Not so long ago its supporters claimed the superiority of the “European model” over the “Anglo-Saxon” one. No longer, with the limping euro area economy enduring a torrid time. In contrast, the UK and the US are motoring along nicely. But as the UK’s weakening trade performance shows, there is no room for schadenfreude: the biggest risk to UK growth is what happens in the euro area. We might not be in the euro, but our prospects are intimately bound up with it.
More Than This
The Eurozone composite Purchasing Managers’ Index (PMI) was unchanged between September and October at 52. That may seem like a small victory given the recent deterioration in the Eurozone's growth outlook but it's very far from what the Eurozone needs to alleviate high unemployment, slow growth and the threat of deflation.
The country breakdown tells the same old story. Germany is holding up, France is looking weak and Spain is the relative outperformer. The Eurozone's report card for 2014 can already be written: "must do better."
But This Isn't It
The European Central Bank (ECB) announced no new measures at last week's meeting. Instead, there were reassuring words. The ECB underlined its determination to continue purchasing financial assets until it raises its holdings to €3 trillion from the current €2 trillion. And it reiterated that it stands ready to adopt full-blown quantitative easing if economic conditions deteriorate. It's a move in the right direction, but the Eurozone's struggles require more.
Still On Hold
It was “no change” in Threadneedle Street as Bank Rate was held at 0.5% for a 68th consecutive month. While the Monetary Policy Committee has been divided on whether rates should increase – we won’t know the vote at last week’s meeting until next week – markets are increasingly convinced that the first rise is drifting further into the future.
Q4 2015 is the most likely date but there is roughly a one in three chance that Bank Rate will still be at 0.5% in mid-2016. Weak wage pressure, falling commodity prices and concerns about growth in the euro area and Asia make investors think the Bank of England will stay away from the “up” switch for some time yet.
Softer
The composite UK manufacturing and services PMI fell from 57.5 to 55.8 in October, its lowest level since May 2013. But it's not time to worry yet. 55.8 is above the long-term average and growth had been expected to moderate. What’s more, there remain clear signs of good health. The service sector is reporting plenty of new business and remains keen to recruit. Growth may be coming down, but it's not throwing in the towel.
Slower
UK industrial production grew by 1.5%y/y in September, a slight slowdown on August. Production growth was slower than estimated in the first release of the GDP numbers for Q3, so we will need to hope that the service sector estimate holds up, or Q3 will turn out to have been weaker than first thought.
And Slower
House price growth continued to slow in October, according to the Halifax. Average UK prices were up 8.8%y/y, a deceleration that began in the summer. This is very much in line with the slowdown in mortgage approvals and the weaker expectations for growth from the RICS survey. At £186k, the average price of a place to live is currently five times average earnings, where it has been for the past four months. Expect further moderation.
Deterioration
The UK’s trade deficit widened in Q3. UK exporters are facing their toughest period since 2009 with weaker demand from Europe and China, and the value of the euro falling. In terms of the overall current account deficit, however, it is increasingly the income deficit that matters more than the balance of trade in goods and services.
In particular, a 50% fall in the net income received from debt securities drove the UK's current account to over 5% of GDP in Q2. If we are to rebalance, it will have to be on both real and financial fronts.
Steady
The US continues to make steady if unspectacular progress. The Institute of Supply Management (ISM) reported service sector growth for a 57th consecutive month, although at a slower rate than in September. The Index fell 1.5 to 58.6. Manufacturing growth accelerated by 2.4 to 59.0. Both surveys indicated further rises in employment and slowing price inflation.
The US jobs machine kept purring, if not motoring, with employment up 214,000m/m and the unemployment rate falling to 5.8%, its lowest level since June 2008. Wages are rising but with productivity increasing, too, there are no signs of growth bumping up against a shortage of labour, so no reason for the Fed to think about raising rates soon.
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