Today has opened with a reminder of one of the biggest hits of Steve Winwood.
While you see a chance take it
While you see a chance take it
It is on my mind for two reasons. The first is that the fifty-year Gilt yield in the UK has risen back to 1% after reaching an all-time low of 0.79%. It is still remarkably cheap for the UK to borrow for infrastructure projects and the like just not as cheap as it was. On the other side of the coin the Bank of England will be trying to make it cheaper today by buying some £1.27 billion of longer-dated ( 2036 – 2071) UK Gilts as part of its reinvestment programme for its £435 billion of QE holdings. This is an extension of QE which can do little good in my opinion which will now continue until 2071 as the Bank has bought a little over £2 billion of it, Something to affect our children and grandchildren.
There was more news on this subject yesterday as Barclays joined the list of banks adding to their exposure.
Total amounts set aside for PPI redress now stand at £51.8-£53.25 billion – over 5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 20 times over the past 8 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs. ( New City Agenda)
This has plainly boosted UK consumption and the stereotypical example would be on car sales. But it is not quite a free lunch for GDP as there have been offsetting impacts elsewhere.
- At Lloyds, retail misconduct costs have amounted to a staggering £14 billion, compared to dividends of just £500 million.
- RBS has not paid a penny in dividends to its shareholders, but has had to find £6.4 billion in misconduct costs and has chosen to pay £3.8 billion in bonuses.
- If Barclays had managed to restrain its misconduct costs then it could have tripled its dividend.
People have asked me why this has taken so long? Easy, those in charge of the banks have been able to maintain their positions with the large salaries and bonuses by “managing” the news flow. In banking crises just like in war the first casualty is the truth.
After yesterday’s strong GDP reading for July we maybe should not have been surprised to see some really good wages numbers, but perhaps not this good.
Estimated annual growth in average weekly earnings for employees in Great Britain increased to 4.0% for total pay (including bonuses), and fell to 3.8% for regular pay (excluding bonuses).
As you can see total pay growth reached 4% so what is called a big figure change and it was driven by the July number rising to 4.2%. Below are the sectoral numbers.
Of the sectors reported on, Construction and Finance and Business services are experiencing the highest pay growth, of over 5% (not adjusted for inflation) for total pay; manufacturing is experiencing the lowest pay growth, of 2.4%.
Actually construction wages rose at an annual rate of 7% in July. The numbers here have been boosted by bonus payments which have been around £30 per week for the last year. So it looks as though something has changed there and in a good way for once. I have to admit that it raises a wry smile as it fits with my Nine Elms to Vauxhall crane count rather better than the official construction figures.
Let me first show you the official view.
In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 2.1% and annual growth in regular pay is estimated to be 1.9%.
The problem with that is that it relies on the CPIH inflation measure which is 17% fantasy via the use of Imputed Rents ( it assumes homeowners pay themselves rent which of course they do not). Thus on a technical level it should not be used as a deflator at all but sadly the UK statistics authorities have abandoned such logic. Let me explain by how they present the overall picture now. They start with regular pay.
£470 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£461 per week), but £3 (0.7%) lower than the pre-recession peak of £473 per week for April 2008……..The equivalent figures for total pay in real terms are £502 per week in July 2019 and £525 in February 2008, a 4.3% difference.
Now let me show some alternative numbers from Rupert Seggins.
How close is real pay compared to where it was at the start of the crisis? That answer still very much depends on your favoured measure of prices. For CPIH fans it’s close, -1% below. If CPI’s your thing it’s -3%. If you prefer RPI it’s -8% and -11% if you like RPIX.
The problem with real wage growth is one of the main issues of the credit crunch and trying to sweep it away with the stroke of a statistical pen is pretty shameful in my view.
Employment and Unemployment
The numbers here were pretty good too.
the estimated employment rate for everyone was estimated at 76.1%; this is the joint-highest on record since comparable records began in 1971 and 0.6 percentage points higher on the year………Estimates for May to July 2019 show 32.78 million people aged 16 years and over in employment, 369,000 more than for a year earlier.
The cautionary note for employment is that the rate of growth has slowed as shown below.
In the three months to July 2019, UK employment increased by 31,000 to reach 32.78 million.
On the other side of the coin we see that unemployment continues to trend lower.
For May to July 2019, an estimated 1.29 million people were unemployed, 64,000 fewer than a year earlier and 716,000 fewer than five years earlier.
Some 11.000 lower in these numbers meaning it is at a 45 year low.
There is a lot to welcome in these numbers as we see wage growth pick-up with rising employment and falling unemployment. In the detail we see that the wage growth has been driven by bonuses and maybe there is a flattering of these numbers from timing changes. But it is also true that the change in the timing of NHS payments has fallen out of the numbers with no appreciable effect.
There are more than a few factors to consider. The wage growth has happened with little or no productivity growth as employment has risen by 1.1% over the past year. Next it is hard not to have a wry smile at the Resolution Foundation who had a conference on responding to recession yesterday. They are a little touchy if you point this out as this reply to me from their communications director highlights.
Given that the report says we’re not ready for a recession, we’re pretty glad we’re not in one . And as a pro-rising living standards think-tank, we’re obviously in favour of stronger wage growth.
Also there is an issue we have long expected. That is after countless occasions where it has been wrong, useless and misleading some were always going to cling to the Phillips Curve like a drowning (wo)man clings to a piece of wood.
For all the talk of its demise, the UK Phillips Curve shows signs of life ( FT economics editor Chris Giles )
To me this is a basic difference in approach. I adapt theory to reality whereas others adapt reality to suit pre-existing theory.
Oh and UK wage growth is now in line with the sort of rate at which the Bank of England would in the past be thinking of raising Bank Rate. So over to you Mark Carney and your Forward Guidance…..