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

9th July 2018

Economic Insight - 9 July 2018

The Government announces preferred model for the future UK-EU relationship

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Chequers agreement and subsequent Government announcement on their preferred model for the future UK-EU relationship.
Press Release

The Government announces preferred model for the future UK-EU relationship

Date: 9th July 2018

The Government announces preferred model for the future UK-EU relationship
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Chequers agreement and subsequent Government announcement on their preferred model for the future UK-EU relationship.
  • At the core of the model is a free trade area for goods.
  • The UK would commit to the EU’s common rulebook for goods, but there would be different arrangements for services.
  • In addition, there would be major restrictions on a swathe of other regulations including environment, climate change, social and employment and consumer protection regulations.
  • A new Facilitated Customs Arrangement (FCA) would be established, that would remove the need for customs checks and controls between the UK and the EU as if a combined customs territory.
Other recent Brexit developments have included:
  • The European Union (Withdrawal) Bill received the Royal Assent on 26 June, becoming the European Union (Withdrawal) Act 2018.
  • A National Audit Office (NAO) report concluded that HMRC had made significant progress in developing its new Customs Declaration Service (CDS). It added that, providing this work was successfully completed, HMRC would have the system capacity to handle customs declarations no matter what the outcome of exit negotiations between the UK and the EU.
On economic developments:
  • The ONS modestly revised up GDP growth in 2018Q1 to 0.2% (QOQ).
  • Services output rose 0.3% (MOM) in April.
  • The Markit/CIPS surveys suggest GDP growth was 0.4% (QOQ) in 2018Q2.
  • The better data and positive comments by the Governor of the Bank of England have raised expectations of a 0.25% increase in the Bank Rate at the August meeting.
  • It seems reasonable to expect a 50% chance of a rise to 0.75% in August. If rates do not go up in August, then there is a very good chance (90%) of a rise in November.

Ruth Lea said, “We do not have the details of the Government’s preferred model of the future UK-EU relationship - a White Paper is expected this week. But the proposals so far released suggest a Brexit with significant restrictions. If an agreement along these lines is negotiated with the EU, the UK would be restricted in its ability to reform regulations, it would be a ‘rule taker’ and not a ‘rule maker’, and the scope for free trade agreements with third countries would be significantly compromised. In addition it is not clear how the proposed Facilitated Customs Arrangement would work – or when it would be ready.”

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

25th June 2018

Economic Insight - 25 June 2018

The Eurozone: solid popular support despite the problems

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Eurozone in the run-up to the European Summit on 28-29 June:
Press Release

The Eurozone: solid popular support despite the problems

Date: 25th June 2018

The Eurozone: solid popular support despite the problems
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Eurozone in the run-up to the European Summit on 28-29 June:
  • There are many economic disparities between Eurozone states, with Italy and, especially, Greece performing relatively poorly within the strictures of the euro. Nevertheless, there remains solid popular support for the euro – even in Italy and Greece.
  • Europe’s Economic and Monetary Union (EMU) remains far from complete. Fiscal union, to support monetary union, remains a pipedream. The Commission is, therefore, obliged to pursue relatively modest and uncontroversial policies that, by their nature, do not tackle EMU’s major deficiencies.
  • Following on from the ECB’s decision to phase out QE by end-2018, there are some doubts about the ability of Italy (for example) to successfully market its sovereign debt, especially if the government instigates a major fiscal boost.
  • Greece’s (third) support programme is due to end in August 2018, but it will continue to heavily scrutinised. Greece has been receiving financial support since May 2010.
Other recent developments have included:
  • The MPC voted 6:3 in favour of keeping the Bank Rate at 0.5%. But the Bank’s chief economist voted for a rate rise, raising speculation of an August hike. It is reasonable to judge there is a 50:50 chance of a hike at this stage.
  • The public finances have improved faster than projected by the OBR. The ONS’s latest estimate for public sector net borrowing (PSNB) is £39.5bn for FY2017, compared with the OBR’s forecasts of £45.2bn (in March 2018) and £49.9bn (in November 2017). The OBR’s forecasts can be inaccurate.
  • Concerning Brexit, the EU (Withdrawal) Bill has passed through Parliament. At the European Summit (28-29 June) it will probably be reported that little progress has been made in the UK-EU negotiations on the future framework since the transition period was agreed.
  • The Chancellor and the Bank Governor both discussed the updated financial relationship between the Treasury and the Bank at the Mansion House (21 June). There will be a £1.2bn capital injection from the Exchequer to the Bank’s balance sheet in order to significantly increase the Bank’s lending capacity.

Ruth Lea said, “Neither the Italian or, especially, the Greek economies have fared well in the straightjacket of the euro. Nevertheless, popular support remains solid. In Italy the balance of those “for” exceeded those “against” by 32%. In Greece the balance was 42%. Doubtless there are several explanations for relatively high levels of support in the EU19, including a failure to link the currency with the economic policies damaging their economies as well as a general wish to appear “modern” and “European”. Under these circumstances it is difficult to see any government pushing for withdrawal from the Eurozone in the near to medium-term. And this even includes Italy where a populist, Eurosceptic government has recently been established.”

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

12345678 (2017)(2016)

Comment, at a glance

Public sector net deficit £5.4bn in June 2018
20 July 2018

Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a deficit of £5.4bn in June 2018, compared with £6.2bn in June 2017. This is the lowest June net borrowing since 2016.

The PSNB so far for FY2018 was £16.8bn, compared with £22.2bn for the first three months of FY2017. This was the lowest year-to-date (April to June) net borrowing since 2007. The OBR forecast public borrowing of £37.1bn for FY2018 for the Spring Statement, around one quarter of the borrowing in FY2009, at the peak of the financial crisis. Borrowing was £153.1bn in FY2009.   

The PSNB for FY2017 (12 months) was revised down a tad to £39.4bn (from £39.5bn), compared with £45.7bn recorded for FY2016. This was the lowest annual net borrowing since the financial year ending March 2007 (FY2006). At the time of the Spring Statement (March 2018) the OBR forecast a total PSNB for FY2017 of £45.2bn, some £5.8bn higher. This wide disparity should serve as a warning: the OBR’s forecasts, including near-term forecasts, can be highly inaccurate. Of this borrowing, £40.6bn was on capital spending (or net investment), such as on infrastructure. The cost of the “day-to-day” activities of the public sector (the current budget deficit) was in surplus by £1.3bn. This current budget surplus is the first annual surplus since the financial year ending March 2002 (FY2001).

 

 

Public Sector Net Debt (PSND) was £1,792.3bn at the end of June 2018 (85.2% of GDP), compared with £1,759.3bn (86.2% of GDP) at end-June 2017.

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Retail sales increased 2.1% in 2018Q2
19 July 2018

Retail sales rose 2.1% (QOQ) in 2018Q2, to be 2.8% up (YOY), with growth across all main sectors. It was the largest QOQ increase since the 3 months to February 2015. Food stores saw the strongest three-month on three-month growth since May 2001 at 2.2%, with feedback from supermarkets suggesting that the continued good weather and World Cup celebrations had encouraged food and drink sales.

In the month of June, however, volume sales slipped 0.5% (MOM) after two very strong monthly rises in April (1.9%) and May (1.3%). June’s fall can be seen as a correction and sales were 2.9% higher (YOY). In addition, the ONS said “…while hot weather and World Cup celebrations increased food store sales, it was suggested by retailers that these factors resulted in a decrease in footfall in non-food stores; which, along with non-store retailing, resulted in a monthly decline of 0.5% in the quantity bought”.

Online sales as a total of all retailing remained unchanged at 18.0% in June. Online spending in clothing and footwear stores continued to achieve new record proportions of online retailing, for the fourth consecutive month, at 17.5%.

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House prices inflation fell to 3.0% in May
18 July 2018

According to official data, UK house prices increased by 3.0% (YOY) in May, down from 3.5% in April. This was the lowest rate since August 2013, when it was also 3.0%. The ONS commented that “the annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018”. The ONS also said the “…decrease in UK house price growth partly reflects a slowdown in the south and east of England”. Prices actually fell 0.4% (YOY) in London in May. On a seasonally adjusted basis, average house prices in the UK decreased by 0.2% (MOM) in May 2018, compared with an increase of 0.4% (MOM) in May 2017.  

The UK’s four countries continued to show different inflation rates in May: England (2.9%), Wales (1.0%), Scotland (4.9%) and Northern Ireland (4.2% (2018Q1)).

In England, there was, as always, a significant range across the regions (figure 6): East Midlands (6.3%), West Midlands (5.0%), South West (3.9%), Yorkshire & Humberside (2.9%), North West (2.9%), East of England (2.4%), South East (2.2%), North East (1.3%) and London (-0.4%).

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CPIH inflation unchanged at 2.3% in June, CPI inflation unchanged at 2.4%
18 July 2018

CPIH inflation was 2.3% in June, unchanged from May. (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 rising prices for motor fuels and domestic gas and electricity produced the largest upward contributions to change in the rate between May and June 2018. But falling prices for clothing and games, toys and hobbies provided the largest downward effects.

The CPI rate was 2.4% in June, also unchanged from May. The inflation rates for goods and services in June were 2.5% (unchanged from May) and 2.0% (2.1% in May) respectively. The core rate of inflation (excluding energy, food, alcoholic beverages & tobacco) was 1.8%, down on May’s 2.0%.

Turning to the producer price index (PPI), the output PPI inflation rate was 3.1% (YOY) in June, compared with 3.0% in May (table 1). The ONS said that all industries provided upward contributions to output annual inflation, with the largest contribution from “petroleum products”.

The input PPI inflation rate rose to 10.2% (YOY) in June, the highest since May 2017, compared with May’s 9.6% (table 3). Crude oil continued to provide the largest upward contribution to the inflation rate, despite slipping a tad in the month. A weaker currency also contributed to inflation.  Crude oil prices slipped 0.1% (MOM) in June but were 50.7% higher (YOY).

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Unemployment rate was 4.2% in three months to May, regular annual earnings growth 2.7%
17 July 2018

Employment grew by 137,000 (QOQ) in the three months to May, and was 388,000 higher than a year earlier. Within the total, full-time men rose by 157,000 (YOY) and full-time women increased by 167,000, whilst part-time men fell by 7,000 (YOY) but part-time women rose by 71,000. The increase in full-time employment was therefore 324,000 (YOY), whilst part-time employment rose just 64,000.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.7%, compared with 74.9% a year earlier and the highest since comparable records began in 1971:
·       The employment rate for men was 80.1%, the highest employment rate since February-April 1991.
·       The employment rate for women was 71.3% and the highest since comparable records began in 1971. The 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 1.41mn in the three months to May, 12,000 lower than the previous quarter and 84,000 down YOY. The unemployment rate (the proportion of the labour force [those in work plus those unemployed] that were unemployed) was 4.2%, compared with 4.5% a year earlier and the joint lowest since 1975. 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 since comparable records began in 1971.

Job vacancies remain strong. There were 824,000 job vacancies in the three months to June 2018 (sic), at record levels. The number was up 7,000 (QOQ) and 39,000 higher (YOY).

Average weekly earnings for employees in Great Britain in nominal terms increased by 2.7% for regular pay (excluding bonuses) and 2.5% for total pay (including bonuses) in the three months to May (YOY). Earnings growth moderated modestly in the latest period. The ONS said that “…latest estimates show that average weekly earnings for employees in GB in real terms (adjusted for price inflation) increased by 0.4% excluding bonuses, and by 0.2% including bonuses, compared with a year earlier”.

All in all, this report suggests the labour market remains robust.

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Trade (goods & services) deficit widened in 3-months to May to £8.3bn
10 July 2018

The total trade (goods & services) deficit widened to £8.3bn in 3-months to May, compared with £3.3bn in the 3-months to February, as exports fell 1.7% (MOM) whilst imports increased 1.5% (MOM). The ONS commented that “…falling exports of cars and rising imports of unspecified goods were mostly responsible for the £5.0bn widening of the total trade deficit.” The deficit on a trend basis is fairly flat, with a bias towards widening. Within total trade, the visible trade deficit increased to £36.3bn in the 3-months to May (£31.3bn in the previous 3 months), whilst the services surplus was little changed at £27.9bn (£28.0bn in the previous 3-months).

The total trade deficit in volume terms widened by £4.7bn in the 3-months to May 2018, which will drag on GDP growth.

Turning to the area analysis of the goods figures for the 3-months to May, the UK recorded a deficit with EU countries of £24.8bn (£22.8bn, previous 3-months) and a deficit with non-EU countries of £11.4bn (£8.5bn).

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GDP rose 0.3% in May, 0.2% in 3-months to May
10 July 2018

The ONS has started to release GDP on a monthly basis. They estimated that GDP rose by 0.3% (MOM) in May, to be 1.5% higher YOY. Services and construction both contributed to the growth, but production dragged. Within GDP:
·       The dominant services sector rose 0.3%. The ONS credited the royal wedding and warmer weather for a boost to retailers in the month.
·       Production output fell 0.4%. Within production, mining & quarrying slipped 4.6% (in part due to the Sullom Voe oil and gas terminal shutdown) and electricity and allied industries were 3.2% lower. But manufacturing recovered 0.4% and water and allied industries rose 1.2%.
·       Construction output jumped 2.8%.

The ONS warned “…the monthly growth rate for GDP is volatile and therefore it should be used with caution and alongside other measures such as the 3-month growth rate when looking for an indicator of the long-term trend of the economy”.

Turning to the favoured rolling 3-month growth rate, GDP rose by 0.2% (QOQ) in the 3-months to May, following no change in the 3-months to April (dragged down by weak construction) and 0.2% growth in 2018Q1. GDP was 1.4% higher YOY (table GVA1 for indices, rounding errors). Services was the only sector to contribute to the growth, with production and construction both falling. Within GDP:
·       Services grew 0.4% (QOQ), to be 1.5% higher YOY. Growth in consumer-facing industries (for example retail, hotels and restaurants) had been slowing over the past year, but in the 3-months to May growth in these industries picked up, particularly in wholesale and retail trade.
·       Industrial production fell 0.6% (QOQ), though was 1.8% higher YOY, dragged down by a weak manufacturing sector. Manufacturing output fell 1.2% (QOQ), reflecting weak exports, though was still 1.6% up YOY. Mining and quarrying grew by 4.6% (QOQ), despite the poor May number (see above). Electricity and allied contracted by 0.5%, probably reflecting the warmer weather in this period, but water and allied rose 1.1%.
·       Construction output decreased by 1.7% (QOQ), despite the better May number (see above) and was 0.3% lower than year earlier.

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Labour productivity decreased 0.4% in 2018Q1
6 July 2018

The ONS reported that output per hour (their main measure of labour productivity, “productivity hours”) decreased 0.4% (QOQ) in 2018Q1, but was 0.9% higher than a year earlier. The quarterly decrease reflected a 0.6% rise in hours worked, only partly offset by a weak 0.2% increase in GDP.

Output per worker also fell 0.4% (QOQ) in 2018Q1, reflecting the 0.6% (QOQ) rise in employment (jobs) and 0.2% increase in GDP.

Earnings and other labour costs growth outpaced productivity growth (YOY), resulting in unit labour cost (ULC) growth of 3.1% (YOY) in 2018Q1, up from the 2.9% growth (YOY) in 2017Q4.

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Markit Surveys for June showed further improvements
4 July 2018

The much-followed Markit/CIPS surveys suggested further recovery in growth overall in June. 
·       The Markit/CIPS manufacturing PMI, however, showed little change. The PMI registered 54.4 in June compared with May’s 54.3 (revised). There was a modest acceleration in new order growth and job creation improved, but these improvements were largely offset by a moderation in output growth. Manufacturing’s performance “remained relatively subdued in June, especially when compared with the marked pace of growth seen before the turn of the year”. (Data released on 2 July 2018.)
·       The Markit/CIPS construction PMI was 53.1 in June, up on May’s 52.5, and comfortably above the 50 no-change threshold. Output growth reached a 7-month high. Residential work remained the best performing category, whilst commercial building also contributed positively. Civil engineering activity rose only slightly in June. (Data released on 3 July 2018.)
·       The Markit/CIPS services PMI increased to 55.1 in June, compared with May’s 54.0, and marked the strongest rise in service sector activity since October 2017. The rate of new business growth was the fastest for just over a year, which survey respondents attributed to successful product launches, new marketing initiatives and improving economic conditions. The June data signalled a sharp rise in average cost burdens reflecting higher fuel bills and staff salaries. (Data released on 4 July 2018.)
·       Markit commented “…the survey data indicate that the economy likely grew by 0.4% in 2018Q2, up from 0.2% in 2018Q1.” They also commented that the rebound in the economy in 2018Q2 “…opens the door for an August rate hike.”

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May’s consumer credit growth eases slightly
29 June 2018

Concerning lending to individuals in May the Bank of England announced:  
·       The amount outstanding on unsecured consumer credit rose to £211.6bn, an increase of 8.5% (YOY), compared with April’s 8.7% (table B). The amount outstanding now exceeds the £208bn peak of September 2008, prior to the Great Recession. The Bank said “…whilst this growth rate remains elevated, particularly compared to 2009-12, the gradual slowing continues the downward trend in growth since late 2016”.
·       The amount outstanding on lending secured on dwellings recovered to £1,376.1bn in May, to be up 3.3% (YOY, unchanged from April) (table D).
·       The number of mortgage approvals for house purchase picked up to 64,526 in May, compared with April’s 62,941 (table E). They were, moreover, higher than the previous six months average (63,803) but were still 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).

Concerning business finance the Bank said the total amount borrowed by businesses from banks or from the financial markets (in the form of bonds, equity and commercial paper) increased in May by £8.9bn, similar to the particularly large flow seen in July 2017. The Bank noted:
·       The strength in borrowing was driven by an increase in businesses’ net bond issuance to £11bn in May, the largest net monthly issuance on record (table F). As with the previous peak in July 2017, May’s increase was driven by a number of large deals related to M&A activity.
·       Contrasting the strength in bond issuance, the growth of businesses’ borrowing from banks slowed to 0.9% (YOY) from April’s 2.0% (table G).

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