Royal Bank of Scotland : The old hope - Economics Weekly

The Chancellor presented his Spending Review last week and took the opportunity to reshape the path for government spending. Better tax receipt projections and savings from lower debt interest payments gave him more room to manoeuvre than expected. He used two thirds of this windfall to slow the pace of spending cuts. Day-to-day departmental spending will now fall by 3% in real terms over the next 5 years, a lot less than the 9% fall in the last 5.

But there are big differences across the different areas of public spending. The NHS, defence, aid and schools budgets were all protected so the brunt was borne by other departments. Transport, business and justice fared worst with cuts of between 17%-37%, adding to already deep cuts those areas experienced in the previous Parliament. Proposed changes to tax credits were abandoned and a new tax, the apprenticeship levy, was introduced. We also had a surcharge to stamp duty of 3% for people buying additional homes.

The Office for Budget Responsibility (OBR) provides the Chancellor's growth projections and little has changed since its last forecast in July. After expanding by around 2.4%y/y this year, growth is expected to remain at a similar pace right through to 2020. But as with previous forecasts the key assumption is that productivity growth - the Achilles heel of the UK post-crisis recovery - accelerates sharply in the coming years to above 2%. That will be a major challenge, despite signs of an improvement in recent quarters. Once again so much of the forecast, including real wage growth and income tax receipts, hangs on this assumption. It remains the big hope in the Chancellor's plans.

For now at least growth is ticking along nicely thanks to a buoyant consumer. GDP growth in Q3 was confirmed as 0.5% from the previous quarter. Spending by households was up 0.8%. Business investment also had a good quarter rising 2.2%, but the trade deficit deteriorated as imports exceeded exports by £14bn. How sustainable is that mix of growth? Well it's hard to blame households for splashing the cash. More jobs and higher wages combined to push compensation of employees up 1.1% on the quarter, making it 4.5% higher than a year ago. With inflation so low that cash goes a long way.

The UK's entrepreneurial streak is alive and well. The number of new businesses in 2014 numbered 351k, which is the highest figure since comparable records began in 2000. The start-up rate (the number of new businesses as a proportion of all businesses) fell slightly from 14.1% to 13.7% but it's still a healthy clip. And it's in our nation's capital where the forces of creative destruction are most visible. London is home to the highest birth rate, but also the highest business death rate. It's just one of the reasons for the region's dynamism and ability to create new jobs and wealth.

Net long-term migration to the UK (i.e. net of those leaving the country) totalled 336k in the year ending June 2015, a 32% rise from the previous year and roughly equal to the population of Leicester. In gross terms immigration totalled 636k - more than Leicester and Derby combined. Work is the most common reason for migration. Almost 50% of the 636k migrated for work reasons with 64% of those having a definite job. It's also worth noting that fewer people are moving out of the UK, too. Emigration in recent quarters is at its lowest level since the turn of the century.

US data continues to point to decent growth. But as has been the case all year it isn't screaming that rate hikes are required now. US consumer spending rose less than forecast for the second month running in October, nudging up by just 0.1%. Meanwhile inflation remains far from worrying. The central bank's preferred measure of inflation showed prices rising 1.3%y/y in October, less than the 1.6% average reading of the past four years.

It was a mixed week for the Eurozone economy. On the plus side the composite Purchasing Managers Index - a survey of private sector activity - rose to its highest level since May 2011, suggesting economic growth, although modest, is continuing. On the other hand the number of unemployed in France reached a record level of 3.59 million. And economic threats to the eurozone from overseas remain pronounced. The European Central Bank's bi-annual Financial Stability Review stated that emerging market vulnerabilities had increased in recent months with China 'of particular concern'.