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ECONOMIC NEWS THIS WEEK

The manufacturing sector continued to weaken, according to the September, Index of Production figures, which recorded the largest monthly fall in manufacturing since May 1992.

On the retail side, the latest data from the Index of Distribution found retailing output increased in August. The October British Retail Consortium (BRC) Retail sales monitor also showed growth in retail sales, indicating consumption remains fairly robust. The Chartered Institute of Purchasing and Supply (CIPS) report on the service sector was downbeat, with rapidly deteriorating balances on the business activity, employment and future expectations indicators. October new car registrations registered strong growth, mainly led by private buyers.

The Halifax reported a small fall in house prices last month, in line with the Nationwide index, which was released last week. Housing supply showed continued to strength in September, with an increase in housing starts and completions.

The first official travel and tourism figures since September 11^th, recorded a significant fall in overseas travel to the UK.

The Recruitment and Employment Confederation (REC) report on jobs for October suggested slowing labour market activity. They reported falling salaries and demand for permanent staff dropping at its fastest rate since 1997.

The National Institute of Economic and Social Research projected 0.6% GDP in the three months to October- close to the economy trend rate of growth.

The Monetary Policy Committee reduced the bank repo rate by 0.5 per cent to 4 per cent, while the European Central Bank also cut their interest rate by 0.5 per cent to 3.25 per cent.

FORTHCOMING UK STATISTICS

The week ahead sees the release of producer prices and consumer price indices. The latest labour market and retail sales statistics are also released. The CBI publishes their Regional Trends Survey.

FACTS IN DETAIL

Index of Production

• Manufacturing output fell by 1.6 per cent between August and September. In 2001Q3, manufacturing output decreased by 0.8 per cent compared with the previous quarter and was 2.9 per cent lower than the same period a year earlier.
• Industrial production fell by 1.2 per cent between August and September. In 2001Q3, production decreased 0.6 per cent compared with the previous quarter, and was 2.9 per cent lower than in the same period of 2000.

Index of Distribution

• Output of the distribution industries increased by 1.1 per cent in the 3 months to August compared with the previous 3 months and by 4.1 per cent on the same period a year earlier.
• Output in the retail trade rose by 1.8 per cent in the 3 months to August compared with the previous 3 months and were up 5.6 per cent on the same period a year earlier.

Retail

• The British Retail Consortium (BRC) Retail Sales Monitor shows the value of total retail sales in October up 8.6 per cent on a year earlier (8.1 per cent September) and up 6.0 per cent on a like-for-like basis (5.7 per cent September).

Housing Market

• The Halifax index fell by –0.5 per cent in October but was up 9.4% on a year earlier (8.5 per cent in September).
• In September there were 14,600 private housing starts, 700 more than in August. Starts in the three months to September were up 3.7% on the previous three months.
• In September, there were 12,300 private housing completions, 500 more than in August. Completions in the three months to September were up 4.7% on the previous three months.

Travel and Tourism

• There were 787,000 holiday arrivals in the UK in September 2001, 16 per cent lower than in September 2000.
• There were 1.9mn visitors (including business trips and visits to family and friends, as well as holidays) to the UK in September 2001, a decrease of 10 per cent on September 2000.

CIPS Report on Services- October 2001

(Balances above 50 indicate expansion)

• Business activity was 46.3 in October, down from 48.1 in September.
• Services employment was 48.3, down from 50.2.
• Future business expectations was 63.3, down from 64.1.

LATEST DEVELOPMENTS AND ECONOMIC PROSPECTS

Output and investment

GDP grew 2.9 per cent in 2000. Economic growth was 2.2 per cent in the year to 2001Q3, and 0.6 per cent in Q3 alone (preliminary estimate).

• Service sector output grew 0.8 per cent in Q3 (preliminary estimate), down marginally from 0.9 per cent in Q2. Services output in Q3 was up 3.5 per cent on a year earlier.
• Manufacturing output fell 0.8 per cent in the 3 months to September (compared with previous 3m), and was down 2.9 per cent on a year earlier.
• Industrial production fell 0.6 per cent in the 3 months to September (compared with previous 3m), and was down 2.9 per cent on a year earlier.
• Whole economy investment was up 2.1% in Q2, compared with Q1, and was up 4.0 per cent on a year earlier, following growth of 2.8 per cent in 2000.
• Business investment rose 1.9 per cent in 2000, and was 14.1 per cent of GDP (following 1999’s record 14.3 per cent share). In 2001Q2, business investment rose 2.5 per cent, and was up 4.0 per cent on a year earlier.
• Manufacturing investment fell by 0.7 per cent in 2001Q2, but was up 3.7 per cent on a year earlier.
• Govt investment grew 15.4 per cent during 2000. In 2001Q2, it was up 10 per cent on the previous quarter, and up 19.2 per cent on a year earlier.

 

Labour market

LFS employment averaged 28.16m in the 3 months to August, down 19,000 compared with the previous 3m and 181,000 higher than a year earlier. The employment rate fell to 74.6% from 74.9% during the previous 3m (historic high of 75.0% in Spring 1990).

• ILO unemployment rate (5.1 per cent) is close to the lowest rate since the series began in 1984. ILO unemployment rose 53,000 to 1.51m in the 3 months to August (compared with previous 3 months), and was down 62,000 on a year earlier.
• Claimant count unemployment in September was 0.94m, down 4,900 on August. The claimant rate was unchanged at 3.1%, the lowest since September 1975.
• Over 326,300 young people have moved into work through the New Deal (to August 2001).

Inflation and Monetary Policy

UK is experiencing the longest period of sustained low inflation since the 1960s.

• RPIX inflation out-turns have been within a narrow band between 1.8 per cent and 3.2 per cent since Bank independence.
• UK HICP inflation remains the lowest in the EU (1.3 per cent in September).
• External forecasters expect inflation to remain close to target.
• In November, the MPC cut interest rates by 1/2 percentage point, to 4 per cent. The previous change – also a quarter-point cut – took place in October 2001.
• Official interest rates have not been so low for so long since the 1960s.
• Long-term interest rates are around their lowest levels for over 35 years.

Trade and the Balance of Payments

UK export growth has weakened – not surprising, given the slowdown in world trade. Goods export volumes were down 1.9 per cent in the 3 months to August, compared with the previous three months. Goods imports fell 1.5 per cent in the same period.

• Current account deficit was £16.2 billion (1_ per cent of GDP) in 2000. Weaker outlook for world trade means deficit projected to widen to over £25 billion, or 2_ per cent of GDP, in 2002 (Budget forecast).

Public Finances

• Fiscal stance in Budget 2001 is at least as tight as set out in Budget 2000 and the Pre-Budget Report.
• Current budget surplus was £23.6 billion in 2000-01.
• Public sector net debt peaked as a percentage of GDP in 1997, having risen sharply during the early 1990s. It has fallen from 44.0 per cent at the end of financial year 1996-97 to 31.6 per cent at the end of 2000-01, and is forecast to remain close to 30 per cent.

Lines to take on impact of US attacks on UK economy

What is the effect of the terrorist attacks on the UK economy?

• Too soon to give estimates of the implications for UK economy. Will be publishing latest forecasts for the UK and world economy in the autumn PBR as usual.
• Tough decisions taken by Government from 1997 to reduce public debt, to establish tight fiscal rules and to make the Bank of England independent mean that UK is well placed to withstand the ups and downs of the economic cycle and the difficult global environment we now face.
• Economic fundamentals are strong. Inflation is low and stable, the public finances are sound, employment is at record highs and interest rates are at the lowest for nearly 40 years.
• Also too early to estimate potential impact on tourism [for info only – Gulf War: US visitors to the UK fell by over 20 per cent in 1991 although obviously complicated by coinciding with US recession].

What action has been taken to maintain the conditions for stability and growth?

• Interest rates have been brought down worldwide, and the central banks of America, the Euro-area, Japan and Britain have made clear their determination to take any necessary further action.
• Oil prices - which have previously risen in times of trouble - have fallen in the past month. The Government will continue to work with the oil producing countries to ensure steadiness of supply and prices.
• Where markets have failed, as on airline insurance, governments across Europe and America have acted to fill the gap, with a new short-term insurance guarantee.

What has the war cost?

• The cost of military operations to date is relatively limited. But it would be inappropriate to give detailed figures for the cost of operations and related activities at this relatively early stage.
• If pressed on why no figures yet: Because Ministers have made clear that this is not likely to be a quick and simple campaign.
• If pressed on who will pay: in line with usual practice, the net additional cost of military operations will be met from the DEL Reserve.