UK productivity rises as real wages and employment fall

After yesterday’s inflation paradox where we in the UK were told it was rising ( CPI), falling ( RPI) and also staying the same ( CPIH) there has been a couple of bits of good news. First not only for inflation prospects but the prospect of having reliable heating this winter and for the latter Italy will be even more grateful after having to declare a state of emergency. From Reuters.

All main arteries that supply neighbouring countries from Austria’s main gas pipeline hub were back online before midnight after a deadly explosion there shut it down on Tuesday, the co-head of Gas Connect Austria said on ORF Radio on Wednesday.

Also looking ahead UK consumers can expect lower water bills as the regulator has announced this already today.

Our initial view of the cost of capital – based on market evidence – is 3.4% (on a real CPIH basis). In RPI terms it is 2.4%, which is a reduction of 1.3% from the 2014 price review. The effect of this change alone should lower bills of an average water and wastewater customer by about £15 to £25.

It is hard not to have a wry smile in that they are in line with the UK establishment by using CPIH but also reference RPI! Oh and whilst the news is welcome we should not ignore the fact that Ofwat has looked the other way as UK water bills have risen year after year.

Real Wages

Whilst the news above is welcome sadly inflation has been higher than wage growth in the credit crunch era as shown by the chart below.

The one area where a little cheer is provided is clothing. They do not compare with house prices so let me help out. Yesterday’s data release is very unwieldy but if we pick the middle of 2007 as June the house price index was 97.7 and as of October this year it was 117.4. Plenty of food for thought there as against nominal wages may be not so bad but there is a catch which is that we are comparing to the previous peak. Of course the picture in terms of real wages is worse as they have fallen.

As to the more recent trend then housing costs are depressing real wages still. The establishment try to hide this as we see here.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.9% in Quarter 3 (July to Sept) 2017 compared with the corresponding quarter of the previous year.

In their fantasy world ( remember they use Imputed Rents which are never paid) you might think that housing costs are rising more slowly than other inflation. But if you switch to actual and real prices of which house prices are one then you get this.

OOH according to the net acquisitions approach have grown by 3.9% in Quarter 3 2017 compared with the corresponding quarter of the previous year.

As you can see the impact of housing costs on the ordinary person’s budget over the past year looks very different if you use real numbers as opposed to made up ones from the fake news registry. On this road the UK real wages situation looks different as a rough calculation shows that CPIH would have been 3.1% just like CPI in October.

The end of “overtime”?

Just for clarity this in the UK involves working beyond your contracted hours and the state of play according to the Resolution Foundation is this.

The typical premium has gone from over 25 per cent in the 1990s to under 15 per cent today. Only one in five workers now get traditional time and a half rates. Most women get absolutely no pay premium at all, possibly because they are more likely to work in sectors without unions.

We can see that as time has passed the reduction in the premium for overtime has put downwards pressure on pay measures. The scale of the issue is shown here.

This is a big deal because a lot of us do paid overtime – 2.6 million people do over 1 billion hours of it a year (and that’s before we even start on the 1.5bn hours of unpaid overtime). Men and those doing manufacturing or transport jobs are most likely to be doing some, but amongst those that do overtime it is a bigger deal financially for part timers and women.

So it has a solid impact which if we look at the trends has negative. The problem is what to do about it? Invariably the Resolution Foundation aligns itself with the central planners but sadly I doubt we can simply wish the problem away by legislation. After all we have an employment success story and some of that seems likely to be due to lower wages at the margin. You could argue employers are being more efficient in allocating hours and work which is a good thing. However it is an alloyed good thing as this time period is one where we have seen the growth of zero hours contracts which presumably have taken up some of the slack. Some types of work ( most of my career for example) are defined around performing tasks not how long it takes to do them so perhaps this definition of work has expanded. More research is welcome though especially into why women seem much less likely to benefit from overtime.

Today’s data

There was slightly better news on wages driven mostly by higher bonuses.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.3% excluding bonuses, compared with a year earlier.

Still a fair way below the hopes and expectations of the Bank of England and this is what it does to real wages.

In the three months to October 2017, real earnings decreased by 0.2% (including bonuses) and by 0.4% (excluding bonuses) compared with a year earlier.

That is using the CPIH measure so if you want it with house prices add around 0.3% to the decline.

Adding to the welcome news was another fall in unemployment.

There were 1.43 million unemployed people (people not in work but seeking and available to work), 26,000 fewer than for May to July 2017 and 182,000 fewer than for a year earlier.

However for perhaps the first time there is a hint of a change ( 2 months data now) in what up until now has been an employment success story.

The UK employment rate fell by 0.2 percentage points to 75.1% in the three months to October 2017 compared with the previous quarter.The level of employment fell by 50,000 for men and by 6,000 for women.


We see a complex picture in today’s data. Wage growth is up on a three monthly basis but this is not because October was an especially good month ( 2.3%) it was that July which dropped out of the data was a particularly weak one (1.7%). Ironically the weaker employment data may offer a little hope as rising output with lower employment will be good for the productivity data and this is confirmed by the hours worked numbers.

Between May to July 2017 and August to October 2017, total hours worked per week decreased by 5.9 million to 1.03 billion.

However on the other side of the coin the employment data is simultaneously troubling as the success saga has at best reached a soggy patch. Mostly it seems that it was the self-employed who saw a change.

 The employment level decreased by 50,000 for men and by 6,000 for women………..The total number of self-employed decreased by 41,000 in the three months to October 2017 compared with the three previous months.



What does the Bank of England think about UK wage growth prospects?

A sense of perspective can give us also a direction of travel so here is this from Sir Jon Cunliffe of the Bank of England yesterday.

The unemployment rate in the UK today is 4.3%. The last time it was that low was 1975 – the year I
graduated from university.
That year, average wages grew by 24%. 42 years later, with unemployment at the same level, whole
economy average weekly earnings grew by 2.2%

Oh and just as a reminder as Sir Jon omitted this bit the wage rises were not a sign of economic triumph as inflation ( measured by the Retail Price Index or RPI) rose to 26.9% in August of that year. Also this is an innovative way of describing a period when RPI inflation went over 5% for a while as the Bank of England sat on its hands.

 energy price inflation between 2010 to 2013;

Actually innovative ( for newer readers this word was twisted in the Irish banking crisis and now in my financial lexicon for this times has an ominous portent to it) move was to claim this.

That is why the Bank of England has a clear primary objective of price stability and a forward-looking inflation
targeting remit. We have an objective to support the government’s economic policy but it is a secondary
objective and subject to the first.

The truth is that it is the other way around as the inflation surge in 2011 that I pointed out earlier or the current phase where the Bank of England cut Bank Rate and expanded QE into an inflation target overshoot proves. In terms of Yes Prime Minister being willing to state things like that would be a qualification for a knighthood or as it described it a K. Indeed another potential qualification for a K might be to write and say this.

Central bank credibility is crucial to anchoring inflation expectations………. Arguably we are only now discovering the impact at very low levels of unemployment of the Bank of England’s credibility as an inflation anchor.

Apparently it is doing this right now while inflation is overshooting! Quite how this triumph fits with the credit crunch era is another fantasy which skips reality.

Wage Growth

There is reality expressed here.

Equally strikingly, that 2.2% is about the same rate of wage growth as in 2011 when unemployment rose
above 8% for the first time since the mid-1990s. Over the following 6 years unemployment has fallen quickly
and continuously but nominal pay growth has largely remained bound between 1 and 3%.

If you think this through logically then this is a basis for my argument that rather than aiming for an inflation rate of 2% per annum you should go lower and then we should find some real wage growth. Also it is sad to see a policymaker skip what are the major issues and causes of what is happening.

I noted above that changes in the world of work have very possibly changed the pricing power of labour and
workers’ appetite for risk (i.e. job insecurity). This is in itself a large area of current debate and I do not want
here to go into these in great detail.

The theme seems to be why look at relevant issues when you can continue to chew over the continuing failure of the Phillips Curve which gets pages and pages as opposed to this one paragraph below.

Some of these important changes in the structure of the labour market, such as the rise in self-employment
and decline in union membership, predated the financial crisis. Others, like the rise in temporary work and
zero hours contracts, are more recent. Technology – and the rise of the gig economy – has further
increased what my colleague Andy Haldane has called the ‘divisibility’ of labour.

Real Wages

It is simply astonishing that a man who voted for the monetary policy easing in August 2016 ignores its role in this.

Inflation is currently above target as a result of the post referendum depreciation of sterling and forecast, for
that reason, to remain so over the next three years.

I find it odd that they forecast the fall in the Pound will keep inflation above target for the next three years because as I explained yesterday the major effects are pretty much behind us now. The inflation Forward Guidance gets odder and indeed somewhat bizarre when you read this.

Domestically generated inflation pressure, however, appears low……..Bank staff calculations suggest that adjusted for this effect indicators of domestic inflation pressure are below levels consistent with the 2% target.

Oh and those who had to make calculations back when inflation was just below 27% are permitted a wry smile at this description of 4% inflation ( using the RPI index).

Measuring domestically generated
inflation when externally generated inflation pressure is high, as at present, is not straightforward.

The general Bank of England view is that wage growth is about to pick up and of course that has been true for years now but specifically it is based around this.

3 month on 3 month annualised AWE growth for regular pay is 2.9%.

As ever central bankers are cherry-picking the data as individuals will care most about total pay. However Sir Jon is less convinced by thoughts of a rise in wages although whilst he does not put it this way they are likely to be supported by lower inflation.

there is in my view a not immaterial risk that the
trade-off is not as it currently appears and that domestic inflation pressure will undershoot the Committee’s
collective expectation.

Today’s Data

This was another disappointing day for the Forward Guidance of the Bank of England.

Between July to September 2016 and July to September 2017, in nominal terms, both regular pay and total pay increased by 2.2%, little changed compared with the growth rates between June to August 2016 and June to August 2017.

This meant that real wages did this and for fans of the RPI subtract around 1%.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.4% including bonuses, and fell by 0.5% excluding bonuses, compared with a year earlier.


There is fair bit to consider here. In my view the views of the Bank of England are driven mostly by an attempt to avoid having to say that the monetary policy easing of August 2016 was a mistake. The majority in favour of this month’s Bank Rate rise do so by optimism on the wages front although of course there is a weakness there as we currently have fallen real wages. Sir Jon Cunliffe avoids it by thinking that inflation will be weak looking ahead.It remains a shame that whatever their views they continue to persist in their beliefs around the Phillips Curve. Sometimes I wonder what it would take for them to abandon it and put it in the recycling bin?

There was a hopeful sign in today’s data which is summarised below.

*U.K. 3Q OUTPUT PER HOUR RISES 0.9% Q/Q, FASTEST SINCE 2Q 2011 ( h/t @stewhampton)

Economics is not called the dismal science for nothing as we note a possible trajectory change as there were fewer hours worked  ( and indeed a 14000 fall in employment). But we have been looking for a productivity rise and this is one of the first signs of it and any continuation would be welcome. Also my first rule of OBR Club may well be in play as of course it ( and the Bank of England) have just downgraded the UK productivity outlook. Sometimes you really couldn’t make it up!







The diversity of modern employment has left the official data behind

Today has opened with the subject of wages and pay in the news ahead of the official data on the subject. The particular issue is described by the Financial Times below.


It was Mr Hammond’s predecessor, George Osborne, who first imposed pay restraint on the public sector back in 2011-12, as part of the then coalition government’s efforts to balance the state’s books after the financial crisis. He initially announced a salary freeze, and later a 1 per cent cap on pay rises.

This slipped out of the news when inflation was low but has returned as it has risen and another factor is that a minority government is much less likely to enforce such a policy than a majority one. The actual changes announced so far are below.


The government announced on Tuesday that prison officers will be given a 1.7 per cent pay increase, while the police will receive a one-off 1 per cent bonus on top of their 1 per cent rise. The settlement for the prison service is in line with an independent pay review body’s recommendations. The deal for the police is somewhat less generous than the 2 per cent recommended by another pay review body.

So far the changes seem to be fiddling at the edges but those who have read or watched the Dambusters story will know that a small crack can turn into a flood of water. It seems unlikely that teachers and nurses for example will not get such deals although I also note that the new regime remains below inflation.

As to the debate over wages in the public and private sectors the Institute for Fiscal Studies offered some perspective in May.


Public sector pay rose compared to private sector pay during and after the 2008 recession, as private sector earnings fell sharply in real terms. Public pay restraint since 2011 has led to the difference between public and private sector pay returning to its pre-crisis level.

Of course not everyone has suffered as salaries for Members of Parliament have risen from £65,768 in April 2010 when an “independent” body was appointed to £76,011thia April.

House Prices

One of the features of using a national average is that some do better and some do worse. On that vein there is this from the Yorkshire Building Society.

However, homes in 54% of local authority areas – including Edinburgh, Birmingham, Peterborough, Leeds and Harrogate – are more affordable now than they were before the financial crash due to wages increasing at a higher rate than property values over this period.

This leads to this conclusion.

At a national level, since September 2007 affordability has improved by 0.6% in Britain overall, by 18.9% in Scotland, 17.2% in Wales but has worsened by 3.3% in England.

My challenge to their calculations come from the fact that they use earnings which have of course risen as opposed to real earnings which have fallen in the credit crunch era. But it is a reminder that in some places house prices have fallen. For example if the “Burnley Lara” Jimmy Anderson was to buy a place back home with the earnings created by over 500 test wickets he would see an average house price of £77,629 as opposed to £94,174 back in 2007.

Oh and as you click on their site they announce their lowest mortgage rate of all time which is 0.89% variable for two years. I also note that it is only variable down to 0% as perhaps they too fear what the Bank of England might do in the future.

Also this morning’s data release reminds us that official UK earnings data ignores the increasing numbers of self-employed.

self-employed people increased by 88,000 to 4.85 million (15.1% of all people in work)

The UK employment miracle

It is easy to forget that the numbers below would have been seen by economists as some sort of economic miracle pre credit crunch.

For May to July 2017, 75.3% of people aged from 16 to 64 were in work, the highest employment rate since comparable records began in 1971…..For May to July 2017, there were 32.14 million people in work, 181,000 more than for February to April 2017 and 379,000 more than for a year earlier.

Some of this is likely due to changes in the state pension age for women but there is also a rise apart from that.  The overall picture is completed by the unemployment numbers.

The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 4.9% for a year earlier and the lowest since 1975…….There were 1.46 million unemployed people (people not in work but seeking and available to work), 75,000 fewer than for February to April 2017 and 175,000 fewer than for a year earlier.

The good news does leave us with several conundrums however. For example if the situation is so good ( employment rising when it is already high) why is economic activity growth weak? Or to put it another way why do we have low and sometimes no productivity growth? Last time around when we had a dichotomy between the quantity labour data and GDP it was the labour market which was the leading indicator but of course we do not know that looking ahead from now.

Average Earnings

These continued recent trends.

Between May to July 2016 and May to July 2017, in nominal terms, both regular pay and total pay increased by 2.1%, the same as the growth rates between April to June 2016 and April to June 2017.

There was a cautionary note in that if we look at the data for July alone there was a fall in bonus payments particularly to the finance sector so there is a possible slow down in pay on the way. However those numbers are erratic as we saw the same in April and then a bounce back.

Moving onto real wages we get something of a confirmation of my critique of the Yorkshire Building Society analysis above.

average total pay (including bonuses) for employees in Great Britain was £487 per week before tax and other deductions from pay, £35 lower than the pre-downturn peak of £522 per week recorded for February 2008 (2015 prices).

If we look at the annual rate of fall it is around 0.4% if you use the official inflation data which has switched to CPIH but around 1% higher if you use the Retail Prices Index.


This month has brought us a reminder that the credit crunch has affected people in many different ways. There was something of an economic aphorism that recessions were 80/20 in that for 80% not much changed but for 20% it did but these days more are affected. For example there are increasing numbers of self-employed about whose wages we know little. No doubt some are doing well but I fear for others. If we move to house prices some are seeing what are increasingly unaffordable values whilst others have seen price falls.

National statistics have been caused difficulties by this as for example depending on the survey used the base level is 10 employees or 20 depending on the survey. This was less of a problem when the economy moved in a more aggregate fashion but now assuming that is a mistake in my view. It also misses out ever more people.

I know the tweet below is from the United States but it covers a few of my themes including if you look closely an improvement apparently related to a methodology change.

Oh and the increases in 2015/16 came mostly as a result of the lower inflation central bankers tell us are bad for us.


The UK productivity crisis meets real wage growth

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)


Are we measuring the wrong type of productivity?

Today gives us an opportunity to look at the latest data on what is the key economic number these days which is wages growth. After yesterday’s inflation data we will be able to look at both nominal and real or inflation adjusted wages growth. The reason it has become a key number is that in countries like the UK ( and US and Japan..) is that the employment situation is strong and recorded unemployment has improved considerably but wages growth has been weak. In the extreme case of Japan there has so often been no wages growth.

An associated influence on this has been problems with productivity as of course it has helped drive wages growth in the past. Whereas according to Bank of England Chief Economist Andy Haldane that happy situation has been replaced by this.

Productivity growth has consistently underperformed relative to expectations, since at least the global financial crisis. This tale of productivity disappointment, in forecasting and in performance, has been extensively debated and analysed over recent years. Some have called it the “productivity puzzle”.

Indeed we have been on something of a road to nowhere.

For the past decade, average productivity growth has been negative. This is unusual, if not unique, historically. You would have to go right back to the 18th century to see a similarly lengthy period of stagnant productivity.

In case you were wondering it compares to this.

there has been a near-monotonic rise in UK productivity. UK TFP growth since 1750 has averaged 0.8% per year. Since the Industrial Revolution, GDP per capita has doubled roughly every 65 years and productivity roughly every 85 years.

Actually some of Andy’s numbers are a little contradictory as he suddenly agrees with the theme on here that things were deteriorating even before the credit crunch.

From 1950 to 1970, median global productivity growth averaged 1.9% per year. Since 1980, it has averaged 0.3% per year.

I find that fascinating because is not that the same period where we saw the influence of increasing globalisation and internationalisation which were badged as bring significant economic benefits?

The United States

The international scale of the issue has been highlighted by the Financial Times today.

US productivity is set to grow this year at around a third of the pace prevailing before the financial crash………..
US labour productivity — a driver of the economy’s fortunes — is forecast to expand 1 per cent this year, an improvement on the 0.5 per cent recorded for 2016 but far shy of the 2.9 per cent growth seen from 1999 to 2006, according to Conference Board projections shared with the Financial Times.

This is true of others as well.

The EU will see 1 per cent growth in GDP per hour, an improvement on last year’s 0.8 per cent but short of the 1.9 per cent seen in 1999-2006.  Japan is on course for 1.1 per cent productivity growth, up sharply from 0.5 per cent in 2016 but still well shy of the 2.2 per cent pace seen before the crisis.

I cannot move on without pointing out that the pre credit crunch figures were inflated in many places by booming housing and banking sectors which then went bust.

the figures lag far behind the 4.9 per cent pace in 1999-2006.

Is it the service sector?

To my mind a large factor in the productivity puzzle has been the switch from actual things being produced to more intangible types of economic growth. If we look at it in a stereotypical sense we see output of cars replaced by output of haircuts or teaching or nursing. The latter is much harder to measure in productivity terms as who wants teachers to be more productive via larger class sizes? It is even worse for nurses as who would want to be in a hospital ward with fewer nurses? The problem here is we need a measure of quality of the output and we struggle to define and measure that. Even worse some areas of production face a future of possible enormous gains in labour productivity by the use of robotics and artificial intelligence but where does that leave the labour? Can we have too much of something that is usually considered to be good.

Looking forwards as Sarah O’Connor points out we are likely to see more growth in the service sector.

The undramatic truth is that many of the jobs of the future are also those of the present. Prime among them are jobs that involve humans looking after other humans. The US Bureau of Labor Statistics has predicted the top 30 fastest-growing occupations for the next 10 years; more than half are some variety of nurse, therapist, healthcare worker or carer. This feels like a safe bet — and not just in the US.

She also points out that this growth will be in jobs that we tend to not value.

Social care jobs, for example, are defined by economists everywhere as low-skilled or unskilled…….Personal care and home health aides in the US make roughly $23,000 a year on average. In Britain, a prolonged squeeze on public spending has had knock-on effects on care workers, many of whom work for private companies that rely on public sector contracts. In England last year, 43 per cent of care workers earned less than £7.50 an hour.

There are plenty of thought-provoking issues here as raising productivity here would involve paying them more as that is the only measure of output we have here. Indeed both GDP and productivity fail us when we cannot measure economic output. On this road no wonder both metrics have problems. If a service sector producer gets more efficient and reduces its price then as money is often the only measure we record lower productivity when in fact things have improved. In other words we are in a something of a mess of our own making.

Today’s data

Not the cheeriest I am afraid to say.

Output per hour – our main measure of labour productivity – fell by 0.5% in Quarter 1 (January to March) 2017. This compares with growth of 0.4% in Quarter 4 (October to December) 2016.

My explanation given above may well work though.

was a result of hours worked growing faster than output;

What about wages?

Growth has been pretty consistent at what seems to be something of a new normal.

Between January to March 2016 and January to March 2017, in nominal terms, total pay increased by 2.4%

It is in fact marginally higher but as we look for real wage growth and note that nominal growth in March was 2.4% we see that it was a mere 0.1% and should it remain the same in April then wage growth will be negative. Of course if we use the RPI then annual wage growth was negative again in March at -0.7%. Sadly such numbers come on the back of a credit crunch era decline.

The Resolution Foundation has a somewhat enduring if increasingly lonely faith in officialdom so it still takes the forecasts of the OBR seriously and has switched to the CPIH inflation measure. I think though like so many places today it was so revved up to say real wages were falling again that it has used the regular rather than total pay data.


There is much to consider here as we find yet another set of statistics that are failing us in the credit crunch era. Our outdated concept of productivity needs to change and it is being challenged at both ends of the spectrum. At one extreme we have the sort of situation covered by Skynet in the Terminator series of firms where robots rule and at the other we have what we might call 100% human occupations. Do we really want to say that one provides a sort of 100% productivity and the other 0% because that is where we are heading right now?

Let me add in another sector which is the self-employed which these days is 15% of our workforce or 4.78 million people. For those in the service sector our main measure of output and hence productivity will be their pay. The very pay numbers that are ignored by the official average earnings data. What could go wrong?

Number Crunching

Regular readers will be aware of my love for football. The numbers game at The Emirates where Arsenal were playing Sunderland had me intrigued. You see pictures of a ground that was a long way from full were all over social media and BBC 5 live reported it was at least a third empty, and yet.

the official number for Tuesday’s game was 59,510. ( ESPN)

Actually Arsene Wenger claimed it was “sold out” but of course he has a long history of eyesight problems and myopia so let’s pass on that. But could we one day see the first empty ground that is counted as sold out?

The Corporate Bond problem at the Bank of England

It is time to once again lift the lid on the engine of Quantitative Easing especially in the UK. As a I pointed out several weeks ago the ordinary version where sovereign bonds are purchased has reached its target of £435 billion ( to be precise £39 million below). However corporate bond purchases are continuing under this from the August 2016 MPC (Monetary Policy Committee ) Minutes.

the purchase of up to £10 billion of UK corporate bonds

This was to achieve the objectives shown below and the emphasis is mine.

Purchases of corporate bonds could provide somewhat more stimulus than the same amount of gilt purchases. In particular, given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts. In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets.

Okay let me open with the generic issue of whether this is a better version of QE? This starts well if we look at the US Federal Reserve.

The FOMC directed the Desk to purchase $1.25 trillion of agency MBS ( Mortgage Backed Securities)……..The goal of the program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Later it bought some more but here we see a case of a central bank buying assets from the market which was in distress which was a combination of housing and banking. We can see how this had a more direct impact than ordinary QE but applying that to the UK in 2016 has the problem of being years too late unless of course the Bank of England wanted to argue the UK economy was in distress whilst growing solidly in August 2016!

This is a clear change of course from Mark Carney as the previous Governor Baron King of Lothbury was not a fan and whilst the Bank of England had a plan for corporate bond QE in theory in practice it just kicked the ball around for a while and gave up. Why? Well as I have pointed out before the market is small because UK businesses are often international and issue in Euros and US Dollars so that the UK Pound market is reduced. This leads to the Bank of England finding itself having to purchase bonds from foreign companies and this week it is back offering to buy the bonds of the Danish shipping company Maersk.  No doubt it and Danish taxpayers are happy about this but I do hope one day we will get a Working Paper explaining how this boosts the UK economy more than ordinary QE.

The technical view

There are some suggested examples in the Financial Times today from Zoso Davies of Barclays.

Initially, this seemed to work. August and September 2016 witnessed a flurry of new deals in the sterling corporate markets despite the uncertainty created by the UK’s vote to leave the EU. Since then, however, companies’ interest in borrowing in sterling has fallen to levels similar to those seen in 2013 and 2014.

As you can see once the “new toy” effect wore off things seem to have returned to something of a status quo. The “new toy” effect was exacerbated because the borrowing was so cheap.

Borrowers have also benefited from somewhat better terms on their bonds. After the initial announcement, sterling credit spreads (the additional yield risk borrowers must pay relative to the UK government to borrow in sterling) came down sharply.

If we look back we see that not only did the UK ten-year Gilt yield drop towards 0.5% but the spread above it corporate bond issuers had to pay fell, so there was a clear incentive to borrow. The catch is that if we recall the “lost decade(s)” experience of Japan the link between that and productivity activity tends to fail. One rather revealing fact is that the article does not mention real economy benefits at all instead we get this.

Our analysis, based on the limited data available for corporate bond markets, suggests that trading activity has not picked up across the sterling market as a whole, implying that the Bank of England has been crowding out other market participants. That said, the evidence is far from convincing in either direction.

The price effect did not last either.

Since then, however, the sterling market has hardly moved, indicating that most of the market impact came from the announcement rather than their execution. And that lack of movement has been a marked underperformance versus dollar and euro credit markets, to the extent that sterling has returned to being a relatively expensive bond market in which to raise financing.

Of course we have a tangled web here because one of the factors at play is the the 208 billion Euro corporate bond purchases of the ECB have allowed some companies to be paid to borrow, or if you prefer issue at negative yields. This is from Bloomberg in January.

Henkel AG’s two-year note issued at a negative yield

Also its activities make us again wonder who benefits? From Credit Market Daily.

A big theme in 2015-16 was the amount US domiciled corporates funded in the euro-denominated debt markets. As shown in the chart above, it was a record 26% of the total volume in 2015 and 22% in 2016. Low rates everywhere, but lower in Europe along with low spreads made it attractive for US corporates to borrow in euros (even when swapped back to dollars)

So the Bank of England is supporting European corporates and the ECB US ones? Time for Kylie.

I’m spinning around
Move out of my way

The article ends with some points that pose all sorts of moral hazards.

If sterling corporate bond issuance collapses and secondary market volumes plummet, it will be clear that the Bank’s newest tool has been propping up this small corner of the fixed-income universe over the past six months. Conversely, the more graceful the exit from corporate bond buying, the less clear it will be that the CBPS has been much more than a placebo for markets.

So if borrowers want to borrow cheaply just go on an issuers strike? Also what if the lower yields have sent other buyers away and crowded them out? That would have created quite a mess.


There are a lot of issues here. Lets us look at the real economy where are the arguments that it has benefited? Whereas on the other side of the coin we can see that subsidising larger companies both ossifies the economy and would help stop what is called “creative destruction”. Whilst the productivity problem began before this program started is it yet another brick in the wall for it via the routes just described? As the Bank Underground blog puts it.

Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years.

Also whilst the Federal Reserve purchases of MBSs seems to have been a relatively successful version of QE we have to add “so far”. This is in the gap between the word “stop” and “end” as whilst it stopped new purchases it maintains its holdings at US $1.75 trillion. How can it sell these and what if there are losses which could easily be large? Will the Bank of England end up in the same quicksand? Frankly I think it is already in it.

Yes equity markets are higher but the one area in the UK that has surged in response to this extra monetary easing has been unsecured rather than business credit.




The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.


There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.


With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.


I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016