Royal Bank of Scotland : Economics Weekly - Fill your tanks

Oil's slide from $110 per barrel in the summer to less than $65 now has many causes, though the biggest catalyst is rising US shale oil production. The US has accounted for almost 90% of the rise in global output this year which when combined with sluggish demand has turned prices around. Swings in oil prices used to be a great fear for economies around the world, but now we are much less exposed to this volatility. Research from the Bank of England suggests the 40% slide should add about 0.3% to GDP growth next year. That's welcome, but doesn't herald a boom. Please see the attached note for more detail on the recent fall in the price of oil. 

It's all about income growth. According to the Bank of England's NMG survey, if interest rates were to rise by two percentage points with no increase in incomes, then 12% of households would have to take some kind of action to be able to meet their debt repayments. But if incomes rose 10% over the same period, just 4% of households would have to resort to finding extra work, cutting back on other spending or other similar measures. And while a rate rise would be tough for the 60% of borrowers who say they would decide to cut spending, 10% of the savers in the survey said that they would look to increase spending. Given this, the BoE estimates that a two percentage point rise in rates would cut overall household spending by 1%, something which will not go unnoticed by the members of the MPC.

Retail sales rose by 0.9% on a like-for-like basis in November. That compares to a 0.6% rise in November 2013. The reason for this rise, according to the British Retail Consortium which helps compile the figures, was Black Friday. And indeed household appliances (which includes 50" TVs) was the best performing category. Black Friday is a US import, a post-Thanksgiving sale heralding the start of the Christmas sales period. And in the UK, those giving thanks include electrical-good retailers, the larger supermarkets and of course consumers who like joining in the rush for bargains. This was the first year that Black Friday captured the imagination, and cash, of UK consumers. But whether it actually boosted sales, rather than simply bringing them forward, remains to be seen.

Neither British industry nor construction had a memorable start to Q4. British industrial output contracted by 0.1% between September and October, with manufacturing down by 0.7%. Similarly, output in the construction sector declined by 2.2%, with housebuilding down 0.8% and spending on new infrastructure projects down 1.8%. Before we start reaching for the panic button we should note that whilst growth is slowing, output is still higher than it was a year ago. Slower growth is something we're going to need to get used to as we look ahead to 2015.

MPC member Martin Weale shared his thoughts on the UK's poor productivity performance since the recession. Most analyses have focused on the domestic situation but Weale stresses that the UK's track record is by no means unusual internationally. Output per hour is lower than it was at the start of 2008, a situation also found in Germany and Norway. While US productivity barely paused during the recession and is now up 10%, there are the faintest signs there, too, of an emerging productivity puzzle. The MPC expects productivity to improve over the next two years but Weale highlights that expectations could be disappointed yet again. And if that happens, rates might need to rise earlier than currently expected.

wrote L.P. Hartley in The Go-Between. So, too remains London. The latest regional accounts show that UK gross value added per resident - roughly the amount produced in an area divided by the number of people living there - was £23,000 in 2013. It ranged from over £40,000 in London to under £17,000 in Wales. For local areas the gap was greater still: from £136,000 in Inner London, West to £11,000 in Anglesey. But remove London and the highest figure is under £39,000, in Berkshire. London is so different that it makes little sense to include it in comparisons of the performance of the UK's regions.

It will take more than a lower oil price to kick life into the Eurozone. The European Central Bank's latest auction of cheap loans to financial institutions was met with muted demand, as it was back in September. In other words, boosting lending across the region across is proving to be very challenging. Meanwhile, Eurozone industrial production in October disappointed. Output has flatlined since the middle of last year, is 4% below the post-crisis high reached in 2011 and 12% below the pre-crisis peak. It's clear that more policy firepower is required. The ECB will be giving outright quantitative easing serious consideration in the New YearDouble click to edit content...