As we advance on the UK labour market data let us first note some good news. This is that the procedure for an “early wire” to be given to the UK establishment has been stopped. To be specific a list of people were in the past given the data some 24 hours before the rest of us, and as the ship of state is a somewhat leaky vessel there were obvious concerns that some traders would be more equal than others.
Moving back to today’s data the background to it was set by this official release from last week.
Productivity – as measured by our main measure, output per hour – fell by 0.5% in Quarter 1 (Jan to Mar) 2017.
As this is a factor in wage growth we have a potential driver of the dip in wage growth we have seen in 2017 but the problematic news did not stop there.
A fall of 0.5% takes productivity Quarter 1 2017 back below the peak achieved in Quarter 4 (Oct to Dec) 2007, which was broadly matched in Quarter 4 2016. Productivity is now 0.4% below the pre-downturn peak and 0.4% below the post-downturn peak.
The productivity problem
This is an example of what Winston Churchill meant when he said that Russia was a riddle wrapped in a mystery inside an enigma. The same type of thinking applies to productivity especially when it is described like this.
Productivity in Quarter 1 2017, as measured by output per hour, stood 16.8% below its pre-downturn trend – or, equivalently, productivity would have been 20.2% higher had it followed this pre-downturn trend
In my opinion looking at it like that merely tells us that the world has changed and that the productivity boat we were previously on sailed elsewhere. There is little point regarding it as a gap we can regain and I find it fascinating that those who seem to think we can get it back are supporters of policies like QE which have supported the zombie banks and companies which are a factor in this.
More significant to me is this from the June 2016 Economic Review.
Productivity is estimated to have grown at a compound average growth rate of 0.1% per quarter during the recovery between 2009 and 2014. This near-flat productivity growth is a phenomenon unprecedented in the UK since the Second World War.
We can update that because if we look at the expansion since the middle of 2013 we see that output per hour has risen from 98.1 then to 99.6 at the end of the first quarter. So a bit better than flat but not by much. This compares to past episodes.
This is in contrast with patterns following previous UK economic downturns where productivity initially fell, but subsequently bounced back to the previous trend rate of growth.
If we look back to the June 2016 Economic Review we can put a number on that.
However, at the same stages of both the 1990s and 1980s recoveries, productivity was more than 16% above the respective pre-downturn levels.
It is worse than that now as productivity three years or so later is where we thought it was then as whilst it has grown since the past was worse than we thought. What we can now clearly see is that yet another type of lost decade has been in play.
Moving to my explanation if we move on from the drop caused by the credit crunch and look at the more recent period I have written before that there are real problems in measuring productivity in the service industries. Not only are they pretty much 80% of our economy but they have been in essence our economic growth. Productivity in haircuts or operations for surgeons? Maybe in some cases but in others no.
The latest numbers seem to be picking this up.
Labour productivity fell in services but rose in the manufacturing industries; services productivity fell by 0.6% on the previous quarter, while manufacturing productivity grew by 0.2% on the previous quarter.
This is the good news side of the issue. What I mean by that is that the number of people who are employed continues to grow.
For March to May 2017, there were 32.01 million people in work, 175,000 more than for December 2016 to February 2017 and 324,000 more than for a year earlier.
Which brings more associated good news.
For the latest time period, March to May 2017, the employment rate for people was 74.9%, the highest since comparable records began in 1971.
My argument would be that the employment is mostly in the service sector where we struggle to measure productivity. If we note the rise and the recent struggles of UK output it may be that measured productivity fell again in the second quarter of this year. So there you have it would you prefer more people in employment or higher productivity? It is not of course completely that simple but it is a factor in play.
Oh and I noted another factor in rising employment.
The increase in the employment rate for women is partly due to ongoing changes to the State Pension age for women resulting in fewer women retiring between the ages of 60 and 65.
This does not necessarily get better as employment improves but generally does.
the unemployment rate for people was 4.5%; it has not been lower since April to June 1975………1.49 million unemployed people, 64,000 fewer than for December 2016 to February 2017 and 152,000 fewer than for a year earlier
Actually these were a little better although you might not think so from the official release.
Between March to May 2016 and March to May 2017, in nominal terms, total pay increased by 1.8%, lower than the growth rate between February to April 2016 and February to April 2017 (2.1%).
If you look into the detail you see that the annual rate of growth in May at 1.8% was better than the 1.3% in April ( where the annual bonus season was weak dragging it lower). This meant that if we switch to real wages the annual rate of fall rose to -0.9% from the -1.3% of April.
If we look deeper into the real wage situation we see that the index in May was at 100.8 which means that as it was set at 100 in 2015. So we have had economic growth with little if any real wage growth and that stretches back as the index was at that sort of level in the summer of 2011. There is a long way to go to the January 2008 peak of 105.8.
Actually as the “not a national statistic” CPIH is used as the inflation measure I am sorry to have to tell you that a more accurate inflation measure would show an even worse performance.
To my mind we should be more concerned about the slow rate of productivity growth than the drop in 2007/08. We are now in a world of QE and zombie banks which will take us some time to get out of especially as many places are still getting in it! I would be looking to take some of the service sector out of the numbers on two grounds. The first is that we simply cannot measure it and for others it is not appropriate. As to improving our performance there have been some interesting ideas from Diane Coyle but there are also dangers as I find myself thinking of all the money being spent on Smart Meters for a very small potential gain as I read this.
Ensuring adequate investment in infrastructure to meet our current and future needs and priorities
Also today is another grim day at the Bank of England especially for its Chief Economist Andy Haldane. Perhaps this is the true reason he is on something of a tour of the UK! Regular readers will be aware that I have listed the many failings of “Output Gap” theory in my time here. Andy has been a test case for these as he has got wage growth wrong again and again and again by using it. Well in February he thought he had struck a cunning plan by changing his framework so that the level at which wages would start to surge higher ( NAIRU) would be when unemployment fell to 4.5% or where we are now only a few months later as opposed to the couple of years he expected/hoped.
Dreamer, you know you are a dreamer
Well can you put your hands in your head, oh no!
I said dreamer, you’re nothing but a dreamer (Supertramp)