Chief Economist’s Weekly Brief – A decent run

It’s ten quarters of growth and counting for the UK economy. Q2’s 0.7% expansion means we’re in the midst of our third longest growth spell since 1955. And there’s even a ray of hope on the economy’s productivity problem. US growth was also decent in Q2. But it may take a bit more than that for the Fed to raise rates.
Download a PDF version of the Chief Economist's Weekly Brief
Finally. UK economic output expanded by 0.7% in Q2. That takes the annual growth to 2.6%, matching the post-war average. Services did fine while industrial production, up 1%q/q, outperformed, thanks to a bumper quarter for oil output. Two pieces of welcome news stand out. First, our average standard of living, or GDP per head, has finally recovered it’s pre-crisis peak. Second, we managed to raise output without working more hours (perhaps even working fewer). In other words, our productivity rose, possibly quite strongly. Workers of Britain, pat yourself on the back.
Credit where it’s due. Mortgage approvals totalled 66k in June, a modest 2k rise from May. Compared to last year approvals were just 1.9% higher. But the improving trend seems set to continue. Consumer credit, meanwhile, is in the fast lane with growth of 7.6%y/y. Personal loans and overdrafts grew by 8.8%y/y. Little wonder when the rate on a £10k personal loan can be below that of a standard variable rate mortgage.
Debt accumulation…Half of UK households have some sort of consumer credit, be it a loan, credit card or overdraft. Amongst those that do the average household owes £3,500. The biggest increase in recent times has been amongst younger people. Average debt in the 16-24 age group doubled from £1,500 to £3,000 in the two years to 2012. Most of that increase is driven by student debt and changes to the way we pay for university. It has a lot further to rise.
…for a new generation. University students graduating this summer will be leaving with an average of around £38,500 owed to the Student Loan Company. Repayments will be calculated as 8% of graduates’ earnings above £21,000, so the more you earn the faster you repay. But plenty of graduates don’t earn much more than £21,000 every year. In fact the Institute for Fiscal Studies estimates that a graduate who was paid an average teacher’s wage would have £25,000 written off after 30 years of repayments.
Rupert Rigsby. Renting is getting more and more expensive. Private rents rose 2.5% in the 12 months to June 2015 across Great Britain. But regional differences are stark. Just like house prices, the biggest rises are to be found in London where rents rose 3.8%y/y. By contrast the North East and North West saw rises of 0.5%. Even excluding London, rents still rose 1.7%, well ahead of inflation. Another similarity with house prices is that rents outstrip wage growth, having risen 10% since January 2011. It keeps getting harder to accumulate the savings to make the transition from renter to owner.
Kremlinology. In olden times intelligence officers with magnifying glasses examined photographs of the Soviet Union’s leadership in attempts to figure out what was happening in that secretive state. Today’s equivalent is the parsing of central bank’s statements. Last week’s US Fed announcement is best seen as another stage in the process of preparing us for a rate rise. The Fed reckons economic conditions continue to improve. More of the same, especially a tighter job market and signs that inflation is rising from the floor, would convince rate setters to move. However, …
Hold fire. US GDP grew at an annualised rate of 2.3% in Q2. While up sharply from Q1’s weather-affected 0.6%, that’s more a solid than a stellar performance. The core personal consumption deflator – a measure of inflation to which the Fed pays close attention – was up just 1.3% on a year earlier, hardly a rate to cause anxiety among central bankers. Markets seem convinced rates will rise this year. But growth doesn’t yet appear to be bumping up against capacity constraints. Wages and salaries rose by the lowest quarterly amount since 1982 in Q2. The Fed could hold off for a while yet.
Summer shutdown. The labour market recovery that had barely begun in the eurozone appears to have stalled. Unemployment registered a figure of 11.1% for third month in a row in June. The number of unemployed across the single-currency bloc is still 6.5 million higher than it was on the eve of the crisis. Meanwhile the region’s rate of inflation remains subdued with prices rising 0.2% compared to last year. Deflation appears to have been averted, for now at least, in part helped by the fall in the euro (making imports more expensive). But can the European Central Bank get inflation back to its target of “below, but close to 2%” amidst signs of such weak demand?