PERSPECTIVES. Oil prices likely to moderate this year, reducing inflationary pressures. Introduction

Transcription

1 PERSPECTIVES By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group Oil prices likely to moderate this year, reducing inflationary pressures Ruth Lea Economic Adviser Arbuthnot Banking Group th January 2018 Introduction One of the most important recent market developments has been the relative firmness of oil prices. In this Perspective, we look at the inflationary impact of higher oil prices on producer and consumer prices inflation, the reasons behind the higher prices and speculate on their future path. We conclude that, assuming no major production disruptions, oil prices are likely to moderate this year. Lower oil prices would, of course, reduce inflationary pressures and accelerate the fall in inflation rates, which are, in any case, likely to decline in 2018H2 when last year s oil price hikes drop out of the 12-month comparison. Higher oil prices have recently pushed up producer prices inflation Following the Brexit referendum in June 2016, and the subsequent weakening of sterling, there was a rapid increase in input PPI (producer prices index) inflation and a more modest increase in output PPI inflation as imported inputs rose in price (chart 1). (Annex charts 1a and 1b show the recent path of sterling.) In addition, higher oil prices in 2016H2 contributed to higher inflation rates. (Chart 4 below shows the recent path of oil prices.) Sterling reached its nadir in October 2016 and has since appreciated overall, though with fluctuations. In October 2016 the average /$ rate was $1.23 and the average / rate was 1.12, but by December 2017 the pound averaged /$1.34, though only / This appreciation helped to curb producer prices inflation in 2017H1, added to which oil prices eased back during that time. In the second half of last year (2017H2), however, oil prices moved up appreciably, adding pressures to producer inflation. Brent crude oil futures had dipped to $42.5pb by 1 July 2017, but had risen to nearly $67pb by 1 December 2017 and, further, to $68pb by 1 January 2018 (see chart 4 below). Inevitably, the moderation seen in producer prices in 2017H1, especially relating to input PPI, was partly reversed, and the higher oil prices can be seen as postponing the normalisation of producer prices inflation after the impact of sterling s sharp depreciation in mid

2 Chart 1 PPI annual inflation: output, input (%), June 2016-November Input Output -5 Output prices Input prices Sources: (i) ONS, UK producer price inflation, November 2017, 12 December 2017; (ii) Ditto, November 2016, 13 December 2016 for June-October 2016 data. The impact of higher oil prices was very marked in the November PPI data (the latest available). 1 Input PPI inflation was 7.3% (YOY) in November, 2.5% higher than October s 4.8%, whilst output (factory gate) PPI rose to 3.0% (YOY) in November, 0.2% higher than October s 2.8%. Charts 2a and 2b show the contributions by component to the increase in the annual rate of inflation. Chart 2a shows, higher crude oil prices contributed 2.3% to the increase in the annual input PPI rate (2.5%), the lion s share. (Crude oil prices rose 7.6% (MOM) in November to be 27.5% higher (YOY).) There were also contributions from, for example, other imported parts and equipment, but home food materials, for example, partly offset the increases. Turning to output PPI, petroleum products accounted for 0.13% of the increase in the annual rate (0.2%). Chart 2a Input PPI, contribution to change in annual rate (percentage points), November Contribution (percentage points) 2

3 Chart 2b Output PPI, contribution to change in annual rate (percentage points), November Percentage points Source: ONS, UK producer price inflation: November 2017, 12 December Knock-on effects for consumer prices inflation Inevitably, 2016 s depreciated pound added to inflationary pressures further up the inflation food chain to consumer prices, reflecting higher prices for directly imported consumer goods, as well as the pick-up in domestic output PPI inflation (chart 3). CPI inflation, benefiting from a strong pound and weak oil prices was less than 1% in mid (CPIH inflation, which includes owner-occupiers housing costs and is the ONS s preferred measure of consumer prices, was a tad higher.) In 2016H2 and early 2017, however, it rose strongly, reflecting a combination of the weaker currency and higher fuel prices. As the ONS explained in their latest press release: transport made a downward contribution to the rate until mid-2016, before increasing sharply to become the largest upward contributor by early This was due largely to increasing prices for motor fuels, reflecting increases in global oil prices together with the fall in the value of the pound. 2 UK fuel prices eased back in 2017H1, helped by the stronger pound and lull in oil prices, but were reversed in 2017H2 when oil prices firmed. 3 Despite these pressures, and assuming no explosion of oil prices, the MPC of the Bank of England continued to judge that inflation was likely to be close to its peak, and would decline towards the 2% target in the medium term as recently as its December meeting. 4 Moreover, the OBR, at the time of the Autumn Statement, projected a fall in CPI inflation to 2.4% for 2018 before returning to the 2% target (see annex chart 2). 5 3

4 01/06/ /08/ /10/ /12/ /02/ /04/ /06/ /08/ /10/ /12/ /02/ /04/ /06/ /08/ /10/ /12/ /02/ /04/ /06/ /08/ /10/ /12/2017 Chart 3 UK CPI inflation rates (%), February 2016-November Goods Services CPI CPIH Core CPI CPIH CPIH, core Goods Services Sources include ONS, UK consumer price inflation: November 2017, 12 December Core inflation is all-items excluding energy and food, alcohol & tobacco. Oil prices have moved higher Chart 4 shows how oil prices have moved since mid-2014, when oil prices were falling dramatically, on plentiful supplies and disappointing demand. 6 The weakness in oil prices continued into 2016, but oil prices have since firmed overall, as already discussed. The easing of prices back in 2017H1 was more than offset by the tightening in 2017H2. Chart 4 Brent oil futures, $ per barrel (pb), monthly (1 st of month) prices, 1 June January Brent futures ($pb) Source: Brent crude historical prices, 4

5 The pick-up in prices reflected both demand and, of greater significance here, supply factors. On the demand side, the world economy has firmed in recent months, as discussed in some recent Perspectives, leading to higher oil demand (not least of all from China). 7 Turning to the supply side, OPEC and its select non-opec partners have crucially cut production and excess stocks have fallen, though note US production is up. The key events behind the changing supply situation have been: In September 2016 OPEC, which still controls about 40% of global oil production, agreed a preliminary deal to cut production for the first time in eight years, to ease fears of oversupply. 8-9 OPEC Member Countries met on 30 November 2016 and agreed to implement a production adjustment of 1.2mbd (million barrels a day), effective from 1 January 2017 for 6 months (the Vienna Agreement ). 10 In December 2016, there was the OPEC-non-OPEC agreement to reduce the output of eleven non-opec countries, with a combined reduction target of 558,000bd (barrels a day), effective from 1 January 2017, for 6 months The non-opec countries were Azerbaijan, Bahrain, Brunei Darussalam, Equatorial Guinea (which joined OPEC in May 2017), Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan. OPEC and their non-opec partners extended the reduction agreements by another 9 months in May These agreements have been broadly complied with, resulting in cutting excess stocks and higher oil prices. 14 In November 2017, OPEC and their non-opec partners (including Russia) agreed to continue with the production adjustments for the year 2018, which will be reviewed in June In addition, there have been several specific factors that have tended to drive up prices, including the Atlantic hurricane season, tensions in Iraq, tensions in Iran and supply disruptions in the North Sea Against this, the US is significantly increasing oil production (including shale oil) Oil prices likely to moderate Concerning the future outlook for the oil market, the International Energy Agency (IEA) made the following key points in their latest, December, Oil markets report : 22 They assumed production by OPEC and their non-opec partners would remain flat in 2018, following the November 2017 OPEC-non-OPEC agreement (see above), though there were political risks to this. If countries break rank, production could rise significantly. In contrast, they raised their annual growth forecast for total US crude oil to 390,000bd (for 2017) and to 870,000bd (for 2018), reflecting the fact that US production is expanding significantly, despite moderation. All in all, they estimated total output from non-opec countries could rise by 1.6mbd in 2018 (0.2mbd higher than their November forecast). On the demand side, global oil demand would grow 1.3mbd in 2018, compared with 1.5mbd for They concluded that total supply growth could exceed demand growth in Moreover, in the first half (of 2018) the surplus could be 200kbd (thousand barrels a day) before reverting to a deficit of about 200kbd in the second half, leaving 2018 as a whole showing a closely balanced market. And producers hopes for de-stocking continuing into 2018 at the same 500kbd pace seen in 2017 may not be fulfilled. Finally, they said that 2018 may not be a happy year for those who would like to see a tighter market. If the IEA is right, it is hard to see prices firming much if at all. Indeed, there is a good chance that, unless there are serious production disruptions in the Middle East (say), prices could moderate in The US Energy Information Administration (EIA), for example, recently projected an average Brent crude oil price of $60pb for 2018 and $61pb for 2019 (compared with $54pb in 2017). 23 This compares a recent trading price of $69pb (10 January 2018). And there is always the chance that the November 2017 OPEC-non-OPEC 5

6 agreement could collapse during 2018, leading to significantly higher production and significantly lower prices. If oil prices do indeed moderate this year, inflationary pressures will, of course, moderate in the UK, other things being equal. The IMF takes a longer-term view of commodity prices but, unfortunately its latest analysis is somewhat dated (July 2017, when Brent crude was $52pb, somewhat below the current level). 24 However, for what it is worth, they took the view that oil prices in the medium-term would be relatively restrained. Prices would continue to firm from their 2016 low point, but remain well below the levels seen in (chart 5). Chart 5 IMF medium-term forecast for crude oil, $/barrel f 2018f 2019f 2020f 2021f 2022f Crude oil price Forecast Source: IMF Primary commodity prices, price forecasts, IMF database, not adjusted for inflation (July 2017). The crude oil price is the average of spot prices for Brent, Dubai and West Texas Intermediate. Latest economic releases There have been several indicators released in the past fortnight, which continue to suggest, on balance, a resilient, if not faster-growing, economy (see annex table 1): 25 Industrial production grew by 1.2% (QOQ) in the three months to November, to be 3.3% up (YOY), whilst manufacturing was 1.4% higher (QOQ), to be 3.9% up (YOY). 26 These are respectable growth rates. Construction output contracted 2.0% (QOQ) in the three months to November, but was 1.6% higher (YOY) and the ONS said that output remains at a relatively high level. 27 The total trade (goods & services) deficit increased slightly to 2.8bn in November, compared with 2.3bn in October. 28 The visible trade deficit rose to 12.2bn in November ( 11.7bn in October), as exports rose 0.6% (MOM) whilst imports increased 1.6% (MOM). The services surplus was estimated to be 9.4bn in November, slightly higher than October s 9.3bn. The trend trade deficit is fairly flat to slightly improving. The ONS confirmed that output per hour (their main measure of labour productivity, productivity hours ) jumped 0.9% (QOQ) in 2017Q3, after slipping 0.2% (QOQ) in 2017Q2, to be up 0.8% (YOY). 29 The quarterly increase reflected a 0.4% increase in GDP in 2017Q3, combined with a 0.5% fall in total hours worked, which was mainly driven by a fall in average hours per worker. As a consequence, output per worker grew slower than output per hour, at 0.4% (QOQ), much in line with GDP. The much-followed Markit surveys for December suggested continued growth in all three sectors: manufacturing, construction and services Markit commented that there was continued resilience 6

7 in the economy at end-2017, adding the survey data are consistent with the economy having grown % in 2017Q4. NIESR estimated that GDP growth in the three months to November was 0.5% (QOQ). 33 According to the Bank of England, the number of mortgage approvals for house purchase firmed to 65,139 in November, compared with October s 64,887, but were still weaker than the average for the previous six months (66,562). 34 The Bank also reported that the stock of total lending to individuals (secured and unsecured) rose to 1,566.1bn in November, of which 87% was secured on dwellings. Within the total, unsecured consumer credit rose by a still buoyant 9.1% (YOY) in November, though down on October s 9.5%. Relevantly, Bank/FCA economists recently concluded that credit growth was not being disproportionately driven by subprime borrowers which was reassuring. Instead, people with higher credit scores had been taking advantage of cheap credit Car registrations (SMMT data) declined by 5.7% (YOY) in 2017, within which registrations of diesel cars fell 17.1% (YOY) The fall in the registrations of diesel cars in December was 31.1% (YOY), following the announcement in the Autumn Budget of a new levy on new diesel cars (due to take effect from April 2018), taking the total decline in registrations in December to 14.4% (YOY). Three other pieces of recent economic news are worth noting: In December the IMF marginally downgraded its GDP forecast for 2017 from 1.7% to 1.6%, whilst leaving growth expectations at 1.5% for This revision can be regarded as within measurement error and does not materially change the UK s outlook. The World Economic League Table 2018 (WELT 2018, data compiled by the CEBR), concluded that the UK economy had recovered from the initial economic blip after the Brexit referendum and now looks set to maintain its position in the rankings It could even improve its position by 2020 by overtaking France. WELT added that the fears of the economic impact of the Brexit vote were exaggerated. The Department for Business, Energy and Industrial Strategy (BEIS) unveiled its industrial strategy at the end of November (Annex table 2 outlines the strategy.) The strategy aims to improve productivity, investment, earnings and growth by supporting successful industries, including pharmaceuticals, in need of support. 46 The reception was mixed, with businesses calling on the BEIS to announce more concrete policies and some serious funding alongside its new strategy. 47 Brexit update There is little to add to the timetable as discussed in our last Perspective. 48 However, at this point it is worth emphasising three key dates: 49 The European Union (Withdrawal) Bill: the report stage will be in the Commons on 16 January 2018 and the third reading on 17 January The Bill will then go to Lords. Both the UK and the EU are aiming to complete the UK-EU transition agreement by March There is a European Council meeting on March 2018 (the next meeting is June). Concerning the future framework, Michel Barnier (the EU s chief negotiator) is planning to complete the draft deal in October 2018, for sign off by the European Council at their October 2018 meeting (the next meeting is December). 7

8 References 1. ONS, UK producer price inflation: November 2017, 12 December ONS, UK consumer price inflation: November 2017, 12 December Department for Business, Energy & Industrial Strategy, Monthly and annual prices of road fuels and petroleum products, 21 December Bank of England, Monetary policy summary and minutes of the MPC meeting ending 13 December 2017, 14 December The Bank s November Inflation Report assumed oil prices of 40-45pb (approximately $54-60pb, at $/ 1.35), until OBR, Economic and fiscal outlook, November The OBR assumed oil prices at $54pb for FY2017 and $58pb for FY Ruth Lea, Falling oil prices and more problems in the Eurozone, Arbuthnot Banking Group, 15 December Ruth Lea, Households spending power: real earnings tell only part of the story, Arbuthnot Banking Group, 23 October 2017, discussed the IMF s October projections. 8. BBC, Oil rallies after Opec ministers announce output cut, 29 September The Organisation of the Petroleum Exporting Countries (OPEC) currently has 14 members: Algeria, Angola, Ecuador, Equatorial Guinea (since May 2017), Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. 10. BBC, Opec countries agree first oil output cut in eight years, 30 November 2016, discussed the Vienna Agreement decided upon at the 171 st Meeting of the Conference of the OPEC (30 November 2016). 11. BBC, Non-Opec countries agree to cut oil output, 10 December OPEC, OPEC and non-opec Ministerial Meeting, 10 December OPEC, Declaration of Cooperation, 30 November Bank of England, Monetary policy summary and minutes of the MPC meeting ending 13 December 2017, 14 December OPEC, Declaration of Cooperation, 30 November BBC, Oil exporters agree to extend output curbs, 30 November BBC, Oil prices rise amid Iraq tensions, 16 October Daily Telegraph, Global oil explorers to cut spending by $3bn, 5 January 2018, discussed tensions in Iran. 19. Daily Telegraph, Good times of lower cost fuel are over, claims the RAC, 4 January 2018, reported that INEOS had to close the North Sea pipeline due to a crack. 20. CNBC, US crude rises 1.2%, settling at $57.36, but still posts biggest weekly loss in two months, 7 December 2017, reported data this week showed that U.S. crude output had risen 25,000 bpd to 9.7mbpd in the week to 1 December, the highest production since the 1970s and close to the production levels of Russia and Saudi Arabia. It also reported that strong Chinese imports supported crude oil futures on 1 December. 21. International Energy Agency (IEA), Oil markets report, 14 December 2017, discusses US production. 22. International Energy Agency, Oil markets report, 14 December 2017, 23. US Energy Information Administration (EIA), Short-Term Energy Outlook, 9 January IMF, Primary commodity prices, price forecasts, IMF database, data not adjusted for inflation, July Ruth Lea, Economic prospects in 2018: still cautiously optimistic, Arbuthnot Banking Group, 2 January 2018, which see for data up to that date. 26. ONS, UK index of production: November 2017, 10 January ONS, Construction output in GB: November 2017, 10 January ONS, UK trade: November 2017, 10 January ONS, Labour productivity: 2017Q3, 5 January Markit/CIPS manufacturing PMI, UK manufacturing sector growth remains solid at end of 2017, 2 January 2018, reported the PMI registered a high 56.3 in December, though lower than November s 51- month high of

9 31. Markit/CIPS construction PMI, Construction output growth eases slightly in December, 3 January 2018, reported the PMI slipped to 52.2 in December (53.1 in November) but was above the 50.0 nochange threshold for the third month running. 32. Markit/CIPS services PMI, Business activity growth picks up, but strong cost pressures persist, 4 January 2018, reported the PMI picked up to 54.2 in December, compared with November s 53.8, to signal the second-fastest upturn in service sector output since April NIESR, Monthly GDP estimates: 3 months to November, 10 January Bank of England, Money and credit: November 2017, 4 January Ben Guttman-Kenney, Liam Kirwin & Sagar Shah, Who s driving consumer credit growth?, Bank Underground blog, 8 January They also concluded that it was reassuring that there was a lack of evidence that mortgage lending restrictions were pushing mortgagors towards taking on consumer credit. 36. CityAM, British debt boom is not causing new subprime bubble, say wonks, 9 January SMMT, Car registrations: December 2017, 5 January BBC, UK car sales see first drop for six years, 5 January IMF, United Kingdom: Staff Concluding Statement of the 2017 Article IV Mission, 20 December BBC, IMF downgrades UK growth forecast on Brexit uncertainty, 20 December Ruth Lea, Households spending power: real earnings tell only part of the story, Arbuthnot Banking Group, 23 October 2017, discussed the IMF s October world forecasts (including the UK). 42. CEBR, World Economic League Table 2018, 26 December Daily Telegraph, Project Fear was wrong and UK economy will overtake France in 2020, say economists, 26 December 2017, also reported that India will leapfrog the UK and France to become the world s 5 th largest economy in dollar terms by Moreover, The UK will fall to 7 th largest by 2032, overtaken by India and Brazil. 44. BEIS, Government unveils Industrial Strategy to boost productivity and earning power of people across the UK, White Paper, press release, 27 November Department of Business, Energy and Industrial Strategy (BEIS), Industrial Strategy: building a Britain fit for the future, White Paper, 27 November BBC, Will the government s economic medicine work?, 27 November 2017, explained the strategy as follows: pick an industry that the UK is already good at and needs investment. Chuck in a bit of government money, cluster the right institutions around it, commit to provide the skills base and give them somewhere to try their new stuff. That could mean faster trials for drugs in the NHS or using public roads to test driverless cars. private investment ensues. 47. Daily Telegraph. Inadequate industrial strategy gets tepid response, 27 November Ruth Lea, Economic prospects in 2018: still cautiously optimistic, Arbuthnot Banking Group, 2 January CityAM, What s around the corner?, 3 January

10 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Annex Chart 1a Effective exchange rates (ERIs) for sterling, euro, and US dollar: monthly averages (October 2015-Dec 2017) Dollar ERI Euro ERI Sterling ERI Sterling ERI (2005=100) Euro ERI (1990=100) Dollar ERI (1990=100) Chart 1b /$, / : monthly averages (January 2015-Dec 2017) /$ / /$ / Source: Bank of England database (spot rates). 10

11 Chart 2 CPI and RPI annual inflation (%), , OBR forecast ( ) RPI annual inflation 10 5 CPI annual inflation 0 CPI inflation (OBR forecasts) Sources: (i) ONS, UK consumer price inflation: November 2017, 12 December 2017, database; (ii) for the RPI; (iii) OBR, Economic and fiscal outlook, November Table 1 Economic data tracker Date Release Source Quarter Outcome 12 Dec CPIH (Nov) ONS 2017Q4 YOY inflation: 2.8% (Nov), 2.8% (Oct) 12 Dec CPI (Nov) ONS 2017Q4 YOY inflation: 3.1% (Nov), 3.0% (Oct) 12 Dec PPI (output) (Nov) ONS 2017Q4 YOY inflation: 3.0% (Nov), 2.8% (Oct) 12 Dec PPI (input) (Nov) ONS 2017Q4 YOY inflation: 7.3% (Nov), 4.8% (Oct)) 12 Dec PPI (input, imported) (Nov) ONS 2017Q4 YOY inflation: 7.4% (Nov), 4.1% (Oct) 12 Dec House prices (Oct, official) ONS 2017Q3 YOY inflation: 4.5% (Oct), 4.8% (Sep) 13 Dec Employment (3 months to ONS 2017Q3-56k (QOQ), +325k (YOY) Oct) 13 Dec Unemployment (3 months ONS 2017Q3-26k (QOQ), -182k (YOY) to Oct) 13 Dec Unemployment rate (3 months to Oct) ONS 2017Q3 4.3%, compared with 4.8% a year earlier, joint lowest rate since Dec Vacancies (3 months to Nov) ONS 2017Q4 Total vacancies: 798k, +14k (QOQ), +45k (YOY) 13 Dec Earnings (3 months to Oct) ONS 2017Q3 2.5% (YOY, total pay, including bonuses), 2.3% (YOY, regular pay, excluding bonuses) 14 Dec Retail sales (Nov) ONS 2017Q4 Volume: +1.1% (MOM), +1.6% (YOY) 14 Dec Retail sales (3 months to ONS 2017Q4 Volume: +0.8% (QOQ), 1.0% (YOY) Nov) 21 Dec Public Sector Net Borrowing (PSNB) (November) 21 Dec Public Sector Net Borrowing (PSNB) (FY to date) ONS 2017Q bn (Nov 2017), compared with + 8.9bn (Nov 2016). ONS FY bn (Apr-Nov 2017), compared with 51.3bn (Apr-Nov 2016) 11

12 21 Dec Public sector finances, public sector net debt (PSND) (November) ONS 2017Q4 1,734.8bn (end-nov 2017, 84.6% of GDP), compared with 1,662.6bn (end- Nov 2016, 83.4% of GDP) 21 Dec Car production (Nov) SMMT 2017Q4-4.6% (YOY); home (-28.1% (YOY)), export (+1.3% (YOY)) SMMT -2.0% (YOY); home (-9.0% (YOY)), export (flat (YOY)) 21 Dec Car production (Jan-Nov 2017) 22 Dec GDP (2017Q3, 3 rd estimate) ONS 2017Q3 0.4% (QOQ, unrevised), 1.7% (YOY, revised) 22 Dec GDP: output breakdown ONS 2017Q3 Services: +0.4% (QOQ); production: +1.3% (QOQ); construction: -0.5% (QOQ) 22 Dec GDP: expenditure breakdown ONS 2017Q3 Household consumption: 0.5% (QOQ); General Government final consumption: -0.2% (QOQ); Gross fixed capital formation (GFCF): 0.3%; contribution of trade to GDP: zero, rounded (exports: 0.8% (QOQ); imports: 0.9% (QOQ)) 22 Dec Household saving ratio ONS 2017Q3 5.2% (2017Q3), 5.6% (2017Q2) 22 Dec Services (October) ONS 2017Q4 0.2% (MOM), +1.2% (YOY) 22 Dec Current Account, Balance of Payments (2017Q3) ONS 2017Q3 Deficit: 22.8bn (4.5% of GDP, 2017Q3), 25.8bn (5.1% of GDP, 2017Q2) 22 Dec Current account: EU/non- EU ONS 2017Q3 EU: deficit of 25.2bn; non-eu: surplus of 2.4bn 22 Dec Visible trade balance ONS 2017Q3 Deficit: 33.6bn (2017Q3), 32.3bn (2017Q2) 22 Dec Services balance ONS 2017Q3 Surplus: 27.7bn (2017Q3), 26.2bn (2017Q2) 22 Dec Primary income balance ONS 2017Q3 Deficit: 11.4bn (2017Q3), 13.2bn (2017Q2) 22 Dec Secondary income balance ONS 2017Q3 Deficit: 5.5bn (2017Q3), 6.5bn (2017Q2) 2 Jan Manufacturing PMI (Dec) Markit- CIPS 3 Jan Construction PMI (Dec) Markit- CIPS 4 Jan Services PMI (Dec) Markit- CIPS 4 Jan Mortgage approvals for house purchase (Nov) 2017Q4 2017Q4 2017Q (Dec), 58.2 (Nov) 52.2 (Dec), 53.1 (Nov) 54.2 (Dec), 53.8 (Nov) BoE 2017Q4 65,139 (Nov), after 64,887 (Oct), compared with 66,562 (average of previous 6 months) 4 Jan Total lending to individuals (Nov), of which: BoE 2017Q4 Growth rate (YOY): 4.0% (Nov), 4.0% (Oct) 4 Jan Secured on dwellings BoE 2017Q4 Growth rate (YOY): 3.3% (Nov), 3.2% (Oct) 4 Jan Unsecured credit BoE 2017Q4 Growth rate (YOY): 9.1% (Nov), 9.5% (Oct) 4 Jan Total loans to non-financial BoE 2017Q3 Growth rate (YOY): 1.7% (Nov), 2.0% businesses (Nov) 5 Jan Productivity (output per hour) (Oct) ONS 2017Q3 +0.9% (QOQ), +0.8% (YOY)

13 5 Jan New car registrations (Dec) SMMT 2017Q4 Dec: -14.4% (YOY), of which diesel % (YOY) 5 Jan New car registrations (Jan- Dec 2017) SMMT : -5.7% (YOY), of which diesel % 10 Jan Index of production (Nov) ONS 2017Q4 Production (Nov): 0.4% (MOM), +2.5% (YOY) 10 Jan Manufacturing output (Nov) ONS 2017Q4 Manufacturing output (Nov): +0.4% (MOM), +3.5% (YOY) 10 Jan Construction output (Nov) ONS 2017Q4 Output (Nov): 0.4% (MOM), 0.4% (YOY) 10 Jan UK trade in goods & services (Nov) ONS 2017Q4 Trade deficit: 2.8bn (Nov), 2.3bn (Oct) 10 Jan UK trade in goods (Nov) ONS 2017Q4 Visible trade deficit: 12.2bn (Nov), 11.7bn (Oct) 10 Jan UK trade in services (Nov) ONS 2017Q4 Services surplus: 9.4bn (Nov), 9.3bn (Oct) 10 Jan Monthly GDP estimates (3 months to Nov) NIESR 2017Q4 Growth rate: +0.5% (3 months to Nov, QOQ) 10 Jan 2017Q4 GDP forecast NIESR 2017Q4 Growth rate: +0.5% (2017Q4, QOQ) Sources include ONS website. Table 2 Industrial Strategy (BEIS) Objective To provide a long-term vision for how Britain can build on its economic strengths, address its productivity performance, embrace technological change & boost the earning power of people across the UK. Points to note Industrial Strategy Challenge Fund (ISCF) will invest 725mn in new Industrial Strategy Challenge Fund (ISCF) programmes to capture the value of innovation. The first Sector Deals (construction, artificial intelligence (AI), automotive, life sciences) have the objective of helping sectors grow & equip businesses for future opportunities, see business environment (the 4 th foundation, below). 4 Grand Challenges 5 foundations of productivity Ideas: to be the world s most innovative economy These are global trends that will shape our rapidly changing future & which the UK must embrace to ensure we harness all the opportunities they bring: Artificial intelligence (AI): we will put the UK at the forefront of the artificial intelligence & data revolution. Clean growth: we will maximise the advantages for UK industry from the global shift to clean growth. Ageing society: we will harness the power of innovation to help meet the needs of an ageing society. Future of mobility: we will become a world leader in the way people, goods & services move. There are 5 foundations, with a clear & complementary vision for each. 13

14 People: to provide good jobs & greater earning power for all Infrastructure: to provide a major upgrade to the UK s infrastructure Business environment: to be the best place to start & grow a business Places: to have prosperous communities across the UK 5 foundations of productivity: support Establish a technical education system that rivals the best in the world to stand alongside our world-class higher education system Invest an additional 406mn in maths, digital & technical education, helping to address the shortage of science, technology, engineering & maths (STEM) skills Create a new National Retraining Scheme that supports people to re-skill, beginning with a 64mn investment for digital & construction training Increase National Productivity Investment Fund (NPIF) to 31bn, supporting investments in transport, housing & digital infrastructure Support electric vehicles through 400mn charging infrastructure investment & an extra 100mn to extend the plug-in car grant Boost our digital infrastructure with over 1 billion of public investment, including 176mn for 5G and 200mn for local areas to encourage roll out of full-fibre networks Launch & roll-out Sector Deals (partnerships between government and industry aiming to increase sector productivity). The first Sector Deals are in life sciences, construction, artificial intelligence (AI) & the automotive sector Drive over 20bn of investment in innovative & high potential businesses, including through establishing a new 2.5bn Investment Fund, incubated in the British Business Bank Launch a review of the actions that could be most effective in improving productivity & growth of small and medium-sized businesses (SMEs), including how to address what has been called the long tail of lower productivity firms Agree local industrial strategies that build on local strengths & deliver on economic opportunities Create a new transforming cities fund that will provide 1.7bn for intracity transport. This will fund projects that drive productivity by improving connections within city regions Provide 42mn to pilot a Teacher Development Premium. This will test the impact of a 1,000 budget for high-quality professional development for teachers working in areas that have fallen behind Each foundation is supported by a range of policies designed to provide businesses with certainty & reassurance that the UK will continue to have a competitive edge, including: Raise total R&D investment to 2.4% of GDP by 2027 Increase the rate of R&D tax credit to 12% Invest 725mn in new Industrial Strategy Challenge Fund (ISCF) programmes to capture the value of innovation Source: BEIS, Government unveils Industrial Strategy to boost productivity and earning power of people across the UK, White Paper, press release, 27 November