UK Q3 GDP Confirmed 0.8% Growth

United Kingdom: UK domestic economy surges ahead but exports are still weighing negatively on the recovery

The Q3 GDP revision confirmed growth at 0.8%. The composition of growth showed that the domestic economy is growing strongly with better than expected private consumption growth (0.8% quarter on quarter), investment growth of 1.4% (helped by a good gain in construction) and Government spending rising by 0.5%. This all contributed to a robust increase in domestic demand in the quarter. In contrast, the external sector proved a drag on growth with exports down 2.4% in the quarter, while imports rose 0.4% meaning that net trade detracted 0.9% from growth. Bank of England Governor, Mr. Mark Carney, in testimony to the Treasury Select Committee, highlighted the UK economy’s exposure to Europe as the biggest risk to the recovery due to Europe’s low inflation, fragile recovery, high unemployment and strong currency.

The BoE also announced changes in the Funding for Lending Scheme (FLS) from 2014; the scheme will be closed to loans related to household borrowing and only open for business lending. This move comes as a response to a recent sizeable gain in UK housing prices which the Bank has been closely monitoring. The latest NHPI (National House Price Index) showed house prices increased by another 0.6% this month bringing the annual gain to 6.5%.

The GDP data and the Bank of England’s "macro-prudential measures" to prevent the housing market overheating gave a slight boost to sterling, which gained on the dollar and the euro to $1.63 and circa 83.5p respectively.

United States: Mixed US data points to a continued recovery

It was a rather uneventful week for US markets due to the Thanksgiving holiday on Thursday. However, the data released this week was varied. Pending home sales fell again in October but building permits rose in the month, while the CaseShiller 20-City Price Index showed a 1% rise in housing prices in the three months to September – indicating that the pace of the housing market recovery may be shifting down a gear. The rate of home price increases has slowed from the start of the year suggesting that the rise in mortgage rates and weakening affordability recently has affected the market somewhat. Elsewhere, the October’s durable goods orders showed a decline of 2.0%, but this followed a 4.1% gain in September. A bigger cause for concern was the 1.2% fall in capital goods orders (ex defence and aircraft), which is a proxy for investment in the economy. The fall in October follows a 1.4% fall in September and indicates that businesses may have been cautious in their outlooks given the political instability in Washington and the threat of tapering. Other US data was more positive with initial jobless claims falling to a two-month low. Leading indicators also improved by 0.2% in October, the fourth consecutive monthly gain. The index was boosted by rising equities, higher home values and an easier credit environment. The index should be helped again in November by rising equities as both the Dow Jones and S&P 500 closed at fresh record highs on Wednesday ahead of Thanksgiving and rose again in early Friday trading.

Europe: Annual inflation ticks back up in November

There was a welcomed increase in the early inflation data for November to 0.9%, following the sharp fall in the annual rate of HICP inflation to 0.7% in October. The unexpectedly strong rise in inflation was spread across several member states – most notably Germany, where the annual rate of inflation rose to 1.6% from 1.2% in October. This signals that there is some inflationary pressure in Europe and relieves some of the pressure on the ECB to take further action. However, regardless of this data, the inflationary environment in Europe remains very subdued and it is quite probable that the ECB may have to act again to ease policy in 2014 as inflation is still running at less than half the Bank’s target rate of below, but close to, 2%. Several ECB members suggested this week that the bank would look at further measures, with Bank of France Governor Noyer saying that the ‘ECB would act again’ if inflation fell further. While Mr Asmussen (executive board member) said that the Bank was ‘technically ready’ for a negative deposit rate (the rate the ECB pays on commercial bank’s deposits), a cut in which may be the Bank’s next move. Contrastingly, Mr Constancio said that a negative rate is only for ‘extreme situations’ and the Bank is not near a decision on it.

The somewhat reduced chance of ECB easing policy supported the Euro which rose to over $1.36 versus the dollar, and equities also had a good week with the Eurostoxx gaining over 1.5%.