Today brings the UK labour market into focus and in particular the situation regarding both real and nominal wage growth. Before we get to that there was news yesterday evening from the Bank of England on one of the highest paid categories.
The 2019 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs. It would therefore be able to withstand the stress and continue to meet credit demand from UK households and businesses.
Yes it is time for the results of the annual banking stress tests which of course are designed to look rigorous but for no-one to fail. So far the Bank of England has avoided the embarrassment of its Euro area peers who have seen a collapse quite soon after. In terms of the detail there is this.
Losses on corporate exposures are higher than in previous tests, reflecting some deterioration in asset quality and a more severe global scenario. Despite this, and weakness in banks’ underlying profitability (which reduces their ability to offset losses with earnings), all seven participating banks and building societies remain above their hurdle rates. The major UK banks’ aggregate CET1 capital ratio after the 2019 stress scenario would still be more than twice its level before the crisis.
As you can see the Bank of England is happy to slap itself on the back here as it notes capital ratios. Although of course higher capital ratios have posed their own problems abroad as we have seen in the US Repo crisis.
Major UK banks’ capital ratios have remained stable since year end 2018, the starting point of the 2019 stress test. At the end of 2019 Q3, their CET1 ratios were over three times higher than at the start of the global financial crisis. Major UK banks also continue to hold sizeable liquid asset buffers.
Actually the latter bit is also an explanation as to why banks struggle to make profits these days and why many think that their business model is broken.
Also I note that their view is that the highest rate of annual house price growth in the period 1987-2006 was 6.6% and the average 1.7%. I can see how they kept the average low by starting at a time that then saw the 1990-92 drop but only 6.6% as a maximum? Odd therefore if prices have risen so little that house prices to income seem now to have become house prices versus household disposable income and thereby often two incomes rather than one.
In terms of share prices this does not seem to have gone down that well with Lloyds more than 4% lower at 64 pence, Royal Bank of Scotland more than 3% lower at 252.5 pence and Barclays over 3% lower at 186 pence. Meanwhile it is hard not to have a wry smile at the fact that the UK bank which you might think needs a stress test which is Metro Bank was not included in the test. Although it has not avoided a share price fall today as it has fallen over 3% to 198 pence. Indeed, this confirms that it is the one which most needs a test as we note it was £22 as recently as January.
Let us start with what are a couple of pieces of good news.
The UK employment rate was estimated at 76.2%, 0.4 percentage points higher than a year earlier but little changed on the previous quarter; despite just reaching a new record high, the employment rate has been broadly flat over the last few quarters.
They get themselves into a little bit of a mess there so let me zero in on the good bit which is tucked away elsewhere.
There was a 24,000 increase in employment on the quarter.
There was also a favourable shift towards full-time work.
This was driven by a quarterly increase for men (up 54,000) and full-time employees (up 50,000 to a record high of 20.71 million), but partly offset by a 30,000 decrease for women and a 61,000 decrease for part-time employees.
I do not know why there was some sexism at play and suspect it is just part of the ebb and flow unless one of you have a better suggestion.
The next good bit was this.
the estimated UK unemployment rate for all people was 3.8%, 0.3 percentage points lower than a year earlier but largely unchanged on the previous quarter…….For August to October 2019, an estimated 1.28 million people were unemployed. This is 93,000 fewer than a year earlier and 673,000 fewer than five years earlier.
There were fears that the unemployment rate might rise. But the reality has been reported by the BBC like this.
UK unemployment fell to its lowest level since January 1975 in the three months to October this year. The number of people out of work fell by 13,000 to 1.281 million.
This area more problematic and complex so let me start my explanation with the data.
Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 3.2% for total pay (including bonuses) and 3.5% for regular pay (excluding bonuses).
The first impact is simply of lower numbers than we have become used to especially for total pay. Let us move to the explanation provided.
The annual growth in total pay was weakened by unusually high bonus payments paid in October 2018 compared with more typical average bonus payments paid in October 2019.
I have looked at the detail and this seems to have been in the finance and construction sectors where bonus pay was £12 per week and £6 per week lower than a year before. I have to confess I am struggling to think why October 2018 was so good as the numbers now are in line with the others? Anyway this should wash out so to speak in the next 2 months as October 2018 really stood out. Otherwise I would be rather troubled about a monthly increase this year that is only 2.4% above a year before.
So if we now switch to regular pay then 3.5% is a bit lower than we had become used to but in some ways is more troubling. This is because the spot figure for October was 3.2% and it looks as if it might be sustained.
This public sector pay growth pattern is affected by the timing of NHS pay rises which saw some April 2018 pay increases not being paid until summer 2018. As a result, public sector pay estimates for the months April to July 2019 include two NHS pay rises for 2018 and 2019 when compared with 2018. In addition, the single month of April 2019 included a one-off payment to some NHS staff.
Thus public-sector pay growth has faded away and is also now 3.2% on a spot monthly basis.
Anyway the peaks and troughs are as follows.
construction saw the highest estimated growth at 5.0% for total pay and 5.4% for regular pay…….retail, wholesale, hotels and restaurants saw the lowest growth, estimated at 2.3% for total pay and 2.5% for regular pay; this is the sector with the lowest average weekly pay (£339 regular pay compared with £510 across the whole economy)
There are elements here with which we have become familiar. The quantity numbers remain good with employment rising and unemployment falling although the rate of change of both has fallen. Where we have an issue is in the area of wage growth. The context here is that it did improve just not as much as we previously thought it did. However we still have this.
In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.5%, and annual growth in regular pay is estimated to be 1.8%.
That is calculated using the woeful CPIH inflation measure but by chance it at CPI are pretty similar right now, so I will simply point out it would be lower but still positive using RPI.
Thus we see that wage growth and inflation seem both set to fall over the next few months as we wait to see how that balances out. But the underlying issue is that we have an area which in spite of the recent improvements is still stuck in a depression.
For October 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at £510 per week in nominal terms. The figure in real terms (constant 2015 prices) is £472 per week, which is still £1 (0.2%) 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 October 2019 and £525 in February 2008, a 4.3% difference.
Fingers crossed that we can escape it…..