News

The Economy - December 2009

Economy shrinks less than thought
On 22 December 2009, the Office for National Statistics reported that UK gross domestic product (GDP) in volume terms fell by 0.2 percent compared with the previous quarter. This was revised from a fall of 0.3 percent published in November 2009. The level of GDP is now 5.1 percent lower than Q3 2008 and 6.0 percent below its peak in Q1 2008.

Other highlights from the ONS include:

The total volume of output in the production industries fell by 0.9 percent, within which energy extraction was down by 5.7 percent and manufacturing output fell by 0.2 percent;
Gross value added excluding oil and gas remained flat over the quarter;
Output of the service industries decreased by 0.2 percent;
The household saving ratio was 8.6 percent in the latest quarter compared with 7.6 percent in the previous quarter;
Real household disposable income rose by 1.2 percent in the latest quarter following a 1.7 percent increase in Q2 2009.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/qna1209.pdf
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-----------------------------------------------------------------------------------------------------------------------------------------Current account deficit grows
On 22 December 2009, the Office for National Statistics reported that the current account recorded a deficit of £4.7 billion in the third quarter of 2009, equating to -1.3 percent of GDP. This compares with a revised deficit of £4.4 billion (-1.3 percent of GDP) in the second quarter. A deficit of £1.6 billion was recorded with the EU compared with a deficit of £2.0 billion in the previous quarter.

Compared with the second quarter, the current account showed a lower surplus on income, which was partly offset by a fall in the deficit on current transfers together with an increase in the surplus on trade in services. The surplus on income fell by £1.5 billion to £6.7 billion, while the deficit on current transfers decreased by £0.6 billion to £3.6 billion and the surplus on trade in services increased by £0.4 billion to £11.8 billion. The deficit on trade in goods was little changed at £19.7 billion.

The current account balance has been revised from the first quarter of 2008. The current account balance now shows a deficit of £22.0 billion in 2008, equivalent to -1.5 percent of GDP.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/bop1209.pdf
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-----------------------------------------------------------------------------------------------------------------------------------------Bank of England unanimous in 0.5 percent rate hold
On 23 December 2009, the Monetary Policy Committee's minutes showed that all nine members voted to hold interest rates at its December meeting.

Minutes from the meeting also showed that the MPC was unanimous in voting to maintain the £200bn quantitative easing (QE), or asset buying, programme.

The MPC agreed that the medium-term outlook for inflation had not changed since its November inflation report.

Source and access to minutes available at: www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/index.htm
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-----------------------------------------------------------------------------------------------------------------------------------------November figures for the main high street banks
On 23 December 2009, the British Banking Association (BBA) published their statistics release for November 2009.

While mortgage lending continued to hold-up in November unsecured loans to consumers dropped further while personal deposits increased by less than in recent months. Loans to the corporate sector declined overall in November, though those to non-financial companies ticked up slightly.

The BBA statistics director reported that:

Household priorities are showing up in the November figures. Demand for new personal loans was weak and people are paying off debt or building savings in response to economic circumstances.
In the housing sector, prices have continued to edge up and approvals for house purchase are now back at a similar level to that of two years ago.
Re-mortgaging activity continues to run at a low level as borrowers revert to low standard variable rates or trackers from maturing fixed rate loans.
Lending to non-financial companies ticked up slightly in November, having declined in each of the previous two months.

Source: www.bba.org.uk/content/1/c6/01/70/91/November_2009_Monthly_Statistics_Release.pdf
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-----------------------------------------------------------------------------------------------------------------------------------------Fall in Services Index
On 23 December 2009, the Office for National Statistics (ONS) reported that the seasonally adjusted Index of Services in October 2009 fell by 3.7 percent compared with October 2008.

Four of the five components of the services sector decreased in the most recent month on a year earlier. The largest contribution to the decrease was business services and finance which fell by 6.0 percent. The only component which increased was distribution.

The ONS adds that output from distribution increased by 0.4 percent compared with October 2008. The largest contribution to the increase was retail which rose by 3.7 percent and motor trades which rose by 3.1 percent. Within motor trades the main increase was in vehicle maintenance and repair. Retail contributed 1.8 percentage points and motor trades 0.5 percentage points to the 0.4 percent most recent month on a year earlier increase

Source and access to full report available at: www.statistics.gov.uk/pdfdir/ios1209.pdf
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-----------------------------------------------------------------------------------------------------------------------------------------Business Leaders are confident about the future of their business, but not government economic policy
According to Ipsos MORI's annual Captains of Industry survey, Britain's business leaders are more optimistic about the economy improving than at any point in the last six years:

In 2008's survey, only four per cent of respondents believed that the UK economy would improve in 2009. This has risen to over a third (36 per cent), while the number that believe the economic situation will get worse next year has decreased by over two thirds to 30 per cent, falling behind the optimists for the first time since 2003;
Captains of industry are also far more positive about the prospects of their own companies, with 53 per cent believing that business will improve in 2010, up more than 30 percentage points on a year ago. Less than one in ten (eight per cent) believe that their situation will get worse;
In spite of the increased optimism, Britain's business leaders are still unconvinced by the government's response. Only one in five (20 per cent) believe that this government's policies will improve the state of the economy while 70 percent disagree.
Further pessimism is evident in concerns about government debt, which is the most important issue facing Britain today according to 48 per cent of respondents. Unemployment (26 per cent) and poor political leadership/lack of confidence in government (25 per cent) come in second and third, further highlighting the negative opinion.

For the full press release from Ipsos Mori, go to: www.ipsos-mori.com/newsevents/latestnews/newsitemdetail.aspx?oItemId=411
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-----------------------------------------------------------------------------------------------------------------------------------------Recovery in sight but stability is vital for manufacturers - EEF/BDO survey
Conditions in the UK's manufacturing sector have continued to improve in the final quarter of 2009 but signs for a strong rebound in 2010 remain elusive according to a major survey released by Engineering Employers' Federation (EEF), the manufacturers' organisation and BDO LLP. Conditions in the UK's manufacturing sector continued to improve in the fourth quarter, a major survey released by EEF and BDO LLP showed.

The fourth quarter survey confirms that the worst of the downturn is behind the sector and the weak pound and recovering world markets are beginning to have a positive impact. But confidence across manufacturing remains fragile, as companies anticipate other obstacles on the road out of recession, such as increased exchange rate volatility and potential supply chain risks.

EEF also warned that given the experience of previous recessions when investment took some three to four years to recover, the steep cutbacks seen during the current downturn present a significant threat to industry's longer term competitiveness.

Manufacturers are moving production back to the UK amid concerns about poor quality and higher freight costs, the report says:

One in seven companies has moved its manufacturing operations to the UK from abroad in the past two years;
The EEF said the UK had become "increasingly competitive and efficient" over the past few years;
Many companies have taken advantage of the low-cost emerging markets, both as market opportunities and also as a means of reducing costs, the EEF's chief economist has said.

Sources, various, including: http://news.bbc.co.uk/1/hi/business/8434458.stm and www.eef.org.uk/policy-media/releases/uk/2009/Recovery-in-sight-but-stability-vital-for-manufacturers---EEFBDO-survey.htm
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-----------------------------------------------------------------------------------------------------------------------------------------Slow recovery expected
On 21 December 2009, the Confederation of British Industry (CBI) reported that the UK economy is expected to exit the recession in the fourth quarter of 2009, but thereafter growth will remain subdued and GDP is unlikely to have reached pre-recession levels by the end of 2011.

The CBI's latest economic forecast predicts that the recession will end when UK growth resumes in the fourth quarter of this year (0.5 percent quarter-on-quarter), helped by consumers bringing their spending forward to beat the VAT rise.

Subsequent growth in the first two quarters of 2010 will be weak at 0.3 percent, but this should strengthen as the global economic recovery gathers pace, businesses rebuild stocks and household spending recovers. Growth in the range of 0.5 percent to 0.7 percent is expected to be maintained through to the end of 2011.

As a result, the UK's leading business organisation predicts annual UK GDP growth of 2.5 percent in 2011, following 1.2 percent in 2010. However, despite two years of economic expansion, UK GDP will still not have returned to its pre-recession level by the end of 2011, which illustrates the depth of the recession and the weakness of the economic recovery.

Unemployment is expected to continue rising over the coming quarters, but peaking slightly lower than previously forecast, at just over 2.8m in 2010 Q3. And after very constrained wage growth during 2009 and 2010, average earnings are expected to rise somewhat faster over 2011, at 3.9 percent.

Household consumption is forecast to contract marginally by -0.2 percent quarter-on-quarter in 2010 Q1, partly as sales fall back in response to the VAT rise. However, it should then grow steadily but very slowly over the remainder of 2010, to give a modest annual growth rate of 0.4 percent. That figure should improve to 2.3 percent in 2011, as household incomes grow more strongly and jobs fears abate.

The planned VAT rise in January will push CPI inflation up sharply before it eases back during 2010 and falls below the Bank of England's 2 percent target throughout 2011. Oil prices are expected to rise continually over the coming two years, as the global economy recovers with a relatively limited oil supply, hitting almost $100 per barrel at the end of 2011.

The UK Bank rate is forecast to start rising in spring 2010, as the Bank of England withdraws some of the monetary stimulus in order to minimise the risk of undesirable inflationary pressure in the medium term. The Bank rate is expected to reach 2 percent by the end of next year, with no further rises during 2011, to assist the sustainability of the recovery as fiscal policy begins to tighten.

Business investment, which has fallen heavily throughout 2009, should start to recover in the spring of 2010 but is likely to remain hindered by excess capacity, weak demand, and credit supply issues.

The strengthening global economy and relative weakness of sterling should spur UK exports to growth of 1.9 percent in 2010 and 5.3 percent in 2011.

The public finances will remain in very poor health for some time, with net borrowing of £180.8bn in 2009/10 rising to £184.1bn in 2010/11, before falling slightly to £154bn in 2011/12.

Source and access to full report available at: www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/0d279dd471f9bd888025768e003b3341/$FILE/CBI%20Economic%20Forecast%20-%20Dec%2009.pdf
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Household finances take a turn for the worse as debt levels are raised to pay for Christmas
On 20 December 2009, Markit reported that at 38.9 in December, down from 40.2 in November, the Markit/YouGov Household Finance Index (HFI), which provides the first indication of consumer finances each month, dropped to a four-month low. Readings above 50.0 signal an improvement and those below 50.0 a deterioration. Worsening household finances were seen across all income groups, but the rate of deterioration was the steepest among those earning less than £15,000 per year. December data also indicated that deteriorating finances were most prevalent among people aged 55 years old and above.

The one-year outlook for UK household finances also worsened in December. Around 39 percent of respondents expect their finances to deteriorate in 2010, against just 27 percent that forecast an improvement. Negative sentiment about the outlook for household finances was centred upon the lowest income group and those respondents aged 55 years old and above. This partly reflected concerns over future income levels among people in these categories, alongside worries over job security.

Exactly 18 percent of survey respondents felt that their jobs were less secure in December compared to the previous month. Only 6 percent reported an improvement in job security. Public sector employees reported a sharper drop in job security than private sector workers.

However, latest data suggested that households cast aside worries over jobs in their spending decisions during the run up to Christmas. Consumer expenditure rose in December across all income groups, led by the highest earners (those earning £57,751 or more per year).

Efforts to reduce debt took a back seat in December, with data pointing to an increase in household debt for the first time in four months. However, the rate of increase was only marginal. Higher debt levels were most commonly reported among respondents aged 18-25 years old and those in the lowest income category.

Households also noted that spending exceeded the amount of cash available for them to spend, suggesting an increase in borrowing. This was most common among those aged 18-25 years old and respondents in the middle income group. Meanwhile, income from employment dropped fractionally in December, largely reflecting lower earning among private sector employees (particularly retail). Households were nonetheless upbeat about their prospects for income from employment in 2010, with the only exception being those working in the construction sector.

Data indicated that inflation perceptions among UK households hit a three-month high in December. Around 50 percent of respondents reported an increase in general prices paid for goods and services, against just 8 percent that signalled a decline. Inflation perceptions were again highest among those respondents aged above 55 years old.

Households also anticipate a rise in general prices for goods and services over the year ahead. The inflation expectations index picked up to its highest level since the series began in March. Around 77 percent expect higher prices in 2010, against just 4 percent that anticipate a decline.

House prices were adjudged by survey respondents to have increased in December, continuing the trend seen since September. Respondents in all UK regions, with the exception of Northern Ireland, thought that the value of their residence rose in value over the month.

Positive sentiment about the 12-month outlook for house prices was maintained in December, although the degree of confidence weakened since November. Around 45 percent of respondents expect a rise in house prices in 2010, compared to 12 percent that anticipate a decline. However, of those predicting an increase in house prices, the majority expect an increase of only 3-4 percent in the year ahead.

Households expressed the strongest degree of negative sentiment about the government's management of the economy for five months in December. The latest data, collected after the pre-Budget report, suggested that households were much less confident in the government's management of the economy than in the previous month.

Negative sentiment was particularly marked among those earning between £34,501 and £57,750 per year. By housing status, the steepest drop in confidence was among homeowners. For the first time since June, those employed in the public sector signalled a sharper drop in sentiment than those with jobs in the private sector.

Source and access to full report available at: www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=5888
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Banking sector more stable
On 18 December 2009, the Bank of England published its bi-annual Financial Stability Report. The Report provides the Bank's current assessment of conditions affecting financial stability and discusses ways to strengthen the financial system in the future.

In relation to current conditions, the Report identifies that the financial system has been significantly more stable over the past six months, underpinned by the authorities' sustained support for the banking system and monetary policy measures. Low risk-free interest rates and reduced uncertainty have led to a rebound in a range of asset prices. Primary issuance in many capital markets has resumed, reducing financing risks for some borrowers. The market rally has boosted bank profits, lowered concerns about potential future losses, and has enabled banks to raise further external capital. Banks have also been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.

At the same time, the Report notes that after such a prolonged period of exuberance earlier in the decade, it is inevitable that some banks around the world have overstretched balance sheets. They will take time to adjust, and in the meantime remain vulnerable to the risk of less rapid than expected economic recovery. Around the world, a number of borrowers, including in the commercial property sector, have large refinancing needs in the coming years. And while funding costs remain low, there is some risk of market participants accumulating excessively risky positions, which could unwind abruptly when yield curves eventually rise.

The report adds that, over time, and consistent with maintaining lending into the real economy, many banks will need to reduce leverage further, extend the maturity of their funding and refinance substantial amounts of funding as official sector support is withdrawn. While their profitability is relatively buoyant and market conditions broadly favourable, banks should take opportunities to strengthen their balance sheets, including by not distributing an excessive amount of profit. That will reduce the risk of disruption to the flow of credit in the future.

In relation to safeguarding financial stability in the future, the Report says that, in the medium term, the root causes of this and previous systemic crises must be tackled - excessive risk-taking in the upswing of the credit cycle and insufficient resilience in the subsequent downturn. An expectation that 'too important to fail' firms will receive public assistance, and that unsecured, unsecured wholesale creditors will not share losses, has exacerbated both the boom and the bust. That calls for a robust, multi-faceted policy response. Regulatory policies should give greater emphasis to systemic risks across the cycle and across institutions, as set out in a recent Bank discussion paper (The role of macroprudential policy, November 2009). They should be complemented by structural measures to contain the spread of risk across the system. And because failures of financial institutions cannot and should not be prevented, the resolution framework will need to be extended to limit the impact on the wider economy.

Source and access to full report available at: www.bankofengland.co.uk/publications/fsr/2009/fsrfull0912.pdf
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Retail sales expected to fizzle out in New Year
On 17 December 2009, the Confederation of British Industry (CBI) reported that retailers enjoyed a third consecutive month of sales growth in the early build up to Christmas, but predicts flat sales in the New Year.

The business group's latest Distributive Trades Survey shows that in the year to December 9, retailers maintained year-on-year sales growth at November's levels, led by a strong performance from grocers and durable household goods. Meanwhile, motor traders reported their fastest sales growth since April 2002.

Highlights from the CBI include:

Asked about sales over the last year, 45 percent of respondents said they had risen, while 32 percent reported a fall. The resulting balance of +13 percent is slightly lower than had been expected (+19 percent), but matched November's figure. Because the survey closed on December 9 retailers could still see a further sales boost for the month as a whole;
Sales for the time of year were reported to be poor by a balance of 16 percent of retailers, and a net 13 percent expect sales to remain below seasonal norms in January;
Stock levels remain almost unchanged from November with a balance of +7 percent reporting them adequate to meet demand;
The volume of orders placed upon suppliers rose again this month (+7 percent), at a slightly slower rate than expected (+13 percent). Mirroring the movement in sales volumes, orders are also expected to be flat in the New Year;
Looking at individual retail sectors, grocers, durable household goods, footwear & leather, and furniture & carpets posted solid growth. Booksellers & stationers saw November's strong performance reversed this month, while chemists also saw a sharp fall in sales. Hardware, china and DIY stores reported sales to be broadly unchanged after several months of falls;
In the wholesale sector, sales volumes were flat (+1 percent), beating expectations of a fall (-31 percent). Very modest sales growth is anticipated in January (+4 percent). After fourteen months of falling sales, industrial materials reported sales to be broadly unchanged on a year ago (+3 percent), the highest figure since August 2008. Clothing, textiles and footwear wholesalers saw the strongest sales growth since March 2004 (+43 percent);
After a torrid year, motor traders enjoyed a second month of sales growth (+58 percent) and they expect a similar rise in sales in the New Year (+60 percent), suggesting that the extension of the car scrappage scheme is boosting demand. A balance of +51 percent of motor traders said sales for the time of year were above average, which surpassed expectations that sales would remain below seasonal norms (-17 percent).

Source and access to full report available at: www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/a478cfbb9b61d9248025768f00368eab?OpenDocument
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Surprise retail sales fall
On 17 December 2009, the Office of National Statistics (ONS) reported that the seasonally adjusted value of retail sales in November 2009 rose by 2.7 percent compared with November 2008.

The seasonally adjusted volume of retail sales in November 2009 rose by 3.1 percent compared with November 2008.

However, the volume of sales was down 0.3 percent month-on-month according to the ONS. That compares with a rise of 0.6 percent in October. The ONS cites a sharp fall in sales at non-specialist retailers, including department stores as a reason for this fall.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/rs1209.pdf
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US interest rates still on hold

On 16 December 2009, the Federal Reserve decided to keep US interest rates on hold at between 0 percent and 0.25 percent, as had been widely expected. Despite continuing signs that the US economy is recovering, the US central bank reiterated that rates would stay at the low level for an "extended period".

Furthermore, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

Source and access to full report available at: www.federalreserve.gov/newsevents/press/monetary/20091216a.htm
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November 2009 Euro area annual inflation up to 0.5 percent
On 16 December 2009, Eurostat, the Statistical Office of the European Communities Euro area, reported that annual inflation was 0.5 percent in November 2009, up from -0.1 percent in October. A year earlier the rate was 2.1 percent. Monthly inflation was 0.1 percent in November 2009.

EU annual inflation was 1.0 percent in November 2009, up from 0.5 percent in October. A year earlier the rate was 2.8 percent. Monthly inflation was 0.2 percent in November 2009.

In November 2009, the lowest annual rates were observed in Ireland (-2.8 percent), Estonia (-2.1 percent) and Latvia (-1.4 percent), and the highest in Hungary (5.2 percent), Romania (4.6 percent) and Poland (3.8 percent). Compared with October 2009, annual inflation fell in one Member State, remained stable in three and rose in twenty-three.

The lowest 12-month averages 4 up to November 2009 were registered in Ireland (-1.4 percent), Portugal (-0.8 percent) and Spain (-0.2 percent), and the highest in Romania (5.7 percent), Lithuania (4.8 percent) and Latvia (4.2 percent).

The main components with the highest annual rates in November 2009 were alcohol & tobacco (4.5 percent), miscellaneous goods & services (2.2 percent) and education (1.6 percent) , while the lowest annual rates were observed for food (-1.2 percent), housing (-1.0 percent) and communications (-0.7 percent) . Concerning the detailed sub-indices, tobacco (+0.13 percentage points), fuels for transport (+0.12) and rents (+0.08) had the largest upward impacts on the headline rate, while gas (-0.30), heating oil (-0.11), milk, cheese & eggs and cars (-0.09 each) had the biggest downward impacts.

The main components with the highest monthly rates were transport (0.7 percent), alcohol & tobacco (0.5 percent) and clothing (0.4 percent), while the lowest were communications (-0.5 percent), recreation & culture and hotels & restaurants (-0.4 percent each). In particular, fuels for transport (+0.12 percentage points), heating oil, tobacco and vegetables (+0.02 each) had t he largest upward impacts, while accommodation services (-0.05), package holidays (-0.04), air transport (-0.03) and telecommunications (-0.02) had the biggest downward impacts.

Source and access to full report available at: http://europa.eu/rapid/pressReleasesAction.do?reference=STAT/09/183&format=HTML&aged=0&language=EN&guiLanguage=en
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Growth of Eurozone private sector at 26-month high in December
On 16 December 2009, Markit reported that its Flash Eurozone Composite Output Index, based on around 85 percent of normal monthly survey replies, rose for the tenth month in a row to reach 54.2 in December, its highest reading since October 2007. The level of business activity has now risen in each of the past five months. Growth was again led by robust gains in manufacturing production, while the rate of expansion in service sector activity also accelerated.

For Q4 2009 as a whole, the average reading for the activity index is the highest since Q4 2007.

Manufacturing production increased for the fifth consecutive month in December, with the rate of expansion the fastest since September 2007. Meanwhile, gains in service sector activity were the sharpest for 25 months.

The combined level of new business placed with Eurozone manufacturers and service providers increased for the fourth month running in December. Although the rate of expansion in new orders was again more marked at manufacturing companies, the latest overall increase was more evenly balanced across the two sectors.

Growth of manufacturing new orders reached a 28-month high following a further incremental improvement in the pace of increase. The latest firming in growth of manufacturing order books reflected improvements in sales to both domestic and export clients. After easing slightly in November, the rate of increase in service sector new business was the fastest for 25 months.

December flash data suggested that active capacity was moving more in line with current activity and demand requirements. Backlogs of work fell only slightly and to the least marked extent during the current 21-month period of reduction. Outstanding business rose at manufacturers for the second month running and at the fastest pace since August 2007. The rate of decline in the service sector was the weakest for 20 months.

Job losses were reported for the eighteenth month in a row in December. However, after accelerating in the previous month, the rate of decline in staffing levels eased noticeably to its lowest since October 2008. Employment was reduced at a faster pace at manufacturers than at service providers, although rates of decrease slowed in both sectors (to 15- and four-month lows respectively).

Price indicators generally moved higher in December. Input costs rose for the third month in a row, with increases registered at manufacturers and service providers. Although selling prices continued to drop, the rate of deflation was the weakest in over a year. The costs and charges indexes for manufacturing posted higher readings than their counterparts for services.

Looking ahead, service providers remained highly optimistic about the outlook for activity in one years' time, although the degree of positivity dipped for the third month running. The manufacturing new orders-to-inventory ratio fell slightly to a three-month low, but remained elevated overall.

Source and access to report available at: www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=5882
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Inflation picks up pace in November: petrol price rise largely to blame
On 15 December 2009, the Office for National Statistics reported that in the year to November, the consumer prices index (CPI) rose by 1.9 percent, up from 1.5 percent in October.

In the year to November, the all items retail prices index (RPI) rose by 0.3 percent, compared with a fall of 0.8 percent in October.

Over the same period, the all items RPI excluding mortgage interest payments index (RPIX) rose by 2.7 percent, up from 1.9 percent in October.

The Office for National Statistics said that by far the largest upward pressure affecting the change in the CPI annual rate came from transport. Within the transport category the largest upward effect came from fuels and lubricants.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/cpi1209.pdf
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Best London sales growth for three years
On 14 December 2009, the British Retail Consortium (BRC) reported that retail sales in central London in November were 13.3 percent higher on a like-for-like basis than a year ago, when sales had fallen 0.4 percent, as financial turmoil hit consumer confidence - especially in the City. November's growth was the best since October 2006.

Retail footfall in November rose further above its year-earlier level, to show the best growth since June. Unseasonably mild weather, together with several special sales events and widespread discounts, attracted shoppers into the capital.

Sterling's weakness, although less marked than last year, continued to attract overseas visitors, especially those from western Europe. Visitors from the Middle East, China and Hong Kong were also good customers for many.

Food sales held up well and instore restaurants benefited from the very wet weather. Shoppers took advantage of special sales events and discounts, giving gains for homewares, furniture, clothing and footwear and fashion accessories. Beauty products did well, with an early start to gift sets for some.

Source and access to full report available at: www.brc.org.uk/showDoc04.asp?id=4018&moid=6867
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Output growth maintained across English regions in November, but cost burdens rise and job shedding persists
On 14 December 2009, Markit reported that the synchronised upturn in business activity across the nine English regions remained on track in November, according to latest PMI data. This was primarily driven by improved inflows of new work in all regions monitored by the survey. Companies suggested that growth was supported by an improvement in global economic conditions and a greater willingness among clients to commit to new expenditure. However, the scars of the recession were still evident in November, with job shedding recorded across all regions. Furthermore, falling backlogs suggested that current workloads were insufficient to test operating capacity. Meanwhile, data highlighted rising cost pressures in November, which led to squeezed margins as firms were generally unable to pass on higher costs to clients.

The North East and London recorded the strongest rises in business activity over the month, with both regions indicating the fastest expansions for over three years. The rebound in activity in the North East represented a marked turnaround from the situation just four months previously, when growth was the slowest of all English regions. Meanwhile, rates of output growth in the West Midlands and North West respectively were the weakest of the English regions in November.

November's broad-based upturn in business activity was supported by increased levels of new work across all nine English regions. Data indicated that the strongest growth was in London and the South East, while the slowest expansion was registered in the South West.

Reductions in payroll numbers during November continued to cast a shadow over the English regions and highlighted the fragility of the recent rebound. Companies generally commented that job shedding reflected ongoing adjustments to excess capacity and a resultant need to cut costs. However, there were again signs that improved levels of business activity helped slow the rate of private sector job shedding. Moreover, latest data indicated a weaker drop in staffing levels in six of the nine English regions and in all cases job shedding remained slower than at the start of 2009. By region, the North West recorded the least marked drop in employment, while the fastest was in the West Midlands.

November data pointed to increased cost burdens across all nine English regions, although rates of inflation varied considerably. The fastest rises in input prices were in the East Midlands and North West, with the latter experiencing its strongest rate of cost inflation for thirteen months. Meanwhile, cost pressures were relatively subdued in London and the North East. Companies recording an increase in input prices generally pointed to higher fuel and raw material costs in the latest survey period. Some also noted that weak sterling had raised the cost of inputs purchased from abroad.

Average output charges were reported to have fallen in the majority of English regions during November, reflecting price discounting and strong competition. The fastest declines were in London and the North East, while companies in the East Midlands recorded the most marked rise in charges. Nonetheless, anecdotal evidence suggested that pricing power remained weak across all regions amid difficult trading conditions. Firms also commented that margins were squeezed as a result of the need to stimulate client demand and retain market share.

Source and access to full report available at: www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=5866
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Producer prices rise
On 11 December 2009, the Office for National Statistics reported that the output price index for home sales of manufactured products rose 2.9 percent in the year to November, compared with a rise of 1.9 percent in the year to October.

The index rose 0.2 percent between October and November, mainly reflecting price rises in petroleum products and, to a lesser extent, food products. These increases were partly offset by a fall in other manufactured product prices.

The output price index excluding excise duties rose 2.0 percent in the year to November. The index rose 0.1 percent between October and November. The output price index excluding food, beverages, tobacco and petroleum rose 2.0 percent in the year to November. The index fell 0.1 percent between October and November.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/ppi1209.pdf
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Retailers confident this Christmas
On 11 December 2009, the British Retail Consortium reported that retailers are overwhelming convinced that this Christmas will be no worse than last year.

42 percent of retailers responding to the British Retail Consortium's (BRC's) Christmas Trading Snapshot Survey, published today (Friday), said this Christmas will be better than last year's. The other 58 percent said sales would be the same as 2008 while none of the respondents thought sales will be worse.

Almost half of retailers expect greater discounting in the run-up to this Christmas; only a quarter expect less. 53 percent thought December's sales will be boosted by customers bringing their purchases forward to beat January's VAT increase. But nearly half of retailers said sales in the New Year will be harmed by the increase in the VAT rate to 17.5 percent, which the Chancellor has confirmed for 1 January.

Source and access to full report available at: www.brc.org.uk/details04.asp?id=1670
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Bank of England Maintains Bank Rate at 0.5 percent and continues with £200 Billion Asset Purchase Programme
On 10 December 2009, the Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5 percent. The Committee also voted to continue with its programme of asset purchases totalling £200 billion financed by the issuance of central bank reserves.

The Committee expects the announced programme to take another two months to complete. The scale of the programme will be kept under review.

Source and access to the full report available at: www.bankofengland.co.uk/publications/news/2009/134.htm
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London businesses optimistic
On 9 December 2009, a Confederation of British Industry (CBI) / KPMG survey revealed that businesses in the capital are the most optimistic they have been in 18 months about prospects for the coming half-year, though they remain cautious about future investment and divided about London's longer-term status as a world city.

The poll of senior executives shows that most firms still think the capital is a good place to do business, and more think so now (86 percent) than when the last survey was conducted in April (80 percent). Business performance has also improved, with fewer reporting falling business values (36 percent) than six months ago (59 percent).

Forty seven per cent of firms are optimistic about their future business prospects, which is the highest proportion since April 2008 (30 percent).

However, a perceived lack of government action on issues such as transport and skills, falling public sector investment and an overly burdensome tax and regulatory regime are seen by firms as threatening London's attractiveness as a place to invest and do business.

While a quarter of respondents say they see London's status improving in five years, another quarter think its standing will shrink compared with cities such as New York, Paris, Tokyo or Mumbai, and half say it will simply remain where it is.

Highlights include:

Firms remain cautious about their investment plans. A third (30 percent) plan to cut back on recruitment and training and a further third (31 percent) on IT infrastructure, equipment, plant and machinery;
The tenth biannual CBI / KMPG survey shows London's businesses have used a variety of human resources strategies to retain skilled staff and survive during the recession. New questions in the survey reveal that, while over half (53 percent) have been forced to make redundancies, staff have also been working with their employers to implement policies such as only recruiting when essential (63 percent), using HR policies to cut costs like expenses (37 percent) and putting a freeze on hiring altogether (26 percent);
This is a critical time to hold on to the skills we have and firms see the business-led London Skills & Employment Board, chaired by the Mayor as playing an important role with three key priorities: working closely with employers to support their needs; tackling youth unemployment; simplifying the skills services on offer;
As a result of the recession, the proportion of firms recruiting staff from overseas has fallen back. In this survey, just 3 percent said hiring from abroad was rising, compared with 15 percent a year ago, and 26 percent said it was stable, compared with 42 percent in 2008. Those firms that are recruiting from outside the EU, and using the new points-based system (37 percent), were asked about its impact on their ability to recruit. 57 percent said the system was causing them some difficulty, 5 percent said it was causing great difficulty and 38 percent reported 'no impact'. No firm said it was actively helping them to recruit;
Firms say increasing the capacity of London's transport system is the best way to meet the capital's future transport needs. Tube and rail systems require the most urgent investment, according to the survey, but the road network also came under criticism from a large number of firms for its reliability (76 percent) and quality (67 percent), and nearly two-thirds (60 percent) said this was only getting worse;
These findings underline the importance of delivering Crossrail by 2017, completing the modernisation of the tube in full and on time, and improving the city's traffic flow and roadworks. Close to three-quarters of firms (72 percent) back the building of a third runway at Heathrow airport, as long as environmental conditions are met;
The CBI has set out three key priorities for the Mayor of London: maintaining levels of investment in major transport projects; promoting London internationally and strengthening business support for SMEs;
Most firms (71 percent) are aware of the Mayor of London's plans to tackle carbon emissions in the capital, but nearly four-fifths (79 percent) are not confident that London has a clear plan setting out how it will achieve the Mayor's ambitious target of cutting carbon emissions by 60 percent by 2025;
Firms are already taking their own steps to reduce emissions because, they say, it makes business sense and is the right thing to do. 50 percent of businesses have updated equipment or technology, 46 percent have taken action through their supply chain, 46 percent have sought information or advice, and 36 percent have changed their energy supplier;
Most (80 percent) feel that financial incentives are the best way to encourage firms to take the green agenda further and 45 percent say better advice and support would help. Just 23 percent say more regulations would encourage them to invest more in low-carbon solutions;
The vast majority of firms (92 percent) think the 2012 Olympic Games is a good way to promote London internationally. Two-thirds think it will boost visitors' experience of the city and a good proportion (61 percent) believes it will lead to regeneration. Fewer than a third (30 percent) feel the Games will strengthen the capital's skills base, however, and just 42 percent see direct business opportunities for their own organisation.

Source and access to full report available at: www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/095e23f11b7e01ae80257680003a352b?OpenDocument
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Manufacturers predict a fall in output
On 8 December 2009, the Confederation of British Industry reported that UK manufacturers predict production will fall a little over the next three months, having expected a pick-up in output in the two previous surveys.

In the latest CBI monthly Industrial Trends Survey, 18 percent of manufacturers anticipate the volume of output will rise over the next three months, while 25 percent think it will fall. The resulting balance of -7 percent is the most negative since July (-14 percent) and is a set back to firms' output expectations in the past two months' surveys.

The lack of a sustained pick-up in output reflects the ongoing weakness of demand. A balance of -42 percent of firms said total order books were below normal, which was a slight improvement on November (-45 percent) and the least negative since December 2008 (-35 percent).

Export order books weakened again, however, reversing part of the improvement seen in November. A balance of -41 percent said they were below normal compared to -37 percent last month.

Source and access to full report available at: www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/34b3c9392f40783480257682005d8b98?OpenDocument
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Fall in production
On 8 December 2009, the Office for National Statistics reported that the seasonally adjusted index of production in October 2009 fell by 8.4 percent compared with October 2008.

The seasonally adjusted index of manufacturing in October 2009 fell by 7.8 percent compared with October 2008.

Source and access to full report available at: www.statistics.gov.uk/pdfdir/iop1209.pdf
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Mixed success for retail sales
On 8 December 2009, the latest British Retail Consortium-KPMG Retail Sales Monitor revealed that UK retail sales values rose 1.8 percent on a like-for-like basis from November 2008, when sales had dropped 2.6 percent, due to turmoil in financial markets hitting consumer confidence. On a total basis, sales rose 4.1 percent against a 0.4 percent decline in November 2008.

The report shows that food sales growth slowed further, largely reflecting lower food price inflation. Clothing and footwear also slowed after October's uplift. Homewares and furniture sales showed further gains, but against larger declines a year ago.

However, non-food non-store sales (internet, mail-order and phone sales) in November were 16.9 percent higher than a year ago compared with 18.0 percent in October. The slower growth rate in November than in October was in line with the slowdown in store sales.

Source and access to full report available at: www.brc.org.uk/showDoc04.asp?id=4016&moid=6863
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Maintaining financial stability across the United Kingdom's banking system
On 4 December 2009, the National Audit Office concluded that the public support provided to UK banks by the Treasury was justified, given the scale of the economic and social costs if one or more major banks had collapsed. In providing that support, moreover, the Treasury met two of the government's principal objectives: protecting depositors' money in banks and maintaining the stability of the financial system. The final cost to the taxpayer will not, however, be known for a number of years.

The overview of the government's response to the crisis shows that the purchases of shares by the public sector together with offers of guarantees, insurance and loans made to banks reached £850 billion, an unprecedented level of support. However, there have been no disorderly failures of UK banks and no retail depositor in a bank operating in the UK has lost money. And, by the end of November 2009, the banking sector as a whole had benefited from improved confidence. But, in 2009-2010, lending to businesses is not likely to meet targets.

The scale of the loss to the taxpayer will not be known for years to come. In April 2009, the Treasury estimated that there may be a loss to the taxpayer of between £20 billion and £50 billion, the wide range reflecting the inevitable uncertainty involved in such an estimate. Total losses will depend on losses from the Asset Protection Scheme and the price at which the government sells its holdings in RBS and Lloyds.

The Treasury expects by April 2010 to have spent £107 million on advisers, some of whom had to be employed at short notice. In total, just under £100 million is expected to be refunded by the banks. Two sets of financial advisers - from Credit Suisse and Deutsche Bank respectively - who were each appointed on retainers of £200,000 a month for a year. The contracts included provisions for success fees of up to £5.8 million, payable at the Treasury's discretion.

As a condition of the recapitalisation scheme, RBS and Lloyds agreed to targets for retail mortgage lending and business lending: RBS would lend an additional £25 billion in 2009-10, and Lloyds an additional £14 billion. To date, both banks are on track to meet their retail mortgage lending commitments but lending to businesses is likely to fall short of the targets. The Treasury is monitoring progress and meets each of the banks regularly. The only formal sanction available if targets are not met is a potential refusal to extend guarantees for wholesale borrowing under the Credit Guarantee Scheme.

Source and access to full report available at: www.nao.org.uk/publications/0910/uk_banking_system.aspx
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Recovery of UK service sector remained intact during November
On 3 December 2009, Martkit reported that the UK service sector continued to expand during November, highlighting its ongoing recovery following the unprecedented declines recorded around the same period last year. Activity was supported by the steepest rise in new business for over two years, as confidence in the marketplace continued to improve.

Nonetheless, there was sufficient evidence to suggest that operating conditions remained tough. Output charges were again lowered in response to ongoing competitive pressures, despite the steepest rise in input costs for over a year. Moreover, employment continued to fall, albeit at the slowest rate for fourteen months.

The headline index from the report is the Business Activity Index, which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago. In November, the index recorded 56.6, a broadly sideways movement on October's twenty-six month high of 56.9. Growth has now been recorded for seven months in succession, with the latest robust expansion centred mainly on the Financial Intermediation and Business Services sectors. By company size, large companies registered the strongest growth, while small enterprises continued to lag some way behind.

Supporting the rise in overall activity was the strongest increase in incoming new business since September 2007. Panellists commented that market conditions were now much improved compared to earlier in 2009 and that previously delayed projects were coming on-line.

Despite continued rises in activity and new business, a nineteenth successive monthly round of job shedding was signalled in November. Reports suggested that job losses were the result of company restructuring, although the overall decline in employment was the slowest for over a year.

Evidence of excess capacity was also provided by a further decline in work outstanding during November. Although modest, backlogs have now been reduced for twenty-six months in a row.

Latest data showed continued disparity between input and output prices. Input costs rose at a marked and accelerated rate that was the strongest since October 2008. Higher fuel charges and the inflationary effects of a weak currency led to the latest rise in input prices. In contrast, output charges fell again during November and at a slightly stronger rate. Competition was reported to remain fierce and a key depressor of pricing power in the latest survey period.

Business expectations improved in November, with the degree of confidence rising to the second strongest in over two years. Panellists are confident that activity will continue to rise (albeit from a low base) and that recent signs of economic recovery will translate into further growth.

Source and access to full report available at: www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=5855
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The Economy - December 2009