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

12th February 2019

Economic Insight - 12 February 2019

Italy enters recession: another sign of a weakening Eurozone economy
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Italian economy along with the Eurozone:
Press Release

Italy enters recession: another sign of a weakening Eurozone economy

Date: 12th February 2019

Italy enters recession: another sign of a weakening Eurozone economy
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the Italian economy along with the Eurozone:
  • The Italian economy fell into a very shallow recession in 2018Q4, with GDP contracting by 0.2% (QOQ), following a 0.1% (QOQ) fall in 2018Q3.
  • In addition, Italy’s economy has several endemic problems including vulnerable banks which hold a considerable proportion of government debt, and a huge public sector debt-GDP ratio (over 130%).
  • The IMF’s latest annual assessment of Italy painted a worrying picture, including high unemployment, very high public debt and vulnerable banks.
  • There have been many institutional developments in the EU to shore up the Eurozone since the debt crisis, which peaked in 2010-2012.
  • Economic and Monetary Union (EMU) is, however, still incomplete, not least of all because there is no fiscal union backing up monetary union.
UK developments included:
  • The Bank of England left monetary policy unchanged at the February meeting, with Bank Rate staying at 0.75%. It seems some way off raising rates.
  • The Bank downgraded their GDP growth forecasts in February’s Inflation Report for 2019 (to 1.2% from 1.7% in November) and 2020 (1.5%, down from 1.7%).
  • According to the Bank the growth of consumer credit slowed in December – to 6.6 (YOY), compared with November’s 7.2%.
  • The Markit/CIPS surveys were all weaker, and fairly subdued, in January, reflecting Brexit uncertainties.

Ruth Lea said, “Concerns about the Italian economy have given rise to renewed debate on the robustness of the Eurozone. There are few expectations that Italy will experience a major financial crisis in the near-term. But, if there were one in an economy as large as Italy’s, there must be doubts whether the Eurozone’s institutional arrangements, as they stand, would be robust enough to cope with it. There have, of course, been many developments to shore up the Eurozone’s institutions since the debt crisis. But European and Monetary Union (EMU) is still far from “complete” in some very key areas. Crucially, there is no fiscal union backing up monetary union. This leaves the Eurozone vulnerable to shocks.”
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

28th January 2019

Economic Insight - 28 January 2019

Increasing concerns about global economic growth, especially in the Eurozone
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the IMF’s January forecast along with the ECB’s latest concerns over Eurozone growth:
Press Release

Increasing concerns about global economic growth, especially in the Eurozone

Date: 28th January 2019

Increasing concerns about global economic growth, especially in the Eurozone
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the IMF’s January forecast along with the ECB’s latest concerns over Eurozone growth:
  • The IMF projected global growth of 3.7% (unchanged from October 2018’s forecast) for 2018, but revised growth down to 3.5% (from 3.7%) for 2019. They added that “risks to global growth tilt to the downside”.
  • They left their US forecasts unchanged, with growth of 2.9% (2018), 2.5% (2019) and 1.8% (2020).
  • But they revised Eurozone growth down again, to 1.8% in 2018 (compared with 2.0% in October and 2.2% in July), and to 1.6% in 2019 (down from 1.9%).
  • Germany’s downgrade was especially marked for both 2018 (now 1.5%), where growth momentum was lost in the second half of the year, and 2019 (now 1.3%). The growth rates for France and Italy were also downgraded, with Italy’s projected growth very lacklustre.
  • The IMF left the UK’s forecasts unchanged (1.4% for 2018, 1.5% for 2019 and 1.6% for 2020), assuming a “deal” on Brexit. They cited a No Deal Brexit as a potential risk to global growth.
  • China’s growth was projected to slow from 6.6% in 2018 to 6.2% in 2019 and 2020, with risks that it may slow more than expected.
  • Turning to the ECB, President Mario Draghi gave a downbeat assessment of the Eurozone’s economy after January’s Governing Council meeting. Indicators had been weaker than expected and “the risks surrounding the euro area growth outlook have moved to the downside”.
  • Eurostat data on November’s industrial production were very weak for the Eurozone’s “big 4”, especially for Germany.
UK developments have included:
  • December’s retail sales fell 0.9% (MOM), after November’s jump. For 2018Q4 sales were down 0.2% (QOQ), which will act as a drag on GDP in the quarter.
  • December’s consumer prices inflation and producer prices inflation moderated, as petrol and oil prices eased.
  • The housing market remains subdued with UK prices rising just 2.8% (YOY) in November, with London’s house prices falling by 0.7% (YOY).
  • The labour market remains robust, with the unemployment rate at 4.0% in the three months to November. The growth in annual average earnings is picking up, reflecting the tighter labour market.
Brexit developments included:
  • The Government lost the “meaningful vote” on the Withdrawal Agreement in the Commons on 15 January 2019, by 432 to 202 votes.
  • There will be another vote on the Withdrawal Agreement on 29 January.

Ruth Lea said, “Both the IMF and the ECB appear to be increasingly concerned about growth prospects in the Eurozone. The “big 3” major economies performed disappointingly last year and Germany and Italy are expected to slow further this year. The ECB’s interest rates are rock-bottom and can be expected to remain so. The ECB may even resort to more QE, if the economies continue to deteriorate. The stability and growth pact limits any fiscal stimulation packages, especially in the case of France and Italy. Germany, however, is in a comfortable fiscal position and could provide fiscal stimulus if it chose to do so.”
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

12 (2018)(2017)

Comment, at a glance

Public sector net surplus record £14.9bn in January 2019
21 February 2019
Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a surplus of £14.9bn in January 2019, compared with a surplus of £9.3bn in January 2018 (figure 1). This was the largest January surplus since records began (in 1993). Central government receipts in January 2019 increased by 9.7% (YOY), to £79.4bn, while total central government expenditure increased by 3.0% (YOY) to £62.2bn. Much of this annual growth in central government receipts in January 2019 came from Income Tax-related revenue, with self-assessed Income Tax, Capital Gains Tax (CGT), Pay As You Earn (PAYE) and National Insurance Contributions (NICs) increasing by £1.9bn, £1.2bn, £1.0bn and £0.7bn respectively.

The PSNB so far for FY2018 (April to January) was £21.2bn, compared with £39.8bn for the first ten months of FY2017 (figure 3). This was the lowest year-to-date net borrowing for 17 years (since 2001). Of this £21.2bn borrowed, £30.4bn was capital spending (or net investment), such as on infrastructure, while the cost of the “day-to-day” activities of the public sector (the current budget deficit) was in surplus by £9.2bn. The OBR forecast public borrowing of £25.5bn for FY2018 for the Autumn Budget (October 2018). This has a good chance of being met. The OBR will make a revised forecast for the Spring Statement (13 March 2019).

Looking at the back data, the PSNB for FY2017 (12 months) was £41.9bn, compared with £44.9bn for FY2016. This was the lowest annual net borrowing for 11 years (FY2006-2007).

Public Sector Net Debt (PSND-ex, excluding public sector banks) was £1,782.1bn at the end of January 2019 (82.6% of GDP), compared with £1,741.6bn (83.4% of GDP) at end-January 2019. The debt/GDP ratio is now falling.

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Labour productivity (output per hour) rose 0.2% in 2018Q4
19 February 2019
The ONS reported that the flash estimate of output per hour (their main measure of labour productivity, “productivity hours”) increased 0.2% (QOQ) in 2018Q4, but was 0.2% lower (YOY). The quarterly increase reflected a 0.2% (QOQ) rise in GDP and a 0.1% (QOQ) fall in total hours worked. (There are rounding errors.) The decrease in hours worked reflected falls in hours worked for both full-time and part-time workers, despite a 0.5% increase in employment.

In contrast, output per worker decreased 0.3% (QOQ) in 2018Q4, reflecting a 0.2% increase in GDP, more than offset by a 0.5% (QOQ) rise in employment. The YOY change in 2018Q4 was -0.1%.

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Unemployment rate was 4.0% in three months to December, annual earnings growth 3.4%
19 February 2019

Employment rose by a robust 167,000 (QOQ) in the three months to December, and was 444,000 higher than a year earlier. Within the total, full-time men rose by 201,000 (YOY) and full-time women increased by 226,000, whilst part-time men rose 54,000 (YOY) but part-time women fell 37,000. The increase in full-time employment was therefore 427,000 (YOY), whilst part-time employment was only 17,000 higher.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.8%, higher than a year earlier (75.2%), and the joint highest estimate since comparable estimates began in 1971. The employment rates for men and women were 80.3% and 71.4% 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 December, 14,000 lower than the previous quarter and 100,000 down YOY. The unemployment rate (the proportion of the labour force [those in work plus those unemployed] that were unemployed) was 4.0%, compared with 4.4% a year earlier. It has not been lower since December 1974 to February 1975. The inactivity rate (the proportion of people aged 16-64 who were economically inactive) was 20.9%, the lowest estimate since comparable estimates began in 1971.

Job vacancies remain strong. There were 870,000 job vacancies in the three months to January 2019 (sic), the highest since comparable records began in 2001. The number was up 16,000 (QOQ) and 46,000 higher (YOY).

Average weekly earnings for employees (GB) in nominal terms increased by 3.4% for both regular pay (excluding bonuses) and total pay (including bonuses) in the three months to December (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 1.2% excluding bonuses, and by 1.3% including bonuses, compared with a year earlier”. There are rounding errors.

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

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Retail sales rose 0.7% in three months to January
15 February 2019

Retail sales rose 0.7% (QOQ) in the three months to January, to be a robust 3.5% higher (YOY).

Retail sales jumped 1.0% (MOM) in the month of January, after December’s 0.7% decline, and were 4.2% higher (YOY). The ONS said the annual increase was “the highest since December 2016, while YOY average store prices slowed to 0.4%, the lowest price increase since November 2016.” The quantity bought in textile, clothing and footwear stores showed strong YOY growth of 5.5% as stores took advantage of the January sales, with a YOY price fall of 0.9%. Noting food store prices experienced a general slowdown throughout 2018, the ONS commented that the quantity bought in January 2019 returned to the strong growth experienced in the summer months at 3.2% (YOY).

In January 2019, online retailing accounted for 18.8% of total retailing, from the 19.8% reported in December 2018.

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House prices inflation eased to 2.5% in December
11 February 2019
According to official data, UK house prices increased by 2.5% (YOY) in December, down on November’s 2.7%. The ONS commented that “…this is the lowest annual rate since July 2013 when it was 2.3%. 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.” Prices rose 0.2% (MOM) in December in both seasonally adjusted and non-seasonally adjusted terms. 

The UK’s four countries continued to show different inflation rates in December: England (2.3% (YOY)), Wales (5.2%), Scotland (2.4%) and Northern Ireland (5.5% (2018Q4)).

In England, there was, as always, a significant range across the regions (figure 4): West Midlands (5.2%), East Midlands (4.2%), Yorkshire & Humberside (4.2%), North West (3.5%), South West (2.9%), South East (1.2%), East (0.2%), London (-0.6%) and the North East (-1.0%).

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Both CPIH inflation and CPI inflation slipped to 1.8% in January
13 February 2019
CPIH inflation fell to 1.8% in January, compared with 2.0% in December. (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 largest downward contributions to change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago…the downward movement partially reflected the response from energy providers to Ofgem’s January energy price cap which came into effect from 1 January 2019.” The ONS also commented that “…these downward effects were partially offset by air fares, with prices falling between December 2018 and January 2019 by less than a year ago.”

The inflation rates for goods and services in January were 1.2% (1.8% in December) and 2.2% (2.1% in December) respectively. The core rate inflation (excluding energy, food, alcoholic beverages & tobacco) was unchanged at 1.8%. The Consumer Prices Index (CPI) 12-month rate was also 1.8% in January 2019, down from 2.1% in December 2018.

Turning to the producer price index (PPI), the inflation rate for the output PPI (goods leaving the factory gate) slipped to 2.1% in January, compared with December’s 2.4% (table 1). The inflation rate for the input PPI (materials and fuels used in the manufacturing process) slowed to 2.9% (YOY) in January, compared with December’s 3.2% (table 3). The ONS reported that “…petroleum products and crude oil provided the largest downward contribution to the change in the annual rate of output and input inflation respectively.” Crude oil prices fell by 6.9% on the year to January 2019, the largest annual decrease since June 2016.

The annual rate of inflation for imported materials and fuels was 2.1% in January (YOY), down on December’s 2.8% (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) appreciated 1.4% (MOM) in January (Table 4).

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Trade (goods & services) deficit widened in 2018Q4, and in 2018
11 February 2019
 The total trade (goods & services) deficit widened by £0.9bn from £9.5bn in 2018Q3 to £10.4bn in 2018Q4, as the goods deficit increased (reflecting higher imports) more than the services surplus increased (table 1). Within the total:
·       The goods deficit rose by £1.4bn from £35.2bn in 2018Q3 to £36.7bn in 2018Q4, as exports rose by just 0.1% (QOQ), whilst imports increased by 1.2%. Rising imports of cars, material manufactures and chemicals were the main contributors to the rise in goods imports in the three months to December 2018. This effect was offset in part by falling imports of unspecified goods (including non-monetary gold) and fuels.
·       The services surplus rose by £0.6bn from £25.7bn in 2018Q3 to £26.3bn in 2018Q4, as exports rose by 1.3% (QOQ) whilst imports were 0.8% higher. 
·       The goods deficit with EU countries widened by £1.6bn (QOQ) to £24.6bn (table 2).
·       The goods deficit with non-EU countries narrowed by £0.2bn (QOQ) to £12.1bn (table 2).

Removing the effect of inflation, the total trade deficit widened £0.6bn (QOQ) in 2018Q4, acting as a drag on constant price GDP growth.

The total trade deficit for the year 2018 widened by £8.4bn from £23.9bn in 2017 to £32.3bn in 2018 (table 1), mainly reflecting an increase in services imports: 
·       The goods deficit rose by £1.8bn to £138.8bn in 2018, whilst the services surplus fell by £6.6bn to £106.5bn in 2018. 
·       The goods deficit with EU countries widened by £0.2bn to £94.9bn, whilst the goods deficit with non-EU countries widened by £1.6bn to £43.9bn (table 2).

Removing the effect of inflation, the total trade deficit widened £3.8bn (YOY) in 2018, acting as a drag on constant price GDP growth.

 

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GDP fell 0.4% in December
11 February 2019

Concerning the monthly data, GDP declined 0.4% (MOM) in December, to be 1.0% (YOY) higher (table GVA3). The fall followed increases of 0.2% (MOM) in both October and November. Within GDP:
·       The dominant services sector slipped 0.2% (MOM). The weaker sectors included "wholesale and retail".
·       Production output fell 0.5% (MOM), within which manufacturing decreased 0.7% (MOM).
·       Construction output also declined. It fell by 2.8% (MOM), with both new work, and repair and maintenance contracting in this period.

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

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GDP rose 0.2% (QOQ) in 2018Q4, 1.4% (YOY) in 2018
11 February 2019
GDP rose by 0.2% (QOQ) in 2018Q4, to be 1.3% higher (YOY, table A2), following 0.6% (QOQ) growth in 2018Q3, 0.4% (QOQ) in 2018Q2 and 0.1% (QOQ) in 2018Q1. Growth for the year 2018 was 1.4%, compared with 1.8% in 2017, and the slowest since 2012, when growth was also 1.4%.


Services (weight 796/1,000) was the driver of growth, whilst production (weight 138/1,000) and construction (weight 60/1,000) both fell. (Agriculture has a weight of 7/1,000.)

Within GDP (table B1):
·       The dominant services sector was a reasonably buoyant 0.4% (QOQ) higher in 2018Q4, after a rise of 0.5% in 2018Q3, driven by professional, scientific, administration and support services.
·       Production (including manufacturing) decreased by 1.1% (QOQ), after growth of 0.6% in 2018Q3.
·       Within production, manufacturing contracted 0.9%. The weakness in manufacturing was broad-based with ten of the thirteen manufacturing industries experiencing a contraction in activity. Manufacturing output of transport equipment fell 2.7% (QOQ), in part reflecting the partial closures of multiple car manufacturing plants. The outputs of the other three production components (mining & quarrying, electricity & gas and water & allied) also fell.
·       Construction slipped by 0.3% (QOQ) after a 2.1% jump in 2018Q3.


Turning to expenditure components (table C2), household consumption and government consumption contributed to growth, but investment weakened and the trade balance deteriorated:
·       Household expenditure growth increased to 0.4% (QOQ), unchanged from the rise in 2018Q3, to be 1.9% higher (YOY).
·       General government final consumption (GGFC) also contributed to growth, rising by 1.4% (QOQ). 
·       But Gross fixed capital formation (GFCF) fell 0.5% (QOQ), to be 1.9% down (YOY).
·       Within GFCF, business investment fell for the 4th consecutive quarter. It was 1.4% down (QOQ) to be 3.7% lower (YOY).
·       Net trade (goods & services) detracted from growth, deteriorating by £0.6bn (constant prices), with a 0.9% rise in exports being more than offset by the 1.3% rise in imports.

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Markit Surveys for January all weaker
5 February 2019
The much-followed Markit/CIPS surveys were all weaker, and fairly subdued, in January.

·       The Markit/CIPS manufacturing PMI fell back to 52.8 in January, compared with December’s 54.2 (a 6-month high). Companies reported that Brexit preparations had led to sharp rises in both purchasing activity and stockpiling of inputs at warehouses. (Data released on 1 February 2019.)

·       The Markit/CIPS construction PMI slipped further to 50.6 in January, from 52.8 in December. All three categories of construction output recorded weaker trends than in December. Residential work was the strongest performing area, whilst commercial work was the worst performing category. Civil engineering showed little growth. (Data released on 4 February 2019.) 

·       The Markit/CIPS services PMI registered 50.1 in January, barely above the 50 no-change value, compared with 51.2 in December. Respondents overwhelmingly linked the slowdown in business activity growth to heightened political uncertainty at the start of 2019, not least of all relating to uncertainties over Brexit. (Data released on 5 February 2019.)

·       Markit estimated that the surveys indicated that “…GDP likely stagnated at the start of 2019 after eking out modest growth of just 0.1% in 2018Q4”.

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