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

24th February 2020

Economic Insight - 24 February 2020

Economic background to 11 March Budget: activity picking up
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data, ahead of the 11 March Budget
Press Release

Economic background to 11 March Budget: activity picking up

Date: 24th February 2020

Economic background to 11 March Budget: activity picking up
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data, ahead of the 11 March Budget:
    • GDP was flat (QOQ) in 2019Q4, whilst growth in 2019 was 1.4%, slightly above the estimate of 1.3% for 2018.
    • Indicators suggest activity picked up after the General Election. Retail sales rose 0.9% (MOM) in January, the housing market has picked up and business surveys have firmed so far this year.
    • Despite the weak GDP number, the labour market remained robust in 2019Q4, though nominal earnings growth weakened slightly.
    • Inflationary pressures remain well contained despite the uptick in January’s CPI inflation rate.
    • Public sector borrowing has risen modestly so far this financial year (FY2019), compared with the same period in FY2018.
    Concerning Brexit developments:
    • David Frost, the UK’s chief negotiator for the upcoming UK-EU negotiations, reiterated that the UK was seeking a Canada-style FTA, without regulatory alignment, in a recent speech.
    • However, Michel Barnier, the Commission’s chief negotiator, strongly implied that the UK could not have a Canada-style trade deal in recent comments. Instead the future UK-EU relationship should be “…a trade agreement that includes, in particular, fishing and includes a level playing field.”
    • There will be a meeting of the Council of the European Union on 25 February, at which the Council is expected to approve the negotiating mandate (for the Commission) for the future UK-EU relationship. Negotiations are expected to start in early March.”
    As background to the upcoming UK-EU negotiations, it is salutary to note the importance of UK-EU trade to the UK:
    • The UK runs a large trade deficit with the EU, which acts on GDP. In 2018, a goods deficit (£94.3bn) was only partly offset by a services surplus (£27.9bn), giving a trade deficit of £66.4bn, 3% of UK GDP.
    • The share of UK exports to the EU is declining. Using conventional trade (gross) data, the share fell from around 50% in 2008 to 45% in 2018, as exports to the non-EU grew faster than to the EU.
    • Using trade in value-added (TiVA) data, which allow for the import content in exports, results in even lower shares of UK exports going to the EU. According to the DIT/OECD the share falls from 43.5% (gross data) to 37.0% (TiVA data) for 2015, whilst the US share rises from 15.7% to 17.9%.
    • The estimated ratio of exports to the EU to UK GDP, moreover, falls if TiVA data are used. The ratio for 2015 was around 12.0% using gross data, but it fell to less than 9% using TiVA data.
    UK political update:
    • There was a cabinet reshuffle on 13 February. Rishi Sunak replaced Sajid Javid as Chancellor of the Exchequer.
    • The Government announced a new Points-Based Immigration System on 19 February 2020, which will become operative on 1 January 2021.

    Ruth Lea said, “Granted the economy ended 2019 on a subdued note, but there are now increasing signs that, in the wake of the General Election, it is returning to growth. There is, therefore, no obvious need for a major fiscal boost in the Budget to ‘get the economy going’. Moreover, given de facto full employment, any such boost would risk over heating the economy as well as jeopardising fiscal prudence.”

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

10th February 2020

Economic Insight - 10 February 2020

The Eurozone economy: weak fourth quarter growth ends a disappointing year
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest Eurozone GDP data:
Press Release

The Eurozone economy: weak fourth quarter growth ends a disappointing year

Date: 10th February 2020

The Eurozone economy: weak fourth quarter growth ends a disappointing year
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest Eurozone GDP data:
    • Eurostat recently announced that the Eurozone grew by 0.1% (QOQ) in 2019Q4. GDP grew by an estimated 1.2% in 2019 after rising 1.9% in 2018.
    • Within the Eurozone, Germany grew by just 0.6% in 2019. French and Italian GDP fell by 0.1% (QOQ) and 0.3% (QOQ) respectively in 2019Q4; annually, they grew by 1.2% and 0.2% in 2019, respectively. Spain’s performance was firmer, growing by 1.8% in 2019.
    • The Eurozone’s poor performance in 2019 continues the picture of relative economic malaise seen over the past 10-12 years.
    • The EU27 continues to lose share of global GDP. In 1980 its share was nearly 29% (MER terms), by 2018 it was down to less than 19% and it is expected to continue declining. In contrast, the US share has shown only a modest fall.
    Central Banks Watch:
    • The MPC left the Bank Rate unchanged at their January meeting at 0.75%. The Bank downgraded their growth forecast for 2020 to ¾% from 1¼%.
    • The Fed left interest rates unchanged at their January meeting.
    UK economic update:
    • The Markit surveys for January (for manufacturing, construction and services) showed marked improvements, following the decisive general election result (12 December).
    • The Bank’s credit data firmed in December.
    Concerning Brexit developments:
    • The European Parliament ratified the Withdrawal Agreement on 29 January 2020 and the UK left the EU on 31 January.
    • The UK entered the transition phase on 1 February, which is due to end by end-2020, by law. During this time, the new UK-EU relationship is due to be negotiated.

    Ruth Lea said, “The Eurozone economy ended 2019 on a very weak note. Moreover, given Germany’s slowdown, its “powerhouse” economy, it will struggle to gain much momentum during 2020. The Eurozone’s growth performance since the Great Recession has been disappointing, weaker than the UK’s and significantly weaker than the US’s. Of the large Eurozone countries, Germany has been the best performer, but German growth has lost impetus as the global economy has slowed. French growth has been singularly lacklustre, whilst Spain has recovered quite well after a prolonged recession. Italian GDP was still 4% lower in 2019 than in 2007, the economy is all but stagnant, whilst Greek GDP was still over 20% lower in 2019 than in 2007, despite some recent improvement.”

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 (2019)(2018)

Comment, at a glance

Markit/CIPS flash composite output index unchanged in February
21 February 2020

The Markit/CIPS flash UK composite output index was unchanged at 53.3 in February, after jumping in January, above the crucial 50.0 no-change mark. Moreover, the latest reading pointed to the joint-fastest expansion of private sector output since September 2018 (equalling that recorded in January). Survey respondents noted that receding political uncertainty since the general election continued to translate into higher business activity and greater willingness to spend among clients.

Specifically:
·       The flash services business activity index slipped to 53.3 in February, however, compared with 53.9 in January. Markit noted that “…there were a number of reports from service providers that the COVID-19 outbreak had weighed on overseas bookings and resulted in the cancellation of some orders from clients in Asia, particularly those based in mainland China”.
·       The flash manufacturing output index rose to 52.8 in February, compare with 50.1 in January. This was the fastest manufacturing output growth since April 2019, but supply chain disruptions were emerging. Manufactures also commented on a headwind from extended shutdowns in China.
·       Markit estimated their GDP “nowcast” pointed to 0.2% growth through 2020Q1.

 

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Public sector net borrowing £9.8bn surplus in January 2020
21 February 2020

The public sector net borrowing (PSNB-ex, excluding public sector banks) was in surplus by £9.8bn in January 2020, compared with a £11.9bn surplus in January 2019, a deterioration of £2.1bn (figure 2, table 1). Self-assessed Income Tax and CGT receipts (combined) were £22.7bn in January 2020, £1.3bn more than in January 2019. Note, however, that late payments mean that the proportion of self-assessed taxes recorded in January and February can vary year-on-year and it is therefore advisable to consider these two months together.

Borrowing in the current financial year-to-date (April 2019-January 2020, FY2019) was £44.8bn, compared with £39.0bn in the same period last year (April 2018-January 2019, FY2018), a deterioration of £5.8bn (figure 3).

Of the £44.8bn, £7.2bn related to the cost of the “day-to-day” activities of the public sector (the current budget deficit), while £37.6bn was capital spending (or net investment), such as on infrastructure. In the current financial year-to-date, central government receipts grew by 2.6% on the same period the previous year to £631.4bn, including £468.9bn in tax revenue. Over the same period, central government spent £645.5bn, an increase of 2.9%. Around two-thirds of this amount was spent by central government departments on providing services and grants; just below one-third was spent on social benefits; and the remainder was spent on capital investment and interest on the government’s outstanding debt.

In March 2019, the OBR forecast that total borrowing would be £29.3bn for the full year FY2019. In December 2019, the OBR released a technical restatement of their March forecast, which brought their forecast into line with current ONS statistical methodology (for example, on student loans). The forecast for the PSNB for FY2019 was revised up to £47.6bn, some £9.2bn higher than the current estimate of the PSNB for FY2018 (£38.4bn). On current trends, the OBR’s latest forecast looks on the high side.

It has been confirmed that the Budget will be held on Wednesday 11 March 2020. There will be revised forecasts by the OBR.

Public Sector Net Debt (excluding public sector banks, PSND ex) was £1,798.7bn at end-January 2020 (79.6% of GDP), compared with £1,757.3bn (80.3% of GDP) at end-January 2019.

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Retail sales recovered 0.9% in January
20 February 2020

Retail sales rose 0.9% (MOM) in January, to be 0.8% higher (YOY), recovering from the falls in the previous two months. The increase was mainly because of moderate growth in both food stores (1.7%) and non-food stores (1.3%). Fuel saw a large fall of 5.7% (MOM) in the quantity bought in January, which coincided with a rise in fuel prices of 2.3 pence per litre between December and January

Retail sales fell 0.8% (QOQ) in the three months to January, to be just 0.8% higher (YOY) (table 1). The ONS commented that there were declines in all sectors.

Online retailing was 19.0% of total retailing in January 2020, compared with 19.3% reported in December 2019.  

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House prices rise 2.2% (annual) in December
19 February 2020

According to official data, UK average house prices in December rose 2.2% (YOY), up from 1.7% (revised) in November (Figure 1). The ONS commented “…over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.” For the first time since February 2018, all regions saw a positive annual growth rate in December, with the lowest annual growth rates in the South East of England (1.2%), followed by the West Midlands (1.4%). London’s prices picked up 2.3% (YOY).

Prices rose 0.3% (MOM) on a non-seasonally adjusted basis in December, and increased 0.4% (MOM) on a seasonally adjusted basis.

The inflation rates for the UK’s four countries showed some convergence in December: England (2.2% YOY, up from 1.3% in November), Wales (2.2% YOY, down from 5.5% in November), Scotland (2.2% YOY, down from 2.9% in November) and Northern Ireland (2.5% (2019Q4, YOY)).

In England, there was, as always, a significant range across the regions (figure 4). The complete list of annual price changes is: Yorkshire & Humberside (3.9%), East Midlands (2.8%), East (2.4%), London (2.3%), South West (2.2%), North West (2.0%), North East (1.8%), West Midlands (1.4%), South East (1.2%). 
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CPIH, CPI inflation rates rose to 1.8% in January
19 February 2020
The CPIH inflation rate rose to 1.8% in January, compared with December’s 1.4%. (CPIH is the Consumer Prices Index including owner-occupiers’ housing costs and is the ONS’s preferred measure of consumer prices inflation.) The ONS commented that “…in January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services. …its contribution increased to 0.55 percentage points, as the gas and electricity price reductions from January 2019 unwound”.

They also commented “…the largest upward contributions to the change in the CPIH 12-month inflation rate between December 2019 and January 2020 came from gas and electricity prices; fuels and lubricants; clothing; and airfares”.

The inflation rates for goods and services in January were 1.3% (0.6% in December) and 2.1% (1.9% in December) respectively. The core rate inflation (excluding energy, food, alcoholic beverages & tobacco) rose to 1.6% (1.4% in December). The Consumer Prices Index (CPI) YOY rate also rose 1.8% in January, compared with December’s 1.3%.

Turning to the producer price index (PPI), the inflation rate for the output PPI (goods leaving the factory gate) rose to 1.1% (YOY) in January, compared with 0.9% (YOY) in December (table 1). The ONS commented that “…petroleum products made the largest upward contribution to the change in the annual rate of output inflation”.

The inflation rate for the input PPI (materials and fuels used in the manufacturing process) rose to 2.1% (YOY) in January, compared with 0.9% in December (table 3). The ONS explained that “…imported metals provided the largest upward contribution to the change in the annual rate of input inflation”. Crude oil prices were little changed in the month. They rose just 0.2% (MOM) but were 11.3% higher (YOY) (table 5).

The annual rate of inflation for imported materials and fuels was 1.9% (YOY) in January, compared with December’s minus 0.1% (revised) (table 4). Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight. Note that the sterling effective exchange rate index (ERI) depreciated 0.4% (MOM) in January, but was 3.3% higher YOY (table 4).

All in all, these reports suggest that prices inflation is reasonably well contained.

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Labour productivity (output per hour) grew 0.3% (QOQ) in 2019Q4
18 February 2020

The ONS reported that the flash estimate of output per hour (their main measure of labour productivity, “productivity hours”) grew 0.3% (QOQ) in 2019Q4, to be 0.3% higher (YOY).

The 0.3% YOY increase was a result of gross value added (GVA) growing faster than hours worked, at 1.1% and 0.8% respectively. (GVA is a measure of the production of goods and services in the economy and is closely aligned to gross domestic product (GDP).) The increase in total weekly hours worked was driven by a 1.0% (YOY) increase in total employment, whilst average actual weekly hours fell 0.2% (YOY).

Output per worker fell 0.5% (QOQ) in 2019Q4, but was unchanged (YOY). GVA and total employment grew at a similar pace (YOY); GVA was up 1.1% whilst employment rose 1.0% (there are rounding errors).

In 2019, there was no growth in output per hour compared with the previous year. Over the same period, output per worker grew marginally by 0.3%.

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Unemployment rate 3.8% in 3 months to December; regular annual earnings growth 3.2%
18 February 2020
Employment rose by 180,000 (QOQ) in the three months to December to a record 32.93mn, and was 336,000 higher (YOY) (table 1 of the ONS’s labour market overview bulletin). The annual increase was mainly driven by full-time workers (up 381,000 (YOY) to a record high of 24.42mn) and women (up 298,000 (YOY) to a record high of 15.61mn). The annual increase in women working full-time (up 262,000 to a record high of 9.31mn) was the largest since February to April 2017.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was a record high of 76.5%, 0.6 percentage points up (YOY) and 0.4 percentage points up (QOQ). The employment rates for men and women were 80.6% and 72.4% respectively. The recent trend 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. However, since the equalisation of the State Pension age, the employment rate for women has continued to rise.

Unemployment was 1.29mn in the three months to December, 16,000 lower QOQ and 73,000 down YOY (table 1). The unemployment rate (the proportion of the labour force that were unemployed) was 3.8%, 0.2 percentage points down on a year earlier and 0.1 percentage point lower than the previous quarter. It has not been lower since November 1974-January 1975. The inactivity rate (the proportion of people aged 16-64 who were economically inactive) was at a record low of 20.5%; 0.4 percentage points lower than the previous year and 0.3 percentage points down on the previous quarter.

Job vacancies remain strong, though they have tended to ease since the beginning of 2019. There were 810,000 job vacancies in the three months to January (sic), still at near-record levels since comparable records began in 2001. The number was up 7,000 (QOQ) but 50,000 lower (YOY).

The annual growth in average weekly earnings (for GB employees) trended upwards between spring 2017 and mid-2019, and in April-June 2019 reached 4.0% for total pay and 3.9% for regular pay, the highest nominal pay growth rates since 2008. It has, however, tended to ease since then. In the three months to December 2019, growth slowed to 2.9% for total pay (including bonuses, 3.2% last month) and 3.2% for regular pay (excluding bonuses, 3.4% last month). But the growth in total pay was weakened by unusually high bonus payments paid in October 2018, compared with more typical average bonus payments paid in October 2019. In real terms, annual pay growth has been positive since December 2017-February 2018 and was 1.4% for total pay (1.6% last month) and 1.8% (unchanged) for regular pay in the three months to December.

All in all, this report suggests the labour market remains robust, though vacancies have moderated and annual earnings growth has slowed.

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Trade (goods & services) deficit of £29.3bn in 2019
11 February 2020
The total trade (goods & services) deficit was £29.3bn in 2019, compared with a deficit of £29.8bn in 2018, an improvement of just £0.5bn, as exports grew 5.0% (YOY) whilst imports rose by 4.7% (table 1).

Concerning goods (visible) trade (including unspecified goods):
·       The deficit narrowed £9.7bn to £129.6bn. Exports increased by 6.4% whilst imports rose by 2.5%.
·       The deficit with EU countries worsened by £1.0bn to £94.5bn (table 2).
·       But the deficit with non-EU countries narrowed by £10.7bn in 2019, falling to £35.1bn (table 2).

The services surplus disappointingly fell by £9.2bn in 2019, to £100.3bn, as exports rose 3.3%, whilst imports increased by 9.8%. The improvement in the goods (visible) balance was, therefore, almost completely offset by the deterioration in the services balance.

Removing the effect of inflation, the total trade (goods and services) balance was little changed in 2019, compared with 2018 (table 10).

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Trade (goods & services) surplus of £5.9bn in 2019Q4
11 February 2020
The total trade (goods & services) surplus was £5.9bn in 2019Q4, compared with a deficit of £3.4bn in 2019Q3, an improvement of £9.3bn, as exports grew 2.9% (QOQ) whilst imports fell 2.3% (table 1).

The ONS pointed out that trade in unspecified goods (including non-monetary gold (NMG) and other precious metals) was significant in 2019Q4. NMG, which is gold bullion not owned by central banks, comprises the majority of precious metals. Because a significant amount of the world’s trade in NMG takes place on the London markets, this trade can have a large impact on the size of and change in the UK’s headline trade figures. Excluding unspecified goods, the total trade deficit (goods and services) was £6.5bn in 2019Q4, £4.0bn higher than in 2019Q3.

Concerning goods (visible) trade (including unspecified goods):
·       The deficit narrowed £14.4bn to £15.1bn. Exports (boosted by a large rise in the exports of precious metals) increased by 10.1% whilst imports fell 4.0%.
·       The deficit with EU countries narrowed by £1.4bn to £21.7bn (table 2). Excluding precious metals, the deficit still narrowed.
·       The balance with non-EU countries showed a surplus of £6.6bn in 2019Q4, an improvement of £13.0bn (the deficit in 2019Q3 was £6.4bn) (table 2). If precious metals are excluded the deficit with non-EU countries widened a tad in 2019Q4.  

The services surplus fell by £5.1bn in 2019Q4, to £21.0bn, as exports fell 5.3%, whilst imports rose 1.5% (table 10). Falling exports of services were seen across most service types and were largely driven by other business services; financial services; and telecommunications.

Removing the effect of inflation, the total trade (goods and services) balance improved by £7.9bn (volume), from a deficit of £0.8bn in 2019Q3 to a surplus of £7.1bn in 2019Q4. Again the trade data were flattered by the movements in precious metals in 2019Q4. Note that there are equal and offsetting entries to higher exports of precious metals in the National Accounts, relating to the acquisitions less disposal of valuables component within gross capital formation (GCF). These (net) movements do not affect headline GDP, but they are reflected in the composition of GDP growth.

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GDP rose 0.3% in December
11 February 2020
 GDP rose 0.3% (MOM) in December, after a fall of 0.3% in November, and a rise of 0.2% in October. It was 1.2% (YOY) higher (table GVA3). Within GDP with all main sectors showed some growth , though it was very weak in production:
·       The services sector grew by 0.3% (MOM) after contracting by 0.4% (MOM) in November. The information and communication sector was the biggest positive contributor on the month, driven by motion pictures.
·       Production rose by 0.1% (MOM) in December 2019, with manufacturing providing the largest upward contribution, rising by 0.3%. Manufacturing’s increase reflected improved transport equipment output (which rose by 3.2%).  
·       Construction grew by 0.4% (MOM), driven by growth in non-housing repair and maintenance, infrastructure, private commercial and public new housing. Construction increased by 2.4% (revised up) in November.

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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