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

27th March 2017

Economic Insight - 27th March 2017

Inflation is rising but keep it in perspective

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest inflation data:
Press Release

Inflation is rising but keep it in perspective

Date: 27th March 2017

Inflation is rising but keep it in perspective

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest inflation data:
  • CPIH annual inflation rose to a greater-than-expected 2.3% in February (1.9% in January).
  • But, firstly, it is still very low by historical standards.
  • Secondly, higher inflation is widely expected to be temporary. Indeed, there are already developments which suggest some of the drivers of the recent price increases could be abating. The pound has stabilised recently and commodity prices may also be stabilising, if not easing.
  • And, thirdly, inflation rates are picking up in other developed countries, including the Eurozone Member States. The UK is not alone.
  • Nevertheless, higher prices are hitting retails sales (volume terms).

  • Other UK data suggest the economy remains fairly robust:
    • The lower pound appears to be boosting exports. The SMMT reported higher car exports in February and the CBI said manufacturers’ export order books were at their highest level for three years.
    • The ONS’s latest labour market data were firm, though annual earnings growth was subdued in the three months to January.
    • The public finances continued to improve in February.
    • NIESR estimated that GDP growth could be 0.6% (QOQ) in the three months to February, after 0.7% in the three months to January.
    Other news:
  • The Bank left monetary policy unchanged at its March meeting, though there is a case for reversing August’s 25 basis points cut.
  • The Prime Minister will trigger Article 50 of the Lisbon Treaty on 29 March, formally starting the 2-year Brexit process.
  • The Fed raised the Fed Funds rate by another 25 basis points at its March meeting, as expected.
Ruth Lea said, “Granted the increase in February’s CPIH inflation was greater-than-expected, but the “jump” should be kept in perspective. Inflation should remain modest and containable and the current rise should be temporary. Other data suggests the economy continues to grow quite well.”
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

Bell Pottinger:
Dan de Belder
020 3772 2561
ddebelder@bellpottinger.com



Download full article

13th March 2017

Economic Insight - 13th March 2017

Spring Budget: better 2017 growth, lower public borrowing and debt

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Spring Budget:
Press Release

Spring Budget: better 2017 growth, lower public borrowing and debt

Date: 13th March 2017

Spring Budget: better 2017 growth, lower public borrowing and debt

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Spring Budget:
  • Economic forecasts were revised, with stronger GDP growth in 2017 (revised from 1.4% to 2.0%), but marginally weaker growth thereafter.
  • Public sector borrowing and debt were both revised down.
  • Policy changes were modestly expansionary for FY2017 and FY2018 and thereafter modestly restrictive. Overall, the budget was neutral.
  • Main spending decisions were increased funds for social care and education. Main tax decisions were increases in self-employed NICs and a cut in the Dividend Allowance.

  • UK data suggest the economy remains fairly robust:
    • Even though industrial production dipped 0.4% (MOM) in January, growth in the 3 months to January was 1.9% (QOQ).
    • Construction output also fell 0.4% (MOM) in January, whilst growth in the 3 months to January was 1.8% (QOQ).
    • The trade deficit was £2.0bn in January, broadly unchanged from December. Exports in the 3 months to January rose by 10.0% (QOQ), whilst imports were 3.1% higher.
    Other news:
  • The OECD revised UK growth for 2017 to 1.6% in March, compared with 1.2% in November and 1.0% in September.
  • The Commons is expected to vote again on the “European Union (Notification of Withdrawal) Bill” on 13 March. Article 50 may be triggered as early as 14 March.
  • The US Federal Reserve is expected to raise rates again at its meeting this week (14-15 March), after a strong February jobs report.
  • The Bank’s MPC meets this week. Their decision is announced on 16 March. No change in policy is expected.
Ruth Lea said, “The Budget was, as expected, a fiscally cautious affair, with no “spending sprees” despite the modestly better outlook for the public finances. The OBR, as expected, upgraded its growth forecast for 2017, after slashing it in November.”
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

Bell Pottinger:
Dan de Belder
020 3772 2561
ddebelder@bellpottinger.com

Download full article

1234 (2016)(2015)

Comment, at a glance

Retail sales slipped 1.4% in 3 months to February, but were 3.1% higher than a year earlier
23 March 2017

Retail sales (volume, GB) slipped 1.4% (QOQ) in the three months to February, but were still 3.1% higher (YOY). The fall in the three months to February was only the second fall since December 2013. It should, however, be noted that very large seasonal factors are applied to the non-seasonally adjusted data over the turn of the year that can significantly affect the pattern of the seasonally adjusted data. The ONS commented “the underlying trend suggests that rising petrol prices, in particular, have had a negative effect on the overall quantity of goods bought over the last three months”.

In the month of February sales bounced back 1.4% (MOM) to be 3.7% higher than a year earlier. Average store prices (including petrol stations) increased by 2.8% (YOY) in February, with the largest contribution coming from petrol stations, where YOY average prices rose by 18.7%.

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Public sector net borrowing deficit £1.8bn in February
21 March 2017

Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a deficit of £1.8bn in February 2017, compared with a deficit of £4.6bn in February 2016, an improvement of £2.8bn. This was the lowest February borrowing since 2007.

The ONS noted that in January and February 2017, the government received £13.4bn and £4.7bn respectively in self-assessed Income Tax, giving a combined total of £18.1bn. These represented the highest combined self-assessed Income Tax receipts on record (records began in 1998). The ONS also noted they had recorded £1.0bn of Lloyds Banking Group (LBG) shares sales in February 2017, bringing the government’s disposal of LBG share sales since September 2013 to £19.0bn.

Due to the volatility of the monthly data, the cumulative financial year-to-date borrowing figures provide a better indication of the progress of the public finances than individual months. The cumulative total for PSNB for the first eleven months of FY2016 was £47.8bn, £19.9bn down on the £67.7bn recorded for the first eleven months of FY2015. £47.8bn was the lowest year-to-date borrowing since the financial year-to-date ending February 2008. Of this £47.8bn, £16.4 billion related to the cost of the “day-to-day” activities of the public sector (the current budget deficit), while £31.4bn related to capital spending (or net investment) such as infrastructure.

The OBR forecast a total for FY2016 of £51.7bn (revised) in March’s Budget, compared with an outturn of £72.0bn for FY2015. The OBR’s revised forecast should be met.

Public Sector Net Debt (PSND) was £1,699.7bn at the end of February 2017 (85.4% of GDP), compared with £1,588.6bn (83.1% of GDP) at end-February 2016. The Chancellor’s target for the PSND (as a % of GDP) is that it must be falling by the end of this Parliament. 

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House prices inflation was 6.2% in January, compared with 5.7% in December
21 March 2017

According to official data, UK house prices increased by 6.2% (YOY) in January (up from 5.7% in December 2016, revised), continuing the strong growth seen since the end of 2013. However, this still remains below the average annual house price growth seen in 2016 of 7.4%.

The UK’s four countries continued to show very different inflation rates in January: England (6.5%), Wales (4.2%), Scotland (4.0%) and Northern Ireland (5.7% (2016Q4)). In England, there was, as always, a significant range across the regions: East of England (9.4%), South East (8.7%), South West (7.4%), London (7.3%), West Midlands (5.8%), East Midlands (5.6%), North West (4.6%), Yorkshire & Humberside (2.7%) and the North East (2.2%).

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CPIH inflation picks up to 2.3% in February
21 March 2017

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) increased to 2.3% (YOY) in February 2017, compared with a 1.9% rise (YOY, revised) in January. The rate in February was the highest since September 2013, having steadily increased since late 2015, reflecting higher commodity prices and the effects of the weaker currency. The ONS said that the main contributor to the increase in the rate was rising transport costs, particularly, fuel. Food prices increased by 0.3% (YOY), following 31 consecutive months of falling prices (YOY). The February figure breached the Bank of England’s 2% inflation “target”.

The inflation rate for goods was 1.9% in February (1.1% in January), whilst the rate for services rose to 2.6% in the month (2.5% in January). The core rate of inflation (excluding energy, food, alcoholic beverages & tobacco) picked up to 2.1% (1.8% in January).

On 10 November 2016, the ONS announced that CPIH (which includes an element of owner occupiers’ housing costs (OOH)) would be their preferred measure of inflation from March 2017. CPIH stands for the Consumer Prices Index, including owner-occupiers’ Housing costs. CPIH uses an approach called rental equivalence (the rent paid for an equivalent house) to measure OOH. The CPI rate, the previous preferred measure, was also 2.3% (YOY) in February, compared with 1.8% in January.

Producer output prices rose by 3.7% in the year to February 2017, edging up from 3.6% (YOY) in January (table 3). February’s annual increase was the eighth consecutive rise after 2 years of falls and the largest increase since December 2011. Even though output prices inflation is rising, “factory gate” inflation still remains fairly modest.

Producer input prices, materials and fuel bought by UK manufacturers for processing, have been trending strongly upwards, reflecting higher commodity prices and the effects of the weaker currency. But the annual increase in February was 19.1%, slightly down on January’s 20.1% (table 1). February’s rate of increase was, nevertheless, the second fastest rate of annual growth since September 2008. Prices of imported materials and fuels rose by 19.0% (YOY) in February (also 20.1% in January), which is the first time the annual rate for imported input costs has been lower than for the overall input PPI since December 2015. Crude oil increased 89.3% (YOY) in February (table 2).

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Unemployment fell 31,000 in three months to January, total annual earnings growth 2.2%
15 March 2017

Employment increased by 92,000 (QOQ) in the three months to January (QOQ), to be 315,000 higher than a year earlier. Within the total, full-time workers and part-time workers rose by 305,000 and 10,000 respectively (YOY). The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.6%, the joint highest since comparable records began in 1971.

Unemployment was 1.58mn in the three months to January, 31,000 fewer than the previous quarter and 106,000 down YOY. The unemployment rate was 4.7%, compared with 5.1% a year earlier. It has not been lower since June-August 1975. The unemployment rate is the proportion of the labour force (those in work plus those unemployed) that were unemployed. The inactivity rate (the proportion of people aged 16-64 who were economically inactive) was 21.6%, slightly lower than in the previous three months (21.7%) and for a year earlier (21.8%).

Job vacancies remain strong. There were 757,000 job vacancies in the three months to February 2017 (sic). This was little changed compared with the previous quarter (up 4,000) and the same as a year earlier.

Average weekly earnings for employees in Great Britain in nominal terms increased by 2.2% (total pay, including bonuses) and by 2.3% (regular pay, excluding bonuses) in the three months to January (YOY). CPI inflation in January was +1.8%, so earnings growth is still outstripping prices inflation, though by a decreasing margin.

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

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£2.0bn trade (goods & services) deficit in January, unchanged from December
10 March 2017

The total trade (goods & services) deficit was £2.0bn in January, broadly unchanged from December (revised). Monthly data are erratic but the trend seems to be fairly flat, to modestly improving, at present.

Within total trade, the visible trade deficit fell marginally to £10.8bn in January (£10.9bn in December). Exports of goods increased by 1.6% (MOM), whilst imports rose by 0.9%. Goods exports to the EU increased by 2.1% (MOM), whilst exports to the non-EU were 1.1% (MOM) higher, after a big jump in December. Taking the three months’ comparison, exports in the three months to January were 10.0% (QOQ) higher, whilst imports were only 3.1% (QOQ) up.

The services surplus was estimated to be £8.9bn in January, unchanged from December. Services exports were 42.4% of total exports in January. On a trend basis, services exports are increasing as a proportion of total trade.

Turning to the area analysis of the goods figures for January, the UK recorded deficits with EU and non-EU countries of £8.5bn and £2.45bn respectively. The recorded share of UK goods exports going to the EU, which is distorted by the Rotterdam-Antwerp Effect (reflecting UK exports routed through these ports for other destinations), was 46.6% in January. On a trend basis, the share of goods exports going to the EU is declining. A geographical breakdown of services trade is not yet available.

The largest country deficits in December were recorded with Germany (£2.6bn) and China (£2.3bn). There were also sizeable deficits with Norway (£2.1bn), the Netherlands (£1.6bn), Belgium-Luxembourg (£1.2bn), Italy (£0.7bn) and Spain (£0.4bn). Trade with the Netherlands and Belgium is distorted by the Rotterdam-Antwerp Effect. Surplus countries included the US (£1.5bn), Switzerland (£0.6bn) and the Irish Republic (£0.4bn).

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Production output grew 1.9% in three months to January
10 March 2017

Industrial production (15% of GDP) increased by 1.9% (QOQ) in the three months to January, with manufacturing providing the largest contribution increasing by 2.1%, its strongest growth since May 2010. Mining and quarrying output (including North Sea oil) rose by 0.2% (QOQ), whilst electricity and allied industries rose 4.0% (QOQ) and water and allied industries increased 0.2% (QOQ). Manufacturing benefited from a strong increase in the volatile pharmaceutical industry.

Production was estimated to have dipped 0.4% (MOM) in January, with manufacturing falling 0.9% (MOM), largely due to a fall in pharmaceuticals output. The monthly data are erratic. Production in January was up 3.2% (YOY), whilst manufacturing was up 2.7% (YOY).  

Separately the ONS reported that construction output fell 0.4% (MOM) in January, but was 2.0% higher than a year earlier. There was a 1.3% (MOM) fall in repair & maintenance in January, but all new work edged up by 0.l% (MOM). In the three months to January construction output rose 1.8% (QOQ).

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Spring Budget 2017
better 2017 growth, lower public borrowing and debt
8 March 2017

The forecasts for the economy and the public finances were revised, as expected.

GDP was forecast to be 2.0% for 2017 (1.4% in November 2016, 2.2% in March 2016). But there were modest downgrades thereafter: 1.6% for 2018 (1.7% in November), 1.7% for 2019 (2.1% in November) 1.9% in 2020 (2.1%) and 2.0% for 2021 (unchanged). The Chancellor said that “The OBR forecast the level of GDP in 2021 to be broadly the same as at Autumn Statement. However, the path by which we get there has changed.” Concerning CPI inflation, the OBR’s revised forecasts were 2.4% for 2017 (2.3% in November), 2.3% for 2018 (2.5%), 2.0% for 2019 (2.1%), 2.0% for 2020 and 2021 (both unchanged). The pick-up in inflation in 2017 is, therefore, fairly constrained and inflation is expected to return to target by 2019. 

On the public finances, the OBR forecast public sector net borrowing (PSNB) to be £51.7bn (2.6% of GDP) in FY2016 (£68.2bn in November 2016 and £55.5bn in March 2016), £58.3bn in FY2017 (£59.0bn in November), £40.8bn in FY2018 (£46.5bn), £21.4bn in FY2019 (£21.9bn), £20.6bn in FY2020 (£20.7bn) and £16.8bn (£17.2bn) in FY2021. The main revision was to FY2016 for which the improved numbers reflect stronger-than-expected tax receipts so far in the current financial year. The cumulative improvement to public borrowing from FY2016 to FY2021 (inclusive) was £24.0bn. Concerning public sector net debt (PSND) as a % of GDP the OBR forecast 86.6% for FY2016 (87.3% in November), 88.8% for FY2017 (90.2%), 88.5% for FY2018 (89.7%), 86.9% for FY2019 (88.0%), 83.0% for FY2020 (84.8%) and 79.8% for FY2021 (81.6%). These forecasts are modest improvements compared with November.

Two of the Chancellor’s targets relate to borrowing and debt (the third relates to welfare spending). On borrowing the target is that the public finances should be returned to balance as early as possible in the next Parliament, and, in the interim, the cyclically-adjusted PSNB should be below 2% of GDP by the end of this Parliament (FY2020). The OBR forecast the cyclically-adjusted PSNB at 0.9% of GDP for FY2020, giving the Chancellor 1.1% of GDP as “wriggle room” (about £24-25bn). Concerning debt, public sector net debt (PSND) as a share of GDP must be falling by the end of this Parliament. Given that PSND as a % of GDP is forecast to be falling after FY2017 this was deemed to be met.

Key policy announcements were:
·         The Spring Budget was broadly neutral over the period from FY2017 to FY2021. Whilst policy decisions for FY2017 and FY2018 were mildly expansionary, they were mildly contractionary for FY2019, FY2020 and FY2021.  
·         Extra spending commitments included: an extra £2bn plus over 3 years for social care; £325mn for the NHS’s best local Sustainability and Transformation Plans (STPs); investment in new T-levels for 16-19 year-old technical students; £300mn for new academic placements; and over £530mn for new free schools (including selective free schools) and to maintain existing schools. There was also £435mn to support businesses affected by the business rates relief revaluation.
·         On the tax side, the main rate of Class 4 National Insurance Contributions (NICs) for the self-employed will increase from the current 9% to 10% (April 2018, when Class 2 NICs are abolished) and to 11% (April 2019).
·         The tax-free dividend allowance for directors/shareholders will be reduced from £5,000 to £2,000 (April 2018).
·         In addition: VED rates for hauliers and the HGV Road User Levy were frozen for another year; a new minimum excise duty on cigarettes based on a pack price of £7.35 will be introduced; and there will be no changes to previously planned upratings of duties on alcohol and tobacco.

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Markit Surveys for February show continuing growth
3 March 2017

The much-followed Markit/CIPS surveys for two of the three main economic sectors were a little weaker in February, but indicated across-the-board continuation of growth.
·         The Markit/CIPS manufacturing PMI was 54.6 in February, slightly weaker than January’s 55.7 reading, but still showing solid growth. Production and new orders both grew. Increased new business inflows were underpinned by improved domestic and overseas demand, the latter aided by the continued weakness of the sterling exchange rate. Input cost inflation eased from January’s record high, whilst factory gate prices rose at a rate close to January’s near series-record. (Data released on 1 March 2017.)
·         The Markit/CIPS construction PMI firmed modestly in February to 52.5 (52.2 in January). Civil engineering replaced house building (residential building) as the main growth driver. Residential building activity increased at its slowest pace for six months, whilst commercial building declined for the first time since October 2016. (Data released on 2 March 2017.)
·         The Markit/CIPS services PMI eased but still indicated growth. The overall Business Activity Index was 53.3 in February (54.5 in January). There was a softer rise in new work, but business optimism remained strong. Weaker consumer spending was a key cause of slower service sector growth. Cost pressures remained elevated. (Data released on 3 March 2017.)
·         Markit said the surveys together suggested the UK economy would grow by 0.4% in 2017Q1, having lost some of 2016Q4’s momentum.

 

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January’s mortgage approvals continued to firm
1 March 2017

Mortgage approvals for house purchase firmed further in January to 69,928, compared with December’s 68,266, and were higher than the average for the previous six months (65,066), according to the Bank of England’s latest “Money and credit” press release (table I). But they were still down on the recent peak of over 75,000 (January 2014). And they were 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). The interest rate cut in August may have stimulated the housing market, amid general market confidence. 

The stock of total lending to individuals (secured and unsecured) rose to £1,520.4bn in January, of which 87% was secured on dwellings. The growth rate was still fairly modest, at 4.0% (YOY), unchanged from December (table G). Within the total:
·         The amount outstanding on lending secured on dwellings rose to £1,326.4bn, to be up 3.1% (YOY), unchanged from December (table H).
·         The amount outstanding on unsecured consumer credit rose to £194.0bn, a robust increase of 10.3% (YOY), but down on December’s 10.6% and November 10.9% (table J). The amount outstanding was still down on the £208bn peak of September 2008.

Total loans (including overdrafts) to non-financial businesses increased by £3.7bn in January and the growth rate was 2.9% (YOY). December’s growth rate had been 4.8% (table M). Within the total:
·         Loans to SMEs (defined as turnover of less than £25 million) slipped by £0.2bn in January, whilst the growth rate was 1.3% (YOY).
·         Loans to large businesses rose by £3.9bn in January, whilst the growth rate was (also) 3.9% (YOY).

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Parliamentary Committees: Evidence

Download Ruth Lea’s evidence to Parliamentary Committees of the House of Lords and Commons.