Chief Economist’s Weekly Briefing – For better, for worse off


Rising inequality has been blamed for everything from slow growth to political earthquakes last year, but on at least one sensible measure income inequality in the UK is substantially lower than it was before the recession.

Falling inequality. The top 0.1% might be running away with it, but things are getting more even for the bulk of the UK population. Median household income was £26,300 in the last financial year, a rise of just over £600 or 2% after accounting for inflation. But the poorest fifth households saw their incomes rise by 5%, whilst the richest fifth experienced a 2% fall. This continues the trend seen since the recession of income growth being stronger for those lower down the pay scale than those at the top. Incomes of the bottom 20% are up 13% compared to 2007, yet the top 20% are still 3% below pre-crisis values. The issue of inequality in the UK is more complicated than most give it credit for.

Mixed messages. A mixed performance for UK industry in Q4. Production rose by 2.1% on the month in November, yet October was weak (down 1.2%) so there’s some catch-up involved. If production output rises at its average pace in December then the sector would have flat-lined in Q4. Construction continued to disappoint in November with activity down 0.2%. At least housebuilding was up by 1.2%. In sum, the UK economy continues to depend on services. If the current trends are maintained then overall the UK economy should have managed to grow by 0.5% in Q4 or 2% in 2016. Not bad.

Coining it in. The profitability of UK firms remained strong in Q3 2016 with no signs of a post-referendum hiccough. At 12.2%, the rate of return on capital was a shade lower than in H1 but still close to the highest levels seen since the late 1990s. Leading the pack was the dominant service sector which returned 18.7%. In contrast, the struggles of the offshore oil and gas industry in the face of a low oil price were evident in a return of just 1.6%.

J-low. Those waiting for a quick fix to the UK’s balance of payments may have to hang on a while longer. The UK’s trade deficit widened to £4.1bn in November. Exports are indeed rising, up almost 8% compared with the same period last year. It’s just imports are also up by a little bit more at around 10%. This is not unexpected and, over time, this balance should shift as a weaker pound encourages exports and lowers imports. It’s what economists called the J-curve – down then up. That’s the theory – and the hope – anyway.

Limitless, seemingly. UK house prices rose 2.7% in Q4, comfortably reversing, and then some, the modest 0.6% decline in Q3. Those hoping for a house price correction will have to keep waiting. Compared to the previous year house prices were 6.5% higher, streets ahead of earnings growth. Scotland experienced the fastest growth on the quarter with a 6.5% rise. The annual growth rate for London (7.0%) may have been the lowest since the middle of 2013 but prices are a staggering 38% above their pre-crisis peak, way out in front of the second strongest performer the South East (+26%).

Eastern promise. London and the South East are the dominant growth engines within the UK, but both had a poor showing in 2016, according to the PMIs at least. The two regions fell within the bottom half of the regional growth league as far as output was concerned, with London ranked 3rd from bottom. The East of England topped the chart (55.1) followed closely by the East & West Midlands and Wales. The East (54.2) also topped the league for job creation well ahead of the West and East Midlands. Scotland and the North East occupied the foot of both tables.

Detail in the retail. Northern Ireland firms finished 2016 on a high with output expanding at its fastest rate in almost 2½ years. December’s reading of 58.7 outshone the UK average (56.4), but NI’s growth is being fuelled by retail activity with sales hitting a record high of 67.8. Cross-border shopping boosted by a weak pound is a major factor. Strip out retail from NI’s PMI and output growth slows to 54.6. Inflationary pressures will act as a major speedbump for retailers and consumer spending in 2017.

Widening. The Eurozone is now into the fourth year of its recovery after the worst of the region’s crisis. When growth resumed in Q2 2013 unemployment stood at 12.1%. It now stands at an improved, but still elevated, 9.8%. In that same time the US has managed to reduce unemployment from 7.5% to 4.7%. Such is the improvement that some are warning of ‘tightness’ in the US labour market and the potential for inflation-generating wage hikes. The narrative around the Eurozone could scarcely be more different. 2017 should be the year of a policy rethink toward the single-currency area.

But you said…New credit into the Chinese economy was more than expected in December. All forms of new credit totalled 1.63 trn yuan (£192bn). It meant Q4 was stronger than both Q3 and Q2 for new credit. With lower real lending rates, improving profits and a slightly rosier manufacturing sector, the environment for borrowing has improved in recent months. But stronger credit growth is at odds with the government’s pledge to cool lending and curb financial risks and asset bubbles (namely property). It’s a familiar narrative. But will 2017 be the year that time is called on China’s credit deluge?

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