Royal Bank of Scotland : Economics Weekly - Statement of intent

The Office of Budget Responsibility is the Treasury's independent view on forecasting the economy and the public finances. Despite some downgrades to growth from 2016 onwards, the OBR envisages an economy humming along nicely at above 2% next year and beyond. It's a solid outlook but rests on one key assumption - real wage growth moves firmly into positive territory over the coming year providing a big relief for household finances.

It's a familiar message on the government's budget deficit - eliminating it is difficult and time-consuming. It is forecast to fall by just £6.3bn this year to £91.3bn. That's half the decline that was expected in March. Lower tax receipts are to blame. So ensuring the public finances move into annual surplus by 2018/19 rests on two things. Firstly, the departmental squeeze on spending has been tightened further from 2016/17. Second, lower government bond yields mean lower debt interest payments.

The headline grabbing announcement of the Autumn Statement was a reform to stamp duty. Each stamp duty rate will now be paid only on the particular slice of the selling price to which it applies, not the whole value of the property as per the current system. 98% of people who buy stand to benefit. But completing the deficit reduction journey and ensuring the UK can sit amongst the best-performing developed economies will take much more. It mainly rests on improving productivity. To that end, the Chancellor looked to provide a helping hand with support to small firms (extending Small Business Rate Relief and the Funding for Lending Scheme), investments in roads (£15bn in road infrastructure improvements already announced) and skills (£10k for post-graduate studies). 

Both the Halifax and Nationwide are in agreement. UK average house prices are slowing, though slowing from a pretty punchy 8.2%y/y and 8.5%y/y growth respectively. So prices continue to grow faster than incomes. And there is a chance that the recently announced reforms to stamp duty may inject a little further life into the market. But all indications remain that the UK's housing market is coming off the boil. The question is will it slow to a simmer, or start to run cold?

The typical household spent £517 a week in 2013, or just under £27,000 a year. That's less than the £28,000 they spent in 2001-02 (adjusted to 2013 prices), At £4,602, the biggest single outgoing for a typical household in 2013 was income tax. If our spending habits reflect our preferences, which they broadly should, then the hierarchy of wants in 21st Century Britain runs something like this: pay for housing first, then food shopping, followed by eating out, paying the bills, filling the car, going on holiday, saving for a pension and buying new clothes. Spending on the typical mortgage fell by 4.6% between 2011 and 2013, but the average spent on rent rose by 27%. The renter / owner divide continues to grow.

The UK is heading towards the year's end in fine fettle, according to the Purchasing Managers' Indices (PMI). Growth in service sector activity accelerated in November, the index rising from 56.2 to 58.6. Firms are hiring more people to meet demand. In manufacturing, the index increased from 53.3 to 53.5 on the back of stronger domestic demand.  Export markets remain weak. Although the construction index slipped from 61.4 to 59.4, it remained firmly in growth territory.

In contrast, the euro area continues to struggle. Activity growth slowed last month, the PMI falling from 52.2 to 51.2. That's growth, Jim, but not as we know it. Although Germany's performance improved, France, Ireland, Italy, and Spain all weakened. Employment growth remains slow and firms' selling prices fell, which bodes ill for deflation risk. It's time to press the "QE" button at ECB HQ.

US employers created a staggering 321,000 jobs in November and the statisticians raised their estimates for the previous two months by 44,000 jobs. There are also signs that wage growth is accelerating, although nowhere near a pace that would raise concerns about inflation. With unemployment at 5.8%, down from 7% this time last year, the Fed will be watching closely to work out when to raise rates. It's by no means a perfect guide, but the last time the US started a rate hiking cycle, in 2004, they did so when unemployment fell to 5.6%, not very far from where we are now. But this strong employment growth contrasts with the PMI surveys which suggested that growth is slowing. If they are correct, the US could be heading for its own productivity puzzle.