Over the past week or so the pace of action in financial markets has really picked up. It was only yesterday that I was discussing disinflationary trends and this morning I note that the price of a barrel of Brent Crude Oil has fallen below US $84 per barrel. Since the peak of US $115.71 on June 19th it has fallen by some 27% and the pace has accelerated over the past 24 hours. The report from the International Energy Agency reducing oil demand forecasts for this year and next and telling us that supply exceeds demand right now certainly put the skids under the oil price! We are now back to levels last seen in the latter part of 2010 so some care should be taken as we have fallen very far very fast and must be vulnerable to a short-covering rally.
Also I would like readers to take a step back from the media coverage which will involve panic over disinflation and deflation in some confused combination. Whilst a falling oil price does signal issues with the current state of the world economy it is also a strong reflationary influence and so many economies will get a much needed boost from it. Indeed it will be oil importers who most benefit and there is a long list of them. For once there is some good news for the Euro area although it comes with a problem for the European Central Bank which will get lower inflation before the growth boost. Imagine the panic if Euro area consumer inflation should have a print below zero. Let me wish Mario Draghi good luck in explaining that one.
However we are seeing consequences of this oil price fall in more and more places with China adding itself to the list today. From the National Bureau of Statistics via Google Translate.
2014 years 9 months, the national consumer price index rose 1.6%
So the disinflationary trend is clearly in evidence (it was 3.1% this time last year) there with some already wondering if we will see before long a number less than 1%. With the producer price numbers negative that may yet happen. Of course Chinese consumers and workers will welcome the reduction in inflation and may choose to avoid reading the experts who will tell them it is bad for them.
As we switch to the UK we see that it will be receiving a boost from the falling oil price and maybe even a small one to the trade figures as it is now a net importer. Adding to this is the recent fall in the value of the UK Pound which has dipped below US $1.59 today. Whilst this will offset some of the oil price fall it should in theory give the economy a boost although the lesson of the 2007/08 depreciation was to weaken expectations for such effects.
We are seeing lower fuel prices at the pump at least. According to the official data petrol prices are some 5.2 pence per litre cheaper and diesel some 8.1 pence cheaper. As I driver of a diesel may I add a little hurrah to the narrowing of the gap? It used to be cheaper but that was before many of us in the UK were persuaded to switch fuel type. Let us hope that more price falls are on their way.
What about today?
Employment has continued its recent growth phase.
There were 30.76 million people in work. This was 46,000 more than for March to May 2014………The proportion of people aged from 16 to 64 in work (the employment rate), was 73.0%,
So our quantity measure has performed extraordinarily well considering the economic distress that we have seen in the UK. However as it approaches all-time highs in terms of the ratio (73.2%) we do have a problem for projecting that forwards. Is this a type of (near) full employment? Personally I think that there is still room for reductions in the under employed sector but any such thoughts about nearing a maximum poses obvious issues.
The improvement in employment has followed through to the unemployment numbers.
There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 fewer than a year earlier. This is the largest annual fall in unemployment on record. Records for annual changes in unemployment begin in 1972.
The unemployment rate continued to fall, reaching 6.0% for June to August 2014, the lowest since late 2008.
Again these are very welcome figures and we should perhaps take a moment to let them percolate.
The hours worked numbers did show a clearer change of trend as they had been growing but now did this.
Total hours worked per week were 987.3 million for June to August 2014. This was:
• little changed on March to May 2014,
• up 24.5 million (2.5%) on a year earlier,
If we continue with our glass half full view there is a glimmer of a possible improvement in productivity there as our economy was growing then (h/t Chris Dillow).
What about real wages?
This remains a problematic area to say the least.
For June to August 2014, regular pay for employees in Great Britain was 0.9% higher than a year
earlier and total pay for employees in Great Britain was 0.7% higher than a year earlier.
Between August 2013 and August 2014, the Consumer Prices Index increased by 1.5%.
As you can see wages continue to be growing more slowly than the rate of inflation. The number for total pay growth in August alone was marginally better at 0.8% but the theme remains broadly the same. If you want an even grimmer measure then take a look at the Retail Price Index which was rising at an annual rate of 2.4% in August. So real wages were falling at an annual rate of 0.7% or 1.6% in August.
Breaking the numbers down
The detail of the average earnings numbers is not what you might expect. You might be surprised to learn that public-sector pay (excluding RBS etc..) was up by 1.6% in the year to August. Not quite the impression we are given is it? Pay in manufacturing was a bright spot but as the last three months have gone 2.2%,1.9% and now 1.3% that looks as though it is fading. My commiserations go to those who work in the retail hotel and restaurant sector as annual pay growth was negative in both July (-0.9%) and August (-1.1%). As it is a low paid sector this looks particularly grim and oddly considering our economic position it is reversing a better effort up to this spring.
If we put 3% economic growth into a computer model I would suggest it would react in the manner of HAL-9000 in the film 2001 A Space Odyssey if we put in overall current wage growth let alone the falls in some areas.
I wanted to widen the perspective today beyond the boundaries of the UK because that is the environment we need to judge our labour market statistics from. We should welcome the fact that the quantity measures are as strong as they are but also be troubled by the continued failure of wages to even keep up with inflation. How can this be with economic growth of 3%? Apparently in the new era quite easily.
I also welcome the fall in the oil price as it should give a boost and of course help the consumer. But it is not the only international trend right now as I observe that the government bond market of Germany has gone to further new highs today with its ten-year bond yield falling to 0.823%. I do not know about you but this makes asset prices (equities and houses) look very vulnerable to me right now. And yet we know that the establishment of political leaders and central bankers will do everything they can to stop any sustained falls. It could yet get very messy.
Of course there are places which could be forgiven for thinking that the credit crunch never existed. From the BBC.
Price of Football: Ticket increases outstrip cost of living
Market Update at 4:10 pm UK Time
It has been rather an extraordinary day with the US Dow Jones index falling some 350 points soon after opening and then swinging wildly. However the real moves -if you will forgive an old bond trader- have been found in the government bond markets. German 10 year bonds now yield a measly 0.77% which does not project much of an optimistic future does it? Also France saw Fitch move its outlook to negative last night and the response? Its government bonds have blasted higher too with the ten-year yield now 1.14%. Even children are old enough to remember days when adverse ratings moves led to upwards panic in bond yields not downwards ones!
Even the 10 year UK Gilt now yields less than 2%.