Of weak wage growth and bond markets

Today I am going to look at some clear changes in the credit crunch era and the way that they link together. Let us start with a clear theme of these days about which there has been news this morning from the land of the rising sun. From Japan Macro Advisers.

The demand/supply condition in the labor market seems as tight as it could be. In May 2017, Japan’s job offers to applicant ratio soared to a 43-year high of 1.49. The increase in the job-offers-applicant ratio marks the third consecutive monthly rise. The current print exceeds the July 1990 levels (1.46) when the Japan economy was enjoying a bubble economy.

It makes you think that the labour market is on this measure stronger than it was than when Japan’s economy was at its peak albeit an unsustainable one. Actually on another measure the situation is so tight they need to look even further back.

New job offers to applicant ratio also show that there is simply not enough supply of labor in Japan. The new job offers to applicant ratio rose to 2.31 in May from 2.13 in the previous month. This marks the highest level of this ratio since November 1973.

As you can see by these measures the labour market is very tight in Japan and is reinforced by these ones reported by Market Insider.

The number of employed persons in May was 65.47 million, an increase of 760,000 or 1.2 percent on year.

The number of unemployed persons in May was 2.10 million, a decrease of 70,000 or 3.2 percent on year.

On the month ( May ) the unemployment rate did rise to 3.1% but as you can see the overall trend seems to be lower in spite of the fact that it is extraordinarily low. Indeed as we have discussed before theories such as the “natural rate of unemployment” or “full employment” are pretty much torpedoed by it as we mull how employment can be more than full?

But if we move to wage growth which according to econ 101 should be soaring we instead see this. From Japan Macro Advisers.

In April 2017, basic and overtime wages, otherwise known as regular wages, rose by 0.4% year on year (YoY), recovering from a decline of 0.1% YoY in March. While an increase in wages is a better news than a decline, the magnitude of the rise continues to be underwhelming.

Quite. As to the real wage growth promised by Abenomics and  reported by the financial  media?

The real wage growth, after offsetting for the inflation in consumer prices, was 0.0% YoY,

So Japan should be seeing wage growth but instead it is flat lining. If we are “Turning Japanese”  then the next bit of news is even worse you see that current wage index for full-time workers is 101 giving an initial though that there has not been much growth since it was based at 100 in 2015. But if you look back the peak in the series was 104.4 in January 2001 and no that is not a misprint.

A possible cause of this is highlighted below and it does provide food for thought as of course Japan is leading the way on a road that many others will be travelling.

The working age population in Japan, defined as the population of the age between 15 and 64, has been shrinking rapidly. In 2016, the work age population in Japan fell by 0.7 million people. Accordingly, job applicants have been declining by 5% per year in the last few years.

Moving On

If we look wider afield we see that wages are struggling beyond the shores of Japan as this from Reuters reminds us.

Wage growth across the developed world is weak. It’s only 2.5 percent in the United States and 2.1 percent in Britain.

It is interesting to note that the have real average hourly earnings falling at an annual rate of 1.3% in the US. The chart below shows that this particular dog is not barking.

Even the figures for Germany are no great shakes when we note this from this morning’s release on the labour market.

In May 2017, roughly 44.1 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). This was a record high since German reunification.

In the UK we have seen quite a change as fears of robots taking everyone’s jobs have been replaced by fears of a former Chancellor of the Exchequer doing so.

George Osborne, the editor of the Evening Standard and former chancellor of the exchequer, has added a sixth job to his portfolio – that of honorary professor of economics at the University of Manchester.

For some Friday humour here are some suggestions for George from the past.

Bond Markets

This week has seen bond markets fall as they try to adjust to a barrage of rhetoric and open mouth operations from central bankers. Those who immediately hid behind a sofa when Janet Yellen told us there would not be another financial crisis in our lifetimes will have missed U-Turns by the ECB and the Bank of England. Also there has been a rather bizarre PR campaign conducted by Bank of England Chief Economist Andy Haldane puffing him up to be the next Governor of the Bank of England on the grounds that he keeps forecasting wages incorrectly. Do I have that right?

We see that the ten-year yield in Germany has risen to 0.47% at one point this morning. If we stay with that whilst it is up that only takes it to around where it was in some of both February and March and indeed May. So not quite as being reported in many places. If we look at the UK the ten-year Gilt yield nudged 1.29% this morning. But if we step back these are very minor moves for markets that really believe what the central bankers are saying which is of course yet another failure for Forward Guidance.

Comment

I wanted to like these two factors ( wage growth and bond yields) because they provide a link to what has happened in 2017. I thought and wrote that it would be a rough year for bond markets based on rising consumer inflation whereas they appear to have looked at low rates of wage growth instead. Of course there have been all the central banking QE purchases but they were a known factor.

As to wages growth itself regular readers will be aware that I fear it is in fact worse than we are told due to the exclusion of the self-employed from the numbers. But also employment figures do not tell the whole story as this from Mario Draghi in Sintra tells us.

Another reason why there is some uncertainty over slack is the correct notion of unemployment – that is, there may be residual slack in the labour market that is not being fully captured in the headline unemployment measures. Unemployment in the euro area has risen during the crisis, but so too has the number of workers who are underemployed (meaning that they would like to work more hours) or who have temporary jobs and want permanent ones…….If one uses a broader measure of labour market slack including the unemployed, underemployed and those marginally attached to the labour force – the so-called “U6” – that measure currently covers 18% of the euro area labour force.

Maybe the weak wage growth is much less of a surprise than we are often told. Especially as it comes with an implied kicker that everything is okay due to this. From Reuters.

In the United States, household net wealth has soared by $40 trillion since the beginning of the expansion in 2009 to $95 trillion from $55 trillion. It is up $11 trillion in just the last two years.

Well that’s okay then is the message, except it isn’t or we would not be where we are.

 

 

It is UK trade and exports that George Osborne should be worried about

Yesterday was something of a strange day for analysis of the UK economy as the Chancellor of the Exchequer gave a rather odd speech in Wales. To get a full idea of the change I would like to take you back to as recently as November 25th for his Autumn Statement. Here is a flavour of it.

Since 2010, no economy in the G7 has grown faster than Britain……Our long term economic plan is working…..growth is then revised up from the Budget forecast in the next two years, to 2.4% in 2016 and 2.5% in 2017.

Also there was the wrapping of his optimism in the flag of the Office for Budget Responsibility.

The OBR has seen our public expenditure plans and analysed their effect on our economy. Their forecast today is that the economy will grow robustly every year, living standards will rise every year, and more than a million extra jobs will be created over the next five years.

So in short happy days were ahead conveniently funded by the OBR finding quite a lot of money down the back of its forecasting sofa. This posed yet another question for the role of the OBR which has been sucked back into the UK establishment in my view. There were opposing views such as ex Bank of England economist Tony Yates who said that such views were absurd.

Quite a change

This was a doppelganger of “yesterday all my troubles were so far away” as in the intervening 6 weeks or so there seems to have been something of a quantum reversal.

I worry about a creeping complacency in the national debate about our economy.

Do you mean the creeping complacency that you spread on the 25th of November George? Anyway let us look at his explanation.

Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world.

Ah it’s somebody else’s fault! What can we do then?

2016 is the year we can get down to work and make the lasting changes Britain so badly needs….. This year, quite simply, the economy is mission critical. We have to finish the job.

This is really quite a confession as after all he has been Chancellor for over five years now so what has been happening in that period if we now need “lasting changes”? Odd when we were told only in November that the “difficult decisions” had been taken “when I presented my first Spending Review” back in the summer of 2010.

Indeed we got a warning which was not far off apocalyptic.

Or it’ll be the year we look back at as the beginning of the decline.

Actually if people were to decide the UK was in decline surely they would look back to the beginning of his Chancellorship in May 2010. But those like me who criticised the OBR back in November will be wondering what has happened to the £27 billion boost they found down the back of their sofa? It does not seem to have lasted long.

We did get a reference to monetary policy that the Chancellor is likely to regret.

Let’s be clear, higher interest rates are a sign of a stronger economy.

There are two issues here. Firstly he is highlighting something that the Bank of England has moved away from as I discussed only on Monday. The idea previously pushed by Governor Mark Carney back in June 2014 that they would rise “sooner than markets expect” or in the summer of this year that they would “come into focus around the turn of the year” is to use my song of the day so yesterday. Perhaps nobody has told George yet. Actually that critique seems to apply to the UK’s political class in general as the Shadow Chancellor John McDonnell parroted a very similar line. Also I would imagine that many of you are wondering why if interest-rates are a sign of a stronger economy we have had an “emergency” 0.5% Bank Rate for nearly 7 years!

Also if something is proving to be useless you have to big it up.

So I’ve created a powerful new Financial Policy Committee in the Bank of England

According to the Halifax UK house prices are rising at an annual rate of 9.5% whilst the FPC is wondering whats on the lunch menu?

Trade is a problem for the UK

Yesterday I exchanged some data with Andrew Sentance about UK exports and today one part of the trade figures backs up his argument.

UK export growth averaged 5.6% per year over the past 20 years, between 1994 and 2014

This is rightly called a “strong performance” but there is a rub as shown below.

UK’s export growth has been relatively low among the G7 since 2012. UK exports fell by 1.5% in 2014, the only country in the G7 to see negative export growth.

Regular readers will be aware of my argument that the Bank of England made a mistake in 2012 by rebalancing the UK economy towards the housing market in the summer of 2012 via its mortgage and banking subsidy effort called the Funding for Lending Scheme. Is it a coincidence that as the UK obsessed about house price gains our eye was not on the ball of export growth? I would argue not. There are always issues with any extrapolation so take care but the number below provides food for thought.

estimates for 2014 suggest that UK goods exports were 8.7 percentage points below their long run average.

How has this come to be? Well take a look at the breakdown.

UK goods exports, in nominal terms, have been contracting at an average rate of -1.6% since 2012, and have been at the bottom of the G7 range. In 2014, UK goods exports fell by 4.1% – the only G7 economy to see negative growth. This was also the lowest growth rate seen since 2009.

The bright light for the UK for so long has been services exports as shown below.

UK exports of services, in nominal terms, have been close to the top of the G7 range since 1994 and consistently saw positive growth. They have grown at an average rate of 7.6% in each year over the 20 year period- which was also the highest average growth rate among the G7 countries

It is nice for us to be able to bask in the pleasure in being the top of a positive league table. However here too our eye seems to have drifted off the ball.

Recent data suggests that UK exports of services slowed in 2014 compared to 2013 by 6.5 percentage points, down to 2.3%. UK exports of services had the lowest positive growth rate in 2014 compared with its G7 counterparts, growing by 2.3%.

A (space) oddity

Apologies as there are actually two. Let me open with the rather odd development that in a booming economy we seem to be importing less.

Imports decreased by £1.2 billion (1.1%) to £101.7 billion in the 3 months to November 2015

Some of that is oil but by no means all of it. Also in spite of the recovery in many of our trading partners in Europe we are exporting less as well.

Exports decreased by £0.3 billion (0.5%) to £71.0 billion in the 3 months to November 2015

A little awkward which even if we allow for lower oil prices has us mulling the fact that world trade seems to be in decline in an apparent boom.

Trade feeds into economic growth

Apologies for a statement of the obvious and let me switch to the more precise net trade feeds into economic growth. This really is something for George Osborne to worry about in my opinion. From today’s UK Economic Review.

The drag from net trade on GDP growth

As we look into the detail we see this.

This has largely been driven by the absence of growth in the export of goods, which in Q3 2015 were 1.7 percentage points lower than the average level in 2008 (as a percentage of nominal GDP), while the import of goods increased by 1.1 percentage points over the same period.

It has been a dragging anchor on the UK economy and its GDP in the credit crunch era as the latest quarter indicates..

Net exports pulled down GDP growth slightly by 0.2 percentage points, for the quarter on quarter a year ago growth, but by 1.0 percentage point for quarter on quarter growth.

Comment

This morning’s UK Economic Review sort of backs George Osborne and the OBR’s past optimistic position.

this still represents the eleventh consecutive quarter of GDP growth and continues the positive trend in rising output that started in 2013.

However the new “realism” seems to have come from this development.

Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.

In economic terms as we review the situation we see that according to the ONS (Office for National Statistics) analysis of this morning the issue is mainly one of trade. Odd that the Chancellor failed to point that out.

Also this is something of a record for even the hapless OBR as only 6 weeks later even the Chancellor has abandoned its forecasts. Time to put it out of its misery.

We are good Europeans

The credit for this never seems to quite arrive at our door but look what we have been doing to help the rest of Europe.

This resulted in a widening of the trade in goods deficit with EU countries to a record level of £22.9 billion in the 3 months to November 2015 compared with the 3 months to August 2015.

There is something rotten in the state of Denmark

One of the most famous quote in literature so let me apply it to the Nationalbanken which did this yesterday.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point.

They do not seem to be keen on pointing out that it makes the new rate -0.65% so let me help out. But who outside the world of central banking thinks that a 0.1% change in interest-rates materially changes anything? It will be a long road back to 0% at this rate! Also the costs of changing interest-rates around the economy seem likely to outweigh any benefit. So let me leave you with a musical summary from the nutty boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha