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Following Bank Rate increase to 0.5%, Bank says future rises will be ‘gradual’ and ‘limited’ 6th November 2017

Introduction

Much as expected, the MPC agreed to raise the Bank Rate from 0.25% to 0.5% at its meeting ending 1 November in order to nudge CPI inflation back to target.1 The rise was voted by a majority of 7-2. In addition, the MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases at £10bn and voted unanimously to maintain the stock of UK government bond purchases at £435bn. The rise, effective from 2 November, was the first rise since July 2007 when it was increased from 5.5% to 5.75%. The Bank Rate was then cut in stages to 0.25%: 5.5% (December 2007), 5.25% (February 2008), 5.0% (April 2008), 4.5% (October 2008), 3.0% (November 2008), 2.0% (December 2008), 1.5% (January 2009), 1.0% (February 2009), 0.5% (March 2009), 0.25% (August 2016). The Bank revised its forecasts only modestly in November compared with August. (See table 1 and chart 1 for GDP only.)2 It is now projecting GDP growth rates of 1.6% for 2017 (1.7% in August), 1.6% for 2018 (unchanged), 1.7% for 2019 (1.8%) and 1.7% for 2020 (first time forecast). Note the Bank expects a pick up in the YOY growth rate from 1.5% (itself upgraded since August) in 2017Q4 to 1.7% in 2018Q4. Concerning CPI inflation, there was a modest increase to the forecast for 2017Q4 but a modest decrease to the forecast for 2018Q4 and the Bank expects to be very near its 2% target in both 2019Q4 and 2020Q4. Concerning the unemployment rate, the Bank has (yet again) lowered its forecasts. Finally, the Bank noted that market expectations for the Bank Rate had moved higher since August. They are now (August data in brackets): 0.4% for 2017Q4, 0.7% for 2018Q4, 0.9% for 2019Q4 and 1.0% for 2020Q4. The Bank explained their forecasts and their policy decision:3-4

“GDP grows modestly over the next few years at a pace just above its reduced rate of potential. Consumption growth remains sluggish in the near term before rising, in line with household incomes. Net trade is bolstered by the strong global expansion and the past depreciation of sterling. Business investment is being affected by uncertainties around Brexit, but it continues to grow

Ruth Lea

Economic Adviser

Arbuthnot Banking Group

ruthlea@arbuthnot.co.uk

07800 608 674

PERSPECTIVES

By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group

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at a moderate pace, supported by strong global demand, high rates of profitability, the low cost of capital and limited spare capacity.”

“CPI inflation rose to 3.0% in September. The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices. On balance, inflation is expected to fall back over the next year and…approach the 2% target by the end of the forecast period.”

“The steady erosion of slack has reduced the degree to which it is appropriate for the MPC to accommodate an extended period of inflation above the target. Unemployment has fallen to a 42-year low and the MPC judges that the level of remaining slack is limited. …the MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to the target.”

Table 1 Bank of England’s economic forecast summary: November 2017 (August 2017 in brackets)

2017 2018 2019 2020

GDP growth rate (%) 1.6 (1.7) 1.6 (1.6) 1.7 (1.8) 1.7 (na)

2017Q4 2018Q4 2019Q4 2020Q4

GDP (YOY, %) 1.5 (1.3) 1.7 (1.8) 1.7 (1.7) 1.7 (na)

CPI inflation rate (%) 3.0 (2.8) 2.4 (2.5) 2.2 (2.2) 2.1 (na)

Unemployment rate (LFS, %) 4.2 (4.4) 4.2 (4.5) 4.2 (4.5) 4.3 (na)

Bank Rate (market expectations) 0.4 (0.3) 0.7 (0.5) 0.9 (0.7) 1.0 (na)

Source: Bank of England, Inflation Report, November 2017, modal projections for GDP, CPI inflation & LFS unemployment for quarterly forecasts. Chart 1 Bank of England forecasts for UK GDP growth (%) since May 2016

Sources: BoE Inflation Reports, May 2016, August 2016, November 2016, February 2017, May 2017, August 2017, November 2017. Concerning future rises the dovish Bank said:5

“All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.”

Moreover, the markets seem to agree (see yield curve, chart 2). But they look unduly dovish and it seems reasonable to project the Bank Rate at 0.75% by end-2018 and at 1.0% by end-2019.

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2017 2018 2019 2020

May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17

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Chart 2 UK instantaneous OIS nominal forward curve (%), months out to 60 months, at selected dates

Source: Bank of England, webpage on yield curves. OIS=overnight index swap rate (latest 2/11/17).

Economy update

Since our last Perspective data suggest the economy is continuing to hold up well, doubtless a factor behind the Bank’s increased interest rate.6 (See also economic data tracker, annex table 1.) The key indicator in the past fortnight was the preliminary GDP estimate for 2017Q3, which increased by a better-than-expected 0.4% (QOQ) in 2017Q2 to be 1.5% higher (YOY).7 This compares with quarterly rises of 0.3% in both 2017Q1 and 2017Q2. GDP per head was estimated to have increased by 0.3% in 2017Q3, to be 0.9% higher than a year earlier. The growth in 2017Q3 was partly driven by services (79% of GDP) which grew 0.4% (QOQ), the same rate as in 2017Q2. It remained the largest contributor to GDP growth. Industrial production (15% of GDP) rose 1.0%, within which manufacturing (10% of GDP) also increased 1.0%, after a weak second quarter. Construction (6% of GDP) contracted 0.7%, the second consecutive quarter of decline, but was still well above its pre-downturn peak. Other data included:

The ONS estimated that services output increased by 0.4% (QOQ) in the three months to August, to be 1.7% higher than a year earlier.8

But the number of mortgage approvals for house purchase slipped to 66,232 in September, compared with August’s 67,232, and were weaker than the average for the previous six months (66,867).9

Growth in unsecured consumer credit continues to rise buoyantly, increasing by 9.9% (YOY) in September, compared with August’s 10.0%. The amount outstanding was, however, still a tad down on the £208bn peak of September 2008.10 And the BoE’s latest survey on credit conditions suggested that growth could ease in forthcoming months.11-12 UK banks and building societies informed the BoE that they expected to tighten up on non-mortgage lending to households in the coming “three months”.

The much-followed Markit/CIPS surveys for October suggested manufacturing remained firm, construction was stronger and services picked up further.13-15 Markit commented “…the [PMI] data point to the economy growing at a quarterly rate of 0.5%, representing an encouragingly solid start to the fourth quarter.”

But car production fell 4.1% (YOY) in September, reflecting weaker domestic demand. Home demand was down 14.1% (YOY), whilst export demand was down just 1.1% (YOY).16

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2 Nov 2017

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The ONS’s Blue Book and Pink Book

The ONS released the 2017 Blue Book (National Accounts) and the 2017 Pink Book (Balance of Payments) on 31 October 2017.17-18 The publications’ data contained revisions which incorporated a wider range of information than in previous estimates and methodological improvements, as is customary. Whilst the revisions to overall GDP and expenditure data were fairly small, the revisions to the allocation of income and wealth between sectors of the economy were more material. See annex box 1 for details. The Pink Book contained the latest annual estimates of the balance of payments up to 2016. They showed the current account deficit widened in 2016 to £115.5bn (5.9% of nominal GDP), recording the largest deficit on record in both absolute terms and as a % of GDP (chart 3a). The worsening reflected the sharp deterioration in the UK’s net investment income with the primary income deficit widening in 2016 to £50.4bn (2.6% of nominal GDP), as UK earnings on assets abroad fell relative to the earnings on foreign investments in the UK. (Primary income relates mainly to investment income but also includes compensation for employees.) The worsening in the primary income deficit was caused mainly by a deterioration in net earnings on direct investments, which switched from a surplus to a deficit for the first time in 2016 since the series began in 1997.19 The decline in UK direct investment income abroad reflected a reduction in the rate of return on these investments. In addition, the rate of return on foreign investments in the UK increased, further contributing to the deficit in direct investment income. There was also a deterioration in the trade deficit (goods and services) in 2016 to £43.0bn (2.2% of nominal GDP), the largest trade deficit in six years, with the worsening goods deficit (to £135.4bn) more than offsetting the improvement in the services surplus (to £92.4bn). The secondary income deficit (comprising current transfers, including those with the EU) was fairly steady at £22.0bn in 2016. Despite the widening in the current account deficit, the UK’s stock position (net international investment position (NIIP)) improved substantially in 2016 with a narrowing in the net liability position to £21.3bn (1.1% of GDP).20 The increase in the sterling value of assets was mostly a result of the depreciation in sterling. Moreover, the Bank of England has noted that official estimates of NIIP use the book or purchase value of these assets. If adjustments are made for changes in the market value using movements in equity prices, the Bank concluded the NIIP remained significantly positive in 2016.21 The ONS’s latest trade data confirm that services as a proportion of trade are increasing and, concomitantly, the goods’ share is declining (chart 3b). Goods comprised over 62% of goods and services trade in 2004, but by 2016 the goods share was down to 55%. Chart 3a Current account & components, balances (£bn), 2004-2016

Goods

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Total

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Goods Services Primary income Secondary income Total

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Chart 3b Trade in goods & services: goods share (%), services share (%), 2004-2016

Source: ONS, “UK Balance of Payments, the Pink Book, 2017 edition”, October 2017.

UK current account: regional analysis

The ONS’s 2017 Pink Book provides data for an update of the regional analysis of the UK’s trade in goods and services. Charts 4a and 4b show the EU/non-EU split for the current account (see also annex table 2). They show that the UK continues to run huge and widening deficits with the EU, whilst the non-EU balance slipped into a small deficit in 2016 after recording modest surpluses (chart 4a). In 2016 the current account deficit with the EU was £111.2bn, comprising a huge visible trade deficit and deficits on primary income and secondary income, marginally offset by a fair surplus in services. For the non-EU deficits on goods, primary income and secondary income were almost offset by a large surplus on services (chat 4b). Turning to bilateral data (see annex table 2), Britain’s largest bilateral current account deficit in 2016 was, by far, with Germany (£34.3bn), followed by China (£24.7bn) and Spain (£14.4bn), which was just ahead of the Netherlands (£14.1bn). (Trade with the Netherlands and Belgium is distorted by the Rotterdam-Antwerp Effect, reflecting UK exports routed through these ports for other destinations.) There were also sizeable deficits with Norway (£11.5bn), Belgium (£11.3bn) and France (£7.4bn). The UK recorded surpluses with Ireland, (£14.8bn), the USA (£10.9bn), Australia (£6.5bn) and Switzerland (£5.6bn). In addition, there was a surplus with the Gulf countries of £13.3bn, £4.2bn with Saudi Arabia alone.

Goods

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Goods share of g&s Services share of g&s

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Chart 4a UK current account balance (£bn), EU and non-EU, 2004-2016

Chart 4b UK current account balance (£bn), EU and non-EU, 2016

Source: ONS, “UK Balance of Payments, the Pink Book, 2017 edition”, October 2017. Chart 5a shows how the share of exports of goods and services to the EU has fallen from 52.0% in 2004 to 43.1% in 2016. (Note that this proportion is also distorted upwards by the so-called Rotterdam-Antwerp effect, see above.) Moreover, the downward trend in the EU share can be expected to continue as growth prospects outside the EU outstrip those in the EU. Even the share of goods going to the EU has dropped below 50% (48.2% in 2016), whilst the share of faster growing services was 36.8% in 2016. Chart 5b shows the year-on-year growth rates from UK exports to the EU and to the non-EU. Even though the figures are erratic, average growth rates for trade to the non-EU clearly outstrip the EU. In 2016 non-EU trade was 8.3% higher (YOY), whilst EU trade grew just 2.8% (YOY).

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EU of which: Germany Non-EU of which: USA Total

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Chart 5a UK exports of goods, services, goods & services, EU shares (%), 2004-2016

Chart 5b Exports (goods & services) to EU and non-EU, annual growth rates (%), 2005-2016

Source: ONS, “UK Balance of Payments, the Pink Book, 2017 edition”, October 2017.

The World Bank’s “Doing Business” report: the UK ranked 7th best

We recently discussed a couple of surveys, both of which suggested that the UK economy was internationally very competitive:22

Specifically on the City, the last Financial Centre Futures (FCF) report confirmed that London remained the top global financial centre (GFC), followed by New York, Hong Kong, Singapore and Tokyo.23

The World Economic Forum (WEF)’s latest global competitiveness report concluded the UK was the world’s 8th most competitive economy.24 It had, however, slipped from 7th in the previous year, overtaken by Hong Kong.

The World Bank’s recent Doing Business 2018 report, a flagship publication, supported the view that, in many respects, the UK is indeed, internationally competitive.25 The 2018 report was the 15th in a series of annual reports “…measuring the regulations that enhance business activity and those that constrain it.” It

Goods

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Goods & services

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Exports to EU (%)

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covers 190 countries. Specifically, Doing Business measures regulations affecting 11 areas of the life of a business. Ten of these areas were included in this year’s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. (The World Bank also measures labour market regulation, which was not included in this year’s ranking.) The data were current as of 1 June 2017. Annex table 3 shows the World Bank’s rankings for selected countries. The top ten were: New Zealand (for the 2nd successive year), Singapore (for the 2nd successive year, having been 1st for some years), Denmark (the highest ranked EU country), South Korea, Hong Kong, the US, the UK, Norway, Georgia (a rapid climber) and Sweden. The UK’s solid 7th position was well ahead of the EU27’s “big 4” economies: Germany (20th), Spain (28th), France (31st) and Italy (46th). The least business-compatible EU countries were Greece (67th) and Malta (84th).

Brexit update

The key developments over past fortnight have been:

A joint statement from Brexit Secretary David Davis and the EU’s Chief Negotiator Michel Barnier said they would meet on 9-10 November, though it seems that it will only be a “stock-taking exercise”.26

The Committee stage of the “European Union (Withdrawal) Bill 2017-19” will begin in the House of Commons on 14 November. The second reading was passed comfortably on 11 September (actually past-midnight on 12 September).27

The Government has agreed to release information purporting to show the potential impact of Brexit on 58 economic sectors.28

Finally, an analysis by economists Hiau Looi Kee (World Bank), Alessandro Nicita (UNCTAD) concluded that “…if the UK fails to secure a new trade deal with the EU and must face tariffs with no preferences, the UK’s total exports (goods) to the EU would drop by at most 2%. The impact is small because the EU’s import demand for UK exports is fairly inelastic, especially for products that that may face higher tariffs.” They added “…contrary to experts’ advice on the would-be catastrophic collapse in trade [following a Brexit vote], the exports of the UK to the EU have in fact increased by 2% since July 2016 according to Eurostat. While the full impact of Brexit is yet to show, particularly because the UK has not yet officially left the EU and thus currently still enjoys tariff-free access to the EU market, there are reasons to be optimistic even if the divorce is finalised”.29

The ECB tapers QE…

As expected the ECB announced the halving of its bond-buying programme at its last meeting (26 October).30-31 From January 2018, it will reduce the amount of assets it buys every month to €30bn from the current level of €60bn. The ECB said the reduced programme would run to the end of September 2018, “or beyond, if necessary”. But it noted that it could increase bond-buying again if economic conditions become less favourable, or if no progress was likely to be made towards the ECB’s inflation target (2%). ECB President Mario Draghi told a press conference “…our programme is flexible enough that we can adjust its size smoothly”, adding that there would be no sudden end to bond-buying. The key interest rates were unchanged at the October meeting: 0.00% (on the main refinancing operations), 0.25% (on the marginal lending facility) and -0.40% (on the deposit facility). Suffice to say the ECB’s monetary policy remains remarkably accommodative, despite evidence that the Eurozone economy is picking (catching) up. Eurostat’s “flash” estimate for GDP for 2017Q3 showed a better-than-expected 0.6% (QOQ) increase.32 The “flash” estimates do not give the country breakdowns, but according to national sources growth was 0.5% (QOQ) in France and 0.8% (QOQ) in Spain.33-34 Unemployment is falling too, down to 8.9% in the Eurozone in September.35-36 Unemployment does,

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however, remain high in some Eurozone economies: Spain (16.7%), Italy (11.1%), France (9.7%), Finland (8.7%), Portugal (8.6%) and 21.0% (Greece, July). Meanwhile, Eurozone CPI inflation remains stubbornly low, presenting the ECB with a dilemma. It fell in October to 1.4% (1.5% in September), with the core rate down to 0.9% (1.1% in September).37

…whilst the Fed has a new chairman

President Trump nominated former investment banker Jerome (Jay) Powell as the new chairman of the Federal Reserve on 2 November, to replace the incumbent Janet Yellen whose term expires in February 2018. The nomination is expected to be confirmed by the Senate. Concerning monetary policy, he is seen as the “status quo” candidate and is broadly expected to maintain the Fed’s policy of gradually tightening monetary policy.38-39 The Fed did not raise rates at its last meeting (31 October-1 November), but is widely expected to do so at its December meeting (12-13 December).40-41 At the time of the September Fed meeting, expectations were for increases in the Fed Funds rate to 1.25%-1.5% by end-2017 (compared with the current 1.0%-1.25%) and to 2.0%-2.25% by end-2018.42-43 The rate increases are all the more likely given the strong GDP figure for 2017Q3. GDP rose at a better-than-expected 3.0% (annualised) after a buoyant 3.1% in 2017Q2.44 There was some deceleration in consumer spending growth in the quarter (possibly reflecting the impact of the hurricanes which battered several states in the quarter) and construction spending was easier, but exports and business investment were firmer. However, October’s US employment data fell short of expectations after the non-farm payroll increased by 261,000, compared with market expectations of 310,000.45 Markets had expected a rebound from September when hurricanes depressed hiring. Average hourly earnings also missed expectations growing by 2.4% (YOY), compared with the expected 2.7% (YOY). But the US jobless rate fell to 4.1% in October, the lowest rate since 2000 and the weaker-than-expected employment report is unlikely to derail the expected December increase in interest rates.

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References

1. Bank of England, “Monetary policy summary & minutes of the MPC meeting ending 1 November 2017”, 2 November 2017.

2. Bank of England, Inflation Report, November 2017, 2 November 2017. 3. Bank of England, “Monetary policy summary & minutes of the MPC meeting ending 1 November 2017”,

2 November 2017. 4. Bank of England, Inflation Report press conference, Opening remarks by the Governor, 2 November

2017. 5. Bank of England, “Monetary policy summary & minutes of the MPC meeting ending 1 November 2017”,

2 November 2017. 6. Ruth Lea, “Households’ spending power: real earnings tell only part of the story”, Arbuthnot Banking

Group, 23 October 2017. 7. ONS, “GDP, preliminary estimate, 2017Q3”, 25 October 2017. The preliminary estimate is based on

output data and there is no breakdown by expenditure components. 8. ONS, “UK index of services, August 2017”, 25 October 2017. 9. Bank of England, “Money and credit, September 2017”, 30 October 2017. 10. Bank of England, “Money and credit, September 2017”, 30 October 2017. 11. Bank of England, “Credit conditions survey”, 12 October 2017. 12. BBC, “UK lenders cutting back on unsecured loans, says Bank”, 12 October 2017. 13. Markit/CIPS UK manufacturing PMI, “UK manufacturing makes positive start to final quarter despite

rising price pressures, 1 November 2017. 14. Markit/CIPS UK construction PMI, “Construction activity rises slightly in October, but optimism falls to

lowest for almost 5 years”, 2 November 2017. 15. Markit/CIPS UK services PMI, “Strongest rate of business activity growth for 6 months in October,” 3

November 2017. 16. SMMT, “UK car production reverses in September as domestic decline drives fall”, 26 October 2017. 17. ONS, “UK National Accounts, The Blue Book: 2017”, 31 October 2017. 18. ONS, “UK Balance of Payments, The Pink Book: 2017”, 31 October 2017. 19. Direct investments (net): net investment by UK/foreign companies in their foreign/UK branches,

subsidiaries or associated companies. A direct investment in a company means that the investor has a significant influence on the operations of the company, defined as having an equity interest in an enterprise resident in another country of 10% or more of the ordinary shares or voting stock.

20. Ruth Lea, “Britain’s external deficit: large and widening”, Arbuthnot Banking Group, 21 December 2015, discussed NIIP.

21. Bank of England, “Inflation Report, November 2017: revisions to the National Accounts and the Balance of Payments”, 2 November 2017. See also annex box 1.

22. Ruth Lea, “The UK economy: productivity growth continues to disappoint”, Arbuthnot Banking Group, 9 October 2017.

23. Financial Centre Futures (Z/Yen and China Development Institute), Global Financial Centres Index report, September 2017 (GFCI22).

24. WEF, “Global Competitiveness Report 2017-2018”, September 2017. 25. World Bank, “Doing Business 2018, Reforming to Create Jobs”, 31 October 2017. 26. Daily Telegraph, “Brussels furious as UK ‘admits next round of Brexit talks will only be talks about

talks’”, 3 November 2017. 27. Ruth Lea, “The UK economy: still growing and fair prospects in 2018”, Arbuthnot Banking Group, 25

September 2017, discussed the second reading. 28. BBC, “Brexit studies details ‘will be published’”, 2 November 2017, reported that “…Ministers had

argued that releasing the economic impact studies would undermine their Brexit negotiating position”. 29. Hiau Looi Kee (World Bank), Alessandro Nicita (UNCTAD), “Short-term impact of Brexit on the UK’s

export of goods”, CEPR’s policy portal, 22 October 2017. 30. ECB, Press conference, 26 October 2016. 31. BBC, “ECB to halve €60bn bond-buying programme”, 26 October 2017.

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32. Eurostat, “GDP up by 0.6% in both the euro area and the EU28”, flash estimates for 2017Q3, 31 October 2017.

33. BBC, “Eurozone growth exceeds expectations”, 31 October 2017. Also, Greek GDP grew 0.4% (QOQ) in 2017Q1.

34. Forex factory, for Spain’s growth rate. 35. Eurostat, “Euro area unemployment at 8.9%, September 2017”, 31 October 2017. 36. CityAM, “Europe growth continues with jobs on the up”, 1 November 2017, reported “…unemployment

fell to lowest in almost 9 years in September – 8.9%, lowest since January 2009”. 37. Eurostat, “Euro area annual inflation down to 1.4%, October, flash estimate”, 31 October 2017. 38. BBC, “Donald Trump nominates Jerome Powell as Fed chair”, 2 November 2017. 39. Times, “‘Real-world’ Powell replaces Yellen at Fed”, 3 November 2017. 40. Board of Governors of the Federal Reserve System, “Implementation note, press release”, 1 November

2017. 41. BBC, “Fed holds interest rates steady for now”, 1 November 2017. 42. Federal Reserve website, 20 September 2017. 43. Ruth Lea, “The UK economy: still growing and fair prospects in 2018”, Arbuthnot Banking Group, 25

September 2017, discussed the Fed’s September meeting. 44. CNBC, “First reading on third-quarter GDP up 3.0%, vs 2.5% rise expected”, 27 October 2017. 45. BBC, “US jobs growth in October falls short of forecasts”, 3 November 2017.

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Annex

Table 1 Economic data tracker

Date Release Source Quarter Outcome

5 Oct New car registrations (Sep) SMMT 2017Q3 426,170 (-9.3% (YOY)), significant fall

5 Oct New car registrations (Jan-Sep 2017)

SMMT … 2.066mn (-3.9% (YOY))

6 Oct Labour productivity (2017Q2)

ONS 2017Q2 Output per hour: -0.1% (QOQ)

10 Oct Index of production (August) ONS 2017Q3 Production (Aug): +0.2% (MOM), +1.6% (YOY)

10 Oct Manufacturing output (August)

ONS 2017Q3 Manufacturing output (Aug): +0.4% (MOM), +2.8% (YOY)

10 Oct Construction output (August)

ONS 2017Q3 Output (Aug): +0.6% (MOM), +3.5% (YOY)

10 Oct UK trade in goods and services (August)

ONS 2017Q3 Trade deficit: £5.6bn (Aug), £4.2bn (Jul)

10 Oct UK trade in goods (August) ONS 2017Q3 Visible trade deficit: £14.2bn (Aug), £12.8bn (Jul)

10 Oct UK trade in services (August) ONS 2017Q3 Services surplus: £8.6bn (Aug), £8.6bn (Jul)

10 Oct Monthly GDP estimates (2017Q3)

NIESR 2017Q3 Growth rate: +0.4% (2017Q3, QOQ)

17 Oct CPIH (Sep) ONS 2017Q3 YOY inflation: 2.8% (Sep), 2.7% (Aug)

17 Oct CPI (Sep) ONS 2017Q3 YOY inflation: 3.0% (Sep), 2.9% (Aug)

17 Oct PPI (output) (Sep) ONS 2017Q3 YOY inflation: 3.3% (Sep), 3.4% (Aug)

17 Oct PPI (input) (Sep) ONS 2017Q3 YOY inflation: 8.4% (Sep), 8.4% (Aug)

17 Oct PPI (input, imported) (Sep) ONS 2017Q3 YOY inflation: 7.9% (Sep), 7.9% (Aug)

17 Oct House prices (Aug, official) ONS 2017Q3 YOY inflation: 5.0% (Aug), 4.5% (Jul), market has cooled

18 Oct Employment (3 months to Aug)

ONS 2017Q3 +94k (QOQ), +317k (YOY), still very robust.

18 Oct Unemployment (3 months to Aug)

ONS 2017Q3 -52k (QOQ), -215k (YOY)

18 Oct Unemployment rate (3 months to Aug)

ONS 2017Q3 4.3%, compared with 4.0% a year earlier, joint lowest rate since 1975

18 Oct Vacancies (3 months to Sep) ONS 2017Q3 Total vacancies: 783k, 3k (QOQ), 32k (YOY)

18 Oct Earnings (3 months to Aug) ONS 2017Q3 2.2% (YOY, total pay, including bonuses), 2.1% (YOY, regular pay, excluding bonuses), generally weak.

19 Oct Retail sales (2017Q3) ONS 2017Q3 Volume: +0.6% (MOM), 1.5% (YOY)

19 Oct Retail sales (September) ONS 2017Q3 Volume: -0.8% (MOM), 1.2% (YOY)

20 Oct Public Sector Net Borrowing (PSNB) (September)

ONS 2017Q3 +£5.9bn (Sep 2017), compared with +£6.6bn (Sep 2016).

20 Oct Public Sector Net Borrowing (PSNB) (FY to date)

ONS FY2017 £32.5bn (Apr-Sep 2017), compared with £35.0bn (Apr-Sep 2016)

20 Oct Public sector finances, public sector net debt (PSND) (September)

ONS 2017Q3 £1,785.3bn (end-Sep 2017, 87.2% of GDP), compared with £1,640.1bn (end-Sep 2016, 82.8% of GDP)

26 Oct Car production (Sep) SMMT 2017Q3 -4.1% (YOY). Home (-14.2%), export (-1.1%)

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26 Oct Car production (Jan-Sep 2017)

SMMT … -2.2% (YOY). Home (-7.2%), export (-0.7%)

25 Oct GDP (2017Q2, 3rd estimate) ONS 2017Q3 0.4% (QOQ), 1.5 % (YOY)

25 Oct GDP: output breakdown ONS 2017Q3 Services: 0.4% (QOQ); production: 1.0% (QOQ); construction: -0.7% (QOQ)

25 Oct Services (August) ONS 2017Q3 0.2% (MOM), +1.4% (YOY)

30 Oct Mortgage approvals for house purchase (Sep)

BoE 2017Q3 66,232 (Sep), after 67,232 (Aug), compared with 66,867 (average of previous 6 months)

30 Oct Total lending to individuals (Sep), of which:

BoE 2017Q3 Growth rate (YOY): 4.0% (Sep), 4.0% (Aug)

30 Oct Secured on dwellings BoE 2017Q3 Growth rate (YOY): 3.2% (Sep), 3.1% (Aug)

30 Oct Unsecured credit BoE 2017Q3 Growth rate (YOY): 9.9% (Sep), 10.0% (Aug)

30 Oct Total loans to non-financial businesses (Sep)

BoE 2017Q3 Growth rate (YOY): 2.6% (Sep), 3.2% (Aug)

1 Nov Manufacturing PMI (Oct) Markit-CIPS

2017Q4 56.3 (Oct), 56.0 (Sep), firm

2 Nov Construction PMI (Oct) Markit-CIPS

2017Q4 50.8 (Oct), 48.1 (Sep), weak

3 Nov Services PMI (Oct) Markit-CIPS

2017Q4 55.6 (Oct), 53.6 (Sep), continued growth

Sources include ONS website. Box 1 ONS’s Blue Book and Pink Book: revisions to the allocation of income and wealth between sectors of the economy

Revisions to the sectoral allocation of income

There were two key revisions to the allocation of income:

The first was a reallocation of income from the corporate to the household sector:

The ONS has switched to using HMRC tax data to estimate dividend income. Those data suggest that household dividend income has risen sharply over the past two decades, from around 1.7% of pre-tax household income in 1997 to 4.5% in 2016, as an increasing number of the self-employed have chosen to incorporate their businesses and to take part of their income in the form of dividends.

The upward revision to dividend income has led to the household saving ratio also being revised up. As a result, the household financial balance (which captures the difference between household saving and investment) is now estimated to have been positive rather than negative over much of the recent past. These revisions are significant and suggest that the household sector is more financially resilient than previously believed.

The counterpart to the rise in household dividend income has been a fall in the income of companies who have paid out those dividends. That revision has pushed down on the corporate financial balance, which is now estimated to have been negative over most of the past five years.

The second key revision primarily affected the allocation of income between the corporate sector and the rest of the world:

The ONS has revised up the amount of interest that is estimated to have been paid on UK corporate bonds. That has further reduced corporate sector income and thus the corporate financial balance, since companies are now estimated to have been paying more interest on their debt. A significant proportion of those higher interest payments are estimated to have been paid abroad.

As a result, the current account deficit, as a proportion of GDP, has been revised around 1 percentage point wider on average since 2006. The current account deficit is estimated to have

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widened to 4.6% of GDP in 2017Q2, from 4.4% in 2017Q1 (compared with 3.4% in the 2017Q1 data available at the time of the Bank’s August Inflation Report).

These revisions reflect a more negative balance on primary income, which is the net value of investment income received by UK residents.

In contrast, the trade balance was broadly unrevised.

Revisions to the sectoral allocation of wealth

The Blue Book and the Pink Book also contained revisions to the allocation of wealth between sectors of the economy.

While estimates of household debt are broadly unchanged from previously published data, the stock of household financial assets has been revised down by £96bn in 2016, or 2% of household net financial wealth. Most of that downward revision reflects lower estimated entitlements from defined contribution pension schemes as a result of a switch to using data from The Pensions Regulator. Those lower pension entitlements have correspondingly raised the net wealth of the corporate sector.

The changes incorporated in the Pink Book also have implications for the net international investment position (NIIP), which is the stock of UK foreign assets less the liabilities owed to other countries. Since those assets, net of liabilities, can be used to finance the current account deficit, the level of the NIIP may affect investors’ perceptions of how sustainable a given current account deficit is likely to be.

The official measure of the NIIP in 2016 has been revised down by 20% of GDP. That downward revision primarily reflects updated benchmarking of share ownership using the 2012 and 2014 Share Ownership Surveys, which suggest that the value of UK equities held overseas is higher than previously thought. The counterpart to that higher wealth held overseas is a smaller amount of wealth held by financial corporations in the United Kingdom.

Overall, the NIIP is now estimated to be slightly negative as a share of annual GDP. The values of foreign direct investment (FDI) assets and liabilities within that are, however, difficult to measure accurately.

Official estimates use the book or purchase value of these assets. Another approach is to try to adjust for changes in the market value using movements in equity prices. One such measure suggests that, despite the downward revision, the NIIP remains significantly positive, at around 75% of GDP.

Source: Bank of England, “Inflation Report, November 2017: revisions to the National Accounts and the Balance of Payments”, 2 November 2017. Ruth Lea, “Households’ spending power: real earnings tell only part of the story”, Arbuthnot Banking Group, 23 October 2017, touched on the changed treatment of dividend payments. Table 2 UK current account balance (£bn), selected countries, 2016

Goods Services Primary income

Secondary income

Total current account

EU, of which: -96.5 14.3 -18.5 -10.6 -111.2

Belgium -11.7 1.3 -1.1 0.2 -11.3

France -5.5 1.7 -3.6 -0.1 -7.4

Germany -32.7 6.7 -8.4 0.1 -34.3

Ireland 3.7 2.2 9.5 -0.6 14.8

Italy -7.4 2.1 -1.2 0 -6.6

Netherlands -17.5 6.2 -3.1 0.3 -14.1

Spain -5.1 -8.3 -0.9 -0.1 -14.4

Non-EU, of which:

-38.9 78.1 -31.9 -11.4 -4.3

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Norway -10.6 1.3 -2.3 0 -11.5

Switzerland -1.5 8.8 -1.6 0 5.6

USA 10.8 22.5 -23.4 1.1 10.9

China, PRC -27.1 1.6 1.0 -0.3 -24.7

Japan -3.2 4.2 -5.8 0.1 -3.7

Saudi Arabia 3.0 1.0 -0.4 0.6 4.2

Residual Gulf Arabian countries

4.7 4.3 0.4 -0.3 9.1

Australia 2.0 2.1 2.4 -0.1 6.5

Total -135.4 92.4 -50.4 -22.0 -115.5

Source: ONS, “UK Balance of Payments, the Pink Book, 2017 edition”, October 2017. The residual Gulf Arabian countries are Kuwait, Bahrain, Iraq, Oman, Qatar and the UAE. Table 3 World Bank: Doing Business, rankings, selected countries

2018 ranking (change on 2017)

2017 ranking

New Zealand 1 1

Singapore 2 2

Denmark* 3 3

South Korea 4 (+1) 5

Hong Kong 5 (-1) 4

US 6 (+2) 8

UK 7 7

Norway 8 (-2) 6

Georgia 9 (+7) 16

Sweden* 10 (-1) 9

Finland* 13 13

Australia 14 (+1) 15

Taiwan 15 (-4) 11

Ireland* 17 (+1) 18

Canada 18 (+4) 22

Germany* 20 (-3) 17

Malaysia 24 (-1) 23

Poland* 27 (-3) 24

Spain* 28 (+4) 32

France* 31 (-2) 29

Netherlands* 32 (-4) 28

Switzerland 33 (-2) 31

Japan 34 34

Russia 35 (+5) 40

Romania* 45 (-9) 36

Italy* 46 (+4) 50

Mexico 49 (-2) 47

Belgium* 52 (-10) 42

Turkey 60 (+9) 69

Greece* 67 (-6) 61

Indonesia 72 (+19) 91

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China 78 78

South Africa 82 (-8) 74

India 100 (+30) 130

Venezuela 188 (-1) 187

Somalia 190 190

Source: World Bank, “Doing Business 2018, Reforming to Create Jobs”, 31 October 2017. EU27 countries marked with an asterisk.