2018Q3
18 October 2018

Retail sales rose 1.2% (QOQ) in 2018Q3, to be 3.4% up (YOY), with strong sales in “other stores” and online retailing.

Retail sales slipped by 0.8% (MOM) in the month of September, due mainly to a fall of 1.5% in food stores. The YOY Increase was 3.0%. Online sales as a proportion of all retailing fell slightly to 17.8% in September 2018 from the 18.0% reported in August 2018, yet food stores and clothing stores both reported record proportions of internet retail at 5.8% and 18.2% respectively.

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House prices inflation was 3.2% in August
17 October 2018

According to official data, UK house prices increased by 3.2% (YOY) in August, down from July’s 3.4% (revised higher). 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 0.2% (YOY), down from being unchanged (revised) in the year to July 2018.”  On a seasonally adjusted basis, average house prices in the UK rose by 0.3% (MOM) in August 2018. 

The UK’s four countries continued to show different inflation rates in August: England (2.9%, compared with July’s 3.3%), Wales (6.2%), Scotland (4.1%) and Northern Ireland (4.4% (2018Q2)).

In England, there was, as always, a significant range across the regions (figure 5): East Midlands (6.5%), West Midlands (5.1%), Yorkshire & Humberside (3.7%), North West (3.3%), South West (2.9%), North East (2.9%), South East (1.9%), East (1.6%) and London (-0.2%).

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CPIH inflation slips to 2.2% in September, CPI inflation falls to 2.4%
17 October 2018

CPIH inflation slipped to 2.2% in September, compared with 2.4% in August. (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 that the largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago. Partially offsetting upward contributions came from increases to electricity and gas prices (they were unchanged between August and September in 2017). The ONS noted that the largest upward contribution to the YOY CPIH inflation rate continued to come from transport, with prices rising by 5.5% (YOY), with the largest contribution within the transport group continuing to come from motor fuels.

The CPI rate fell to 2.4% in September (2.7% in August). The inflation rates for goods and services in September were 2.5% (2.7% in August) and 2.0% (2.2% in August) respectively. The core rate of inflation (excluding energy, food, alcoholic beverages & tobacco) was 1.8% (1.9% in August).

Turning to the producer price index (PPI), the output PPI inflation rate rose to 3.1% in September, compared with August’s 2.9% (table 1). The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

The input PPI inflation rate picked up to 10.3% (YOY), compared with August’s 9.4% (table 3). The annual rate was driven by crude oil prices, with September maintaining 26 months of positive inflation for crude oil. The monthly rate was also driven by crude oil prices. Crude oil prices (in sterling) increased 38.2% (YOY) in September, though this was down on August’s annual increase of 41.0% (revised).  They rose 3.3% (MOM) in September.

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Unemployment rate was 4.0% in three months to August, regular annual earnings growth 3.1%
16 October 2018

Employment slipped by just 5,000 (QOQ) in the three months to August, but a robust 289,000 higher than a year earlier. Within the total, full-time men rose by 132,000 (YOY) and full-time women increased by 206,000, whilst part-time men increased 21,000 (YOY) but part-time women fell by 69,000. The increase in full-time employment was therefore 338,000 (YOY), whilst part-time employment fell 48,000.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.5%, slightly lower than in the previous 3 months (75.7%) but higher than a year earlier (75.1%). The employment rates for men and women were 80.1% and 71.0% 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 1.36mn in the three months to August, 47,000 lower than the previous quarter and 79,000 down YOY. The unemployment rate (the proportion of the labour force [those in work plus those unemployed] that were unemployed) was 4.0%; it has not been lower since the 3 months to February 1975. The rate in the 3 months to August 2017 was 4.3%. The inactivity rate (the proportion of people aged 16-64 who were economically inactive) was 21.2%, higher than for the previous three months (21.0%) but lower than a year earlier (21.4%).

Job vacancies remain strong. There were 832,000 job vacancies in the three months to September 2018 (sic), around the highest since comparable records began in 2001. The number was up 3,000 (QOQ) and 35,000 higher (YOY).

Average weekly earnings for employees (GB) in nominal terms increased by 3.1% for regular pay (excluding bonuses) and 2.7% for total pay (including bonuses) in the three months to August (YOY). This marked a pick-up in earnings growth. The ONS said that “…latest estimates show that average weekly earnings for employees in GB in real terms (adjusted for price inflation) increased by 0.7% excluding bonuses, and by 0.4% including bonuses, compared with a year earlier”. 

All in all, this report suggests the labour market remains robust, despite the stalling in employment growth.

 

 

 

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Trade (goods & services) deficit narrowed in 3 months to August to £2.8bn
10 October 2018

The total trade (goods & services) deficit narrowed in the 3 months to August by £4.7bn to £2.8bn, within which:
·       The goods deficit narrowed by £3.5bn to £32.3bn, as exports rose by 6.6% (QOQ) whilst imports were 1.7% higher. The narrowing of the goods deficit was mainly due to falling imports of unspecified goods (including non-monetary gold) and rising fuels exports. 
·       The goods deficit narrowed by £2.4bn to £22.0bn with EU countries, and narrowed by £1.1bn to £10.2bn with non-EU countries.
·       The services surplus rose by £1.1bn to £29.4bn, as exports rose by 2.2% (QOQ) whilst imports were 1.0% higher. 

The total trade deficit in volume terms narrowed by £6.1bn in the 3 months to August to £0.8bn, which acted as a boost to GDP growth (in volume terms).

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GDP rose 0.7% (QOQ) in the 3 months to August but flat in August
10 October 2018

GDP rose by 0.7% (QOQ) in the 3-months to August, to be 1.5% (YOY, table GVA2). In the 3-months to June (2018Q2) growth had been 0.4% (QOQ) and in the 3-months to July growth was 0.7% (revised). All three sectors contributed well. Within GDP (table GVA1 for 3-months on 3-months data):
·       Services were a reasonably buoyant 0.5% (QOQ) higher, within which the wholesale, retail and motor trade sector made the largest contribution to growth. The World Cup and the hot weather supported growth in July.
·       Production (including manufacturing) rose by 0.7% (QOQ). Within production manufacturing rose 0.8% (with widespread strength across the sector), mining & quarrying rose 1.8% and water & waste grew 2.6%. But electricity & gas fell 1.7% reflecting lower demand due to higher than average temperatures during the 3-month period.
·      
Construction grew 2.9% (QOQ). The sector continued to recover following a relatively weak start to the year.

The ONS commented “…long-term growth continues to lag behind its historical trend”.

Turning to the more volatile monthly data, GDP was flat (MOM) in August, to be 1.5% (YOY) higher (table GVA3). It followed a 0.4% (MOM, revised higher) increase in July. Within GDP:
·       The dominant services sector was flat (MOM). Growth in the information and communication sector was partially offset by a fall in accommodation and food services.
·       Production output rose 0.2% (MOM), within which manufacturing fell 0.2% (MOM). But mining & quarrying rose 2.1%, electricity & gas rose 1.8%, whilst water & waste rose 0.6%.
·       Construction output fell back by 0.7% (MOM), after two strong months of growth.

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Labour productivity increased 0.5% in 2018Q2
5 October 2018

The ONS reported that output per hour (their main measure of labour productivity, “productivity hours”) increased 0.5% (QOQ) in 2018Q2, after a 0.6% fall in 2018Q1, and was 1.4% higher than a year earlier. The quarterly increase reflected a 0.4% rise in GDP, reinforced by a fall (0.1%) in total hours worked (despite the 0.1% increase in employment, average hours per worker fell). Output per worker increased 0.3% (QOQ) in 2018Q2, reflecting a 0.4% increase in GDP, partly offset by the 0.1% (QOQ) rise in employment (jobs). It was just 0.2% higher YOY. Labour productivity, as measured by both output per hour and output per worker, remains well below the levels it would have achieved had productivity growth continued at the pre-downturn rate.

The ONS has started to release data on labour productivity broken down by attributable inputs, which are only available for the market sector. The market sector encompasses all activity where output is sold for the market price, which is primarily the private sector, but also public corporations which, despite being publicly owned, operate for profit. The market sector produces around 80% of total output in the economy, while the non-market sector (primarily government, but also non-profit institutions, such as charities) makes up the remaining 20%.

The ONS estimated that market sector labour productivity rose by 1.7% (YOY) in 2018Q2. The contributions to growth were attributed to inputs as follows:
·       0.8% to changes in capital deepening, which is capital per hour worked.
·       0.1% to changes in labour composition, the skills make-up of the workforce.
·       0.8% to changes in “multi-factor productivity” (MFP), calculated as the residual. The ONS explains changes in MFP can arise for a number of reasons including technological progress, economies of scale, changes in management techniques and business processes or more efficient use of factor inputs. MFP is linked, therefore, not to an increase in the quantity or quality of measured factor inputs but rather to how they are employed.

The ONS also released data on public service productivity, which measures the productivity of providing public services, not the productivity of the public sector. (Many public services in the UK are delivered jointly by private- and public-sector bodies.) Productivity decreased in 2018Q2 by 0.8% (YOY).

 

 

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Markit Surveys for September mixed
3 October 2018

The much-followed Markit/CIPS surveys were mixed in September. Manufacturing improved modestly whilst construction and services slipped. 

·       The Markit/CIPS manufacturing PMI picked up, registering 53.8 in September compared with August’s 53.0 (revised). Rates of expansion in output and new orders gained traction, while the trend in new export business saw a modest recovery after August’s contraction. (Data released on 1 October 2018.)

·       The Markit/CIPS construction PMI fell back. It was 52.1 in September after August’s 52.9, but comfortably above the 50 no-change threshold. Civil engineering was the worst performing sub-category, but house building and commercial construction continued to increase at a solid pace. (Data released on 2 October 2018.) 

·       The Markit/CIPS services PMI slipped but was still solid. It was 53.9 in September, after August’s 54.3. Service providers reported higher levels of business activity, attributing them to a solid increase in new work and competitive pricing strategies. Cost burdens increased reflecting higher wage bills and rising fuel prices. (Data released on 3 October 2018.)

·       Markit estimated that “…the UK economy expanded by just under 0.4% in 2018Q3”.  

 

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August’s consumer credit growth eases
1 October 2018

Concerning lending to individuals the Bank of England announced: 

·       The amount outstanding on unsecured consumer credit rose to £214.2bn in August, an increase of 8.1% (YOY), down on July’s 8.5%, but still relatively buoyant (table B). The amount outstanding now exceeds the £208bn peak of September 2008, prior to the Great Recession. The Bank noted that “…the annual growth rate of consumer credit slowed further in August, reflecting weaker monthly lending flows. The annual growth rate was the lowest since August 2015, and well below the peak of 10.9% in November 2016.”

·       The amount outstanding on lending secured on dwellings increased by £2.9bn to £1,384.5bn in August, to be up 3.1% (YOY), compared with July’s 3.2% (table D). The Bank noted “…net lending has been relatively stable over the past year or so…it has now been around 3% since late 2016, and remains modest compared to the pre-crisis period.”

·       The number of mortgage approvals for house purchase picked up to 66,440 in August, compared with July’s 65,156 (table E). They were, moreover, higher than the previous six months average (64,310) 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) increased by £1.9bn in August (table G). Net lending was £1.9bn to large businesses, but lending to small and medium enterprises (SMEs) was flat in the month. The annual growth in total net lending was 1.3% in August, after -0.2% in July (there was a large increase in July 2017), remaining weak compared with the past two years. Annual growth in lending to SMEs remained close to zero for the eighth consecutive month.

 

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