UK employment looks strong but wage growth less so

Today brings us a consequence of yesterday;s discussion as we analyse the latest wages numbers which are entwined with the productivity situation. These days the causality is invariably assumed to be from productivity to wages but there is this about Henry Ford from National Public Radio in the US.

 $5 a day, for eight hours of work in a bustling factory.

That was more than double the average factory wage at that time, and for U.S. workers it was one of the defining moments of the 20th century.

Which led to this.

”It was an absolute, total success,” Kreipke says. “In fact, it was better than anybody had even thought.”

The benefits were almost immediate. Productivity surged, and the Ford Motor Co. doubled its profits in less than two years. Ford ended up calling it the best cost-cutting move he ever made.

Some combination of positive and lateral thinking led Henry Ford to quite a triumph as we mull whether anyone would have that courage today. Perhaps some do but they are on a smaller scale and get missed.

Also there is the issue that some advances take us backwards in some respects as research from Princeton in the US quoted by regis told us this.

In their aggressive scenario, the world stock of robots will quadruple by 2025. This would correspond to 5.25 more robots per thousand workers in the United States, and with our estimates, it would lead to a 0.94-1.76 percentage
points lower employment to population ratio and 1.3-2.6 percent lower wage growth between 2015 and 2025.

This type of analysis is usually nose to the grindstone stuff however or if you like a type of micro economics where the measured effects are likely to look bad as robots replace people and the loss of usually skilled jobs leads to lower average wages. PWC have given a more macro style analysis a go. From the Guardian.

Artificial intelligence is set to create more than 7m new UK jobs in healthcare, science and education by 2037, more than making up for the jobs lost in manufacturing and other sectors through automation, according to a report.

A report from PricewaterhouseCoopers argued that AI would create slightly more jobs (7.2m) than it displaced (7m) by boosting economic growth. The firm estimated about 20% of jobs would be automated over the next 20 years and no sector would be unaffected.

In essence it comes down to this assumption.

as real incomes rise

Some may be wondering if “as society becomes richer” necessarily leads to that especially after a period where policies like QE have led to wealth rising via higher asset prices but real incomes have struggled in many places and real wages in the UK have fallen. The truth is that we are unsure and analysis on both sides mostly depends on the assumptions behind it. You pretty much get the answer you looked for.

What are wages doing?

Actually UK wage growth has been if we allow for the margin of error looks to have been pretty stable so far in 2018.

Between March to May 2017 and March to May 2018, in nominal terms, regular pay increased by 2.7%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.8%).

Between March to May 2017 and March to May 2018, in nominal terms, total pay increased by 2.5%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.6%).

Whilst there is a small fall on this basis we see that from February to May total pay growth has gone 2.6%, 2.5%, 2.6% and now 2.5%. By the standards of these numbers that is remarkably stable. This poses a question for the Bank of England as there is not much of a sign of annual wage growth there.

If we move to real wages we find that most of the change we have seen has come from falling inflation.

Between March to May 2017 and March to May 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.2%.

Actually they are being a little disingenuous there as people might think that this refers to the CPI inflation measure whereas later they explain that it is CPIH ( H=Housing) with its fantasy imputed rents. This flatters the numbers as the latter keeps giving lower inflation readings and this is before we get to the Retail Price Index or RPI which would have real pay still falling.

The output gap

Today’s quantity numbers for the UK labour market were good again.

There were 32.40 million people in work, 137,000 more than for December 2017 to February 2018 and 388,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.7%, higher than for a year earlier (74.9%) and the highest since comparable records began in 1971.

Also whilst we do not have a formal measure of underemployment like the U-6 measure in the United States it looks as though it is improving too as Chris Dillow points out.

Big drop in the wider measure of joblessness in Mar-May (unemp+part-timers wanting f-t work + inactive wanting a job) – down from 4.51m to 4.35m

Yet the continuing good news does not seem to be doing much for wages. We get surveys telling us they are picking up but the official data is either missing it or it is not happening. If we go through that logically then is wage growth is taking place it must be in the ranks of the self-employed or smaller companies ( the various official surveys only go to companies with a minimum of ten or in some cases 20 employees).

Productivity

This looks to have improved because the economy was growing through this period albeit nor very fast but hours worked did this.

the number of people in employment increased by 137,000  but total hours worked fell slightly (by 0.3 million) to 1.03 billion. This small fall in total hours worked reflected a fall in average weekly hours worked by full-time workers.

An odd combination in some ways as why take on more staff whilst reducing hours? But the optimistic view is that employers were expecting a rise in demand and were getting ready for it. Whatever the reason recorded productivity looks to have risen.

Comment

There is quite a bit to consider here. If we look back to 2007 we see total pay growth fluctuating around 5% and making a heady 7.3% in February. But before that there were plenty of 4% numbers. Now we occasionally break the 3% barrier but the last time if we use the three-month average was in the summer of 2015. So much for “output gap” style analysis so beloved by the Ivory Towers and the Bank of England.

As to the possible Bank of England move in August today’s numbers are unlikely to change your mind. Those arguing for a rise will look at the strong employment situation and those against will note the slight fading of wage growth. Which will an unreliable boyfriend go for?

What we need are better data sources and let me ask for two clear changes. We need wages data which at least tries to cover the self-employed and smaller businesses. We also need to be much clearer about what full-time employment is. As we stand we are in danger of failing the Yes Minister critique.

Sir Humphrey Appleby: If local authorities don’t send us the statistics that we ask for, then government figures will be a nonsense.

James Hacker: Why?

Sir Humphrey Appleby: They will be incomplete.

James Hacker: But government figures are a nonsense anyway.

Bernard Woolley: I think Sir Humphrey want to ensure they are a complete nonsense. ( The skeleton in the cupboard via IMDb)

 

 

 

 

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Can robots rescue the UK from its productivity problem?

This is an issue which bedevils economists especially those who project straight lines into the future and their forecasts were left at a dizzying altitude by the impact of the credit crunch. The Bank of England puts it like this.

From 2007, 10-year average productivity growth was negative for the first time in almost a century.  Overall, it was the worst decade since the late 18th century.

What it goes onto say is that for the first 3-4 years things were normal in terms of a recession but it was after this that the change happened in that it did not then recover and go forwards. There are a couple of times ( 1761 & 1781 ) where we did worse but as I have pointed out before if I had data telling me things were going badly in the industrial revolution I would keep rechecking the data. Such as we understand it here is the past.

10-year productivity growth averaged 0.7% in the 19th century and 1.4% in the 20th

That research was from April but earlier this month the Bank Underground blog returned to the subject again.

 In its latest Inflation Report, the Monetary Policy Committee forecasts productivity growth to be a little faster than its average in recent years, as increases in investment begin to feed through, but still only half the rate seen before the financial crisis.

That reads rather like the MPC ( Monetary Policy Committee) taking out a bit of an each way bet. Or maybe a response of sorts to the Labour party proposal to give it a target for productivity growth.

Bank’s Agents

For those unaware these are the employees of the Bank of England who do their best to keep it in touch with the state of play in the economy.

In total, about 30 Agents have discussions with around 9000 businesses per annum, including most of the UK’s largest companies, as well as thousands of SMEs, covering all sectors of the economy.

They may not realise the significance of their opening salvo.

companies chose recruitment over business investment.

Those familiar with my work will know that these leads into two themes of mine. One is that labour productivity was very likely to have been affected by the way that employment has performed so well in the credit crunch era and pretty much by definition in the period when it rose before output did. Second comes something inconvenient for the economics profession in that it wanted the UK to be more like Germany in maintaining employment in a recession which happened. The latter is rather awkward for the idea of the Bank of England Ivory Tower being tasked with improving productivity.

Along the way I note an implication for the immigration debate in this below.

Strong growth of labour availability was associated with low real wages growth. Many of our contacts recruited additional staff, sometimes to handle sales growth but often to improve non-price competitiveness – for example to raise levels of service and marketing. Low real wages growth made these actions affordable

There are other factors at play as well as the picture is complicated as for a start correlation does not prove causation but the Ivory Towers seem to reject any such thought out of hand. Whatever the cause this is one of the stories of the credit crunch.

 So we observed that the composition of the economy and workforce pivoted towards lower value-added services and jobs, resulting in downward pressure on average wages and productivity levels

What about investment?

In essence this was often put on the back burner but now things seem to be changing according to the Bank Agents.

The Bank’s Agents’ recent experience is that, increasingly, the focus of many companies is turning to investment in labour-saving plant and machinery to raise productivity and alleviate resource bottlenecks.

Why might this be?

Often the benefits from investment in new plant and machinery include a reduction in the need for labour.  Higher labour costs shorten the payback period and incentivise such investment.

I find this intriguing because if we look at the current situation we see that real wages have until recently been falling and are currently flat at least in broad terms. So what we are seeing here if the Agents are right is employers expecting higher wages in the future and therefore responding with what we might call labour-saving investment. This includes an area where up until now the UK has been regarded as weak.

 Robotic technologies in particular are being deployed in a mix of manufacturing and service industries, at relatively low-cost and often with payback periods of less than five years. Usually, the working life of the equipment being deployed is greater than five years, making the investment extremely attractive.

We are given many examples of the use of robotics although I think that self-service tills are stretching the point somewhat. Also what could go wrong with the example below?

Looking into the future, restaurant and bar staff may be gradually replaced through automation and self-service beer pumps.

But on other side of the coin some reviewing their investment and pension savings may be grateful for any signs of intelligence at play.

an example being the use of artificial intelligence to assist institutional investors.

Comment

It is nice to see a part of the Bank of England being upbeat about the UK economy especially as it is the part that has its nose to the ground as opposed to in the clouds.

 However, the frequency of cases where contacts are looking to address rising costs and poor productivity suggests to us that whole-economy productivity growth should soon start to recover.

Lets hope so although in my opinion things were not as bad as some claimed due to this.

The fact that examples are becoming more common across sectors suggests that the recent slowdown of labour supply growth may be followed by a sustained productivity recovery

I have argued plenty of times that the strong employment performance of the UK economy has affected productivity and further that in many areas I do not think you can measure it at all. But higher labour supply does look like it reduced both productivity growth and real wage growth as well as reducing investment.

Also there is a very powerful reply to the post which I can only echo 100%.

One comment I heard recently was “Why would you invest in business when housing returns 8%”. ( Ed Mackenzie )

This of course will be like red-hot cinders for the Bank of England as its modus operandi in the credit crunch era has been to get house prices rising again via a litany of policies. On this road to nowhere it has contributed to a fall in UK productivity.

The implication being that the high returns on assets were dwarfing returns from capital investment.

Whatever happens next there are considerable advances in robotics to be seen.

 

Good news for UK GDP and maybe even productivity trends

Rather aptly on GDP ( Gross Domestic Product ) day the UK received some good economic news as from a land down under the clock ticked past midnight.

Prime Minister Malcolm Turnbull will on Friday confirm that — as reported last week by Fairfax Media — Britain’s BAE Systems has won a hard-fought contest to help Australia with the $35 billion program to build nine new frigates to be named the Hunter class. ( Sydney Morning Herald)

According to Save the Royal Navy around a third of the contract is up for grabs with the rest being in Australia mostly Adelaide.

BAES will now have to conduct an extensive round of negotiations with many potential suppliers in Australia and globally. The exact break down of benefits to UK manufacturers is obviously not yet available but the Rolls Royce prime movers and the David Brown gearboxes will be UK-made. Overall economies of scale across the supply chain will help reduce both construction and through-life costs for both nations.

The success puts the UK and BAES in good position to compete for an even larger order from Canada and there are some suggestions that if we win we should call it the Commonwealth class. Still let us not get too carried away but it has been decades since we had success in terms of naval exports on this scale.

Still whilst we are looking at good news for GDP let us take in this morning’s data as well.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.2% between Quarter 4 (Oct to Dec) 2017 and Quarter 1 (Jan to Mar) 2018; the 0.1 percentage points upward revision since the second estimate reflects improvements to the measurement of construction output.

So a case of entente cordiale as we move to the same rate of growth as France albeit by a different route as we have revised up they have revised down. Also this brings into play three themes of which as we note the first quarter of 2017 was revised up as well the issue of (under) measuring the first quarter remains. That is something we share with the US. Next comes my theme that the UK GDP growth trajectory is of the order of 0.3% per quarter. Finally the one sad aspect here is yet more trouble with the construction series which is what “improvement” is defined as in my financial lexicon for these times.

Construction output was estimated to have decreased by 0.8% in Quarter 1 2018, revised upwards from negative 2.7% in the second estimate of GDP.

Seeing as the construction numbers were originally estimated at -3.3% there is quite a problem here. I have discussed this many times as we have seen a large company transferred in from services as a “quick fix” and meddling with the deflator too but we remain in a type of groundhog day. Now as we cannot produce reliable quarterly estimates what could go wrong with switching to a monthly series for GDP as we are about to do?

Productivity

Regular readers will be aware that I think that a fair bit of the UK’s so-called productivity crisis is down to miss measurement. This is to some extent confirmed by a speech by the Bank of England’s Chief Economist Andy Haldane yesterday. After stumbling in the dark he has realised this.

The first and most important point to make is that the UK does not lack for innovative, high-productivity companies…..Their productivity is world-leading,
their technology world-beating, their managers and workers world-renowned. They are inspirational.

However in the UK they are forming their own type of island.

Fact three is that the productivity gap between the top- and bottom-performing companies is materially larger
in the UK than in France, Germany or the US. In the services sector, the gap between the top- and
bottom-performing 10% of companies is 80% larger in the UK than in our international competitors .
This productivity gap has also widened by far more since the crisis – around 2-3 times more – in
the UK than elsewhere.

Looked at in this way we are doing well.

There are more UK companies in the upper tail than in
Germany, with its much-vaunted industrial reputation, and France. The top 10% of UK companies have
levels of productivity at least 100% above the median.

Returning to my view I think that the concept of productivity only applies to certain sector of the economy as how do you measure it in say a haircut? Sometimes when service is involved faster is not necessarily better it is worse.

Along the way we discover why Andy Haldane has changed his economic views.

The short answer appears to be because the UK is, on many dimensions, a global innovation hub……..The UK is the largest magnet for tech talent in Europe.

This is really rather awkward for the man who brought us “Sledgehammer QE” and wanted a 0.1% Bank Rate. Of that more later as with his usual forecasting skill Andy chose yesterday to emphasis the success of England on the football field.

And then, of course, there is the World Cup. Without wishing to tempt fate, England’s recent sporting
success on the football field (and cricket pitch) has probably added to that feel-good factor among
England-supporting consumers.

Once I read this I should have immediately bet on England losing to Belgium! Anyway returning to this theme Andy was keen to do some ( let’s face it badly needed) cheerleading for himself and by default his ongoing campaign to be the next Governor of the Bank of England,

The MPC has also undertaken asset purchases amounting to almost £½ trillion since 2009. This has
provided additional monetary stimulus to the UK economy, at its peak equivalent to a further reduction in
interest rates of up to around 2.5 percentage points.

I do not know if he stopped for an expected round of applause at this point or after this attempt to present himself and his colleagues as a set of economic super heroes.

Without these measures, we estimate the economy would have been around 8% smaller and unemployment 4 percentage points higher.

A more accurate response would have been to laugh after all Andy would have thought it was with him as opposed to the reality of it being at him.

Comment

The last day or so has seen some better economic news for the UK and this continued in this morning’s money supply data.

The total amount of money held by UK households, businesses and non-intermediary other financial corporations (NIOFCs) (Broad money or M4ex) increased by £19.6 billion in May

This balanced out April’s dip.

 Smoothing through the recent volatility by taking a two-month average suggests money has increased broadly in line with its recent average.

The annual rate of growth of 4% means that should we achieve our inflation target of 2% then we can expect economic growth of 2% towards the end of this year and early next. The flaw in this is the oil price and of course the impact of the Unreliable Boyfriend on the UK Pound £.

The less satisfactory situation is something that Chief Economist Haldane is less keen to emphasis which is that if you apply a “Sledgehammer” to the monetary system then the UK’s history tells you to expect this.

Annual growth of consumer borrowing, excluding mortgages, slowed a little in May to 8.5%

Remember that is on top of double-digit annual growth rates.

Meanwhile those who have followed my critiques of imputed rent and its impact on the inflation numbers and GDP since 2012 or so may like to note this. From the economics editor of the Financial Times for whom it is apparently good enough for the former factors but not for measuring productivity.

Only if you include owner occupied imputed rents, which anyone sensible who does this sort of thing excludes.

Still if you apply that much more widely he and I agree for once.

Can the Bank of England improve productivity?

This morning has brought a reminder of a challenge to the Bank of England,

Labour has said it will set the Bank of England a new 3 per cent target for productivity growth but refused to specify when this should be achieved. John McDonnell, shadow chancellor, will on Wednesday launch Labour’s final report on the UK’s financial system. ( Financial Times)

Reading this raised a wry smile as of course the reforms of Governor Carney reduced productivity by changing the output of the Monetary Policy Committee from 12 meetings a year to 8. But I think we all know they are likely to overlook that one.

Why?

The interim report was published in December and hammered out a familiar beat about UK productivity.

UK productivity has stagnated since the financial crisis of 2007/08. Real output per hour worked rose
just 1.4% between 2007 and 2016 . Within the G7, only Italy performed worse (-1.7%). Excluding the UK, the G7 countries have experienced a 7.5% productivity increase over this period, led by the US, Canada and Japan.

Also there is this.

In addition, the ‘productivity gap’ for the UK – the difference between output per hour in 2016 and
its pre-crisis trend – is minus 15.8%. The productivity gap for the G7 ex-UK countries is minus 8.8%.

I have been consistently dubious about “productivity gap” type analysis for several reasons. Firstly some economic activity and hence productivity before the credit crunch was just an illusion or a type of imagination. Otherwise we would not have had a credit crunch. Also the simple reality is that we have ups and downs not just ups.

Added to that is the problem of international comparisons. Let me illustrate that with some official data from the Office for National Statistics.

The UK’s long-running nominal productivity gap with the other six G7 economies was broadly unchanged in 2016: falling from 16.4% in 2015 to 16.3% in 2016 in output per hour worked terms.

Yet there are clearly problems with this as I note we are doing better than Japan which is a strong exporting nation.

On a current price gross domestic product (GDP) per hour worked basis, UK productivity in 2016 was: above that of Japan by 8.7%, with the gap narrowing from 10.0% in 2015

Also we have apparently done much better than Italy in the credit crunch era by getting worse relative to them!

lower than that of Italy by 10.5%, with the gap widening from 9.6% in 2015

Or if you prefer I think the comparison with France tells us the most if we recall that our economies are much more similar than we often like to admit and yet we are.

lower than that of France by 22.8%, with the gap widening from 22.2% in 2015

Thus we can only conclude that the numbers are not giving us the full picture. For example I think it is the UK’s success with employment that has to some extent worsened recorded productivity.

Also the Financial Times is in error on the data.

Productivity growth has never exceeded 3 per cent a year in Britain.

I think there is a clue in the phrase Industrial Revolution which challenges that! Or more recently there was over 6% in 1940 and 41 or 5% in 1968 in terms of total factor productivity according to FRED the database of the St.Louis Fed.

How would this happen?

A basic problem is identified which I agree with.

UK banks have helped to create a distorted economy. Lending is flowing into unproductive sectors.

This goes further.

As a central bank sitting at the heart of
the UK financial system, the Bank of England needs to be playing an active, leading role, ensuring banks
are helping UK companies to innovate. Flow of funds analysis shows that banks are diverting resources
away from industries vital to the future of this country.

Here I depart a little as I think that the Bank of England should set an environment to help banks change but it is not its role to centrally direct. I do agree with the last sentence as for example I have written many times about how the Funding for Lending Scheme pumped up UK mortgage lending rather than business lending.

One way this occurs is that banks have to put much more capital aside for business lending than they do for mortgage lending or unsecured lending. Also on the demand side for business lending there is a feature which my late father ( who was a small business owner) really,really,really,really ( h/t Carly Rae Jepson)  hated. Here is Dan Davies on Medium pointing out the reality here.

Because, historically, a very high proportion of business lending in the British market has been mortgage-lending-in-disguise. The business loan is usually secured, and usually additionally secured by a charge over the owner’s house.

He hints at some hope for the future but have I clearly pointed out yet that my father hated this feature with a passion? Changes though will need to be throughout the Bank of England infrastructure as the Bank Underground blog has in my view lost the plot as well.

Combining this with firm accounting data, we estimate that a £1 rise in the value of the homes of a firm’s directors leads the average firm in our sample to invest 3p more and increase their total wage bill by 3p.

Yes house prices raise both investment and wages. You might wonder with house prices soaring in recent years compared to almost any other metric it did not trouble anyone that investment and wages are not following it! But instead taking the numbers above with the ones below mean it is apparently a triumph.

This is because the homes of firm directors are worth £1.5 trillion………..Combined with the microeconometric evidence that firms invest 3p more for every £1 increase in the value of their director’s homes, this implies that nominal business investment would rise by around £4.5 billion (0.03*150); an increase of about 2.8%.  By a similar calculation, a 10% increase in real estate prices would increase the total nominal wages paid by firms by 0.8% due to the homes of firm directors.

Thus the answer to life the universe and everything is not 42 as one might reasonably argue especially on international towel day but it is at least according to all echelons of the Bank of England higher house prices. It is time for some PM Dawn to cool us down.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “Why?” is the question that’s on your mind
But reality used to be a friend of mine

Comment

There is a lot to consider here as there is a fair bit of nuance. You see there are areas which can be improved I think. Firstly there are the barriers to business lending around supply ( risk capital requirements) and demand ( having to pledge your home). Next there are changes caused ironically by the higher house prices the Bank of England is so keen on. From Dan Davies again.

we’ve got a generation of young adults coming through who neither own houses, nor have any realistic aspirations to do so. Residential housing as an asset has been more or less completely financialised, and now needs to be seen as part of the pension savings industry .

So the future for millennials is very different and as banks are unlikely to be accepting avocados on toast or otherwise as security this is on its way.

And if you have a generation of businesspeople who don’t own houses, and who therefore can’t be fit into the historic template of British small business lending, then you’ve got the impetus for a total reinvention of small business finance in the UK.

Thus the Bank of England does need to get in tune with Tracy Chapman.

Don’t you know
They’re talkin’ bout a revolution
It sounds like a whisper.

Can it under its present leadership? I very much doubt it but for all the hot air it produces there is an opportunity under the new Governor next year to really drive things forwards. After all he or she hopefully will not be connected to a policy like QE which via its support of zombie banks in particular has worsened productivity.

Meanwhile on a lighter note Financing Investment also suggests this.

Moving some Bank of England functions to Birmingham.

This would help justify HS2 to some extent. But I also recall this from Yes Prime Minister. Here is the Chief of the Defence Staff on relocation.

You can’t ask senior officers to live permanently in the North!  The wives would stand for it for one thing. Children’s schools. What about Harrods? What about Wimbledon? Ascot? Henley? The Army & Navy club? I mean civilisation generally, it is just not on…….Morale would plummet.

Mind you there was some hope

I suppose other ranks can be, junior officer perhaps

 

UK real wages fell again in March

Today brings us to an area of the UK economy where the trend has remained positive and frankly amazingly so. Regular readers will be aware that back in the “triple-dip” ( hat tip to Stephanie Flanders then of the BBC now of Bloomberg for the phrase) days of 2011/12 that the employment data moved first and was followed by GDP in 2013. Thus employment trends have become something of a leading indicator as again we face a phase where they tell us one thing whereas other signals head south.

An example of other signals was seen only yesterday.

Much could be made of the adverse impact on April’s footfall of Easter shifting to March, but even looking at March and April together – so smoothing this out – still demonstrates that footfall has plummeted.  A -3.3% drop in April, following on from -6% in March, resulted in an unprecedented drop of -4.8% over the two months. (Springboard)

They then made a somewhat chilling comparison and the emphasis is mine.

 Not since the depths of recession in 2009, has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%.

This added to this from KPMG a few days before.

April’s figures show retail sales growth falling off a cliff, with sales down -3.1 per cent on last year, but we must exercise caution and remember that the timing of Easter makes meaningful month-on-month comparisons difficult. That said, the three-month average is more helpful to assess, but this too points to sales only growing modestly

As you can see there are poor numbers there but two factors are at play. Firstly there is the impact of the period we have been through where real wages fell and I mean that in two senses. We have seen a recent dip which we have at best only begun to emerge from backing up an overall fall which again depends how you measure it but is more than 5%. Next is the decline of the high street which if the ones by me are any guide is ongoing.

Germany

Another signal of a slow down that is much wider than in the UK was seen earlier as Germany reported this.

The Federal Statistical Office (Destatis) also reports that the gross domestic product (GDP) increased 0.3% – upon price, seasonal and calendar adjustment – in the first quarter of 2018 compared with the fourth quarter of 2017.

For perspective there is also this.

This is the 15th quarter-on-quarter growth in a row, contributing to the longest upswing phase since 1991. Last year, there were higher GDP growth rates (+0.7% in the third quarter and +0.6% in the fourth quarter of 2017).

So the slow down is much more than just the UK and we will have to see what develops next. I would remind you of yesterday’s subject which was hints of a fiscal stimulus in the Euro area as it becomes clearer why that might be doing the rounds. Also as I had started with leading indicators I am afraid it is yet another bad day for the Markit business surveys or PMIs which told us this in January.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

That was for the Euro area and Germany had a higher reading so for them to have been right the German economy shrank in February and March.

UK Real Wages

There are signs of trouble here so let us go straight to the numbers.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.9% excluding bonuses, and by 2.6% including bonuses, compared with a year earlier.

In the rather odd world of Mark Carney and the Bank of England those are excellent figures especially if you look at the March figures alone which showed 3% growth on a year before. Let us continue on that sort of theme for a moment.

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

This has been copied and pasted across the media as showing real wage growth yet that is somewhat misleading. This is because if you actually look at what people get in they pay packets March actually showed a slowing to an annual rate of 2.3%. Now at absolute best the UK inflation rate was 2.3% according to the CPIH measure but that of course relies on imputed rents to bring it down from the 2.5% of CPI and is lower than the 3.3% of the RPI. According to the official data which you have to look up as it is not ready for copy and pasting real wages fell by 0.1% on the most friendly measure which is using CPIH.

Let me put this another way UK single month wage growth has now gone 3.1%, 2.8%, 2.6% and now 2.3%. I will not insult you by pointing out the trend here but will show you how this is being reported with the one strand of hope being that February has been revised up by 0.3% and fingers crossed for March on that front. From @katie_martin_fx

ING: “Rising UK wage growth points to summer rate hike”

Meanwhile the back picture is along the lines of this.

Actually it is worse than that in the longer-term because for some reason they use an inflation measure with imputed rents in it ( CPIH) which lowers the numbers. Secondly they are using regular pay which as I have explained above flatters wage growth at the moment.

Employment

This is the ying to the yang above as the numbers remain very good.

There were 32.34 million people in work, 197,000 more than for October to December 2017 and 396,000 more than for a year earlier………..Between October to December 2017 and January to March 2018, total hours worked per week increased by 6.6 million to 1.03 billion.

There was a dip at the opening of this year in hours worked per person but that may be the ides of March. However there was further credence to the view that the productivity issue is being measured badly and is often just the flipside of employment growth especially when GDP growth is low.

Output per hour – The Office for National Statistics’ (ONS’) main measure of labour productivity – decreased by 0.5% in Quarter 1 (Jan to March) 2018.

Comment

As you can see the strong employment growth seen in the UK for some time has fed into strong wages growth which meant that the Bank of England raised interest-rates in May. Oh hang on………

Sorry there must have been some strands of the Matrix style blue pill in my tea this morning. Returning to reality the UK’s employment numbers are excellent and the improvement as in fall in unemployment has continued. But the simple truth is that the wages data relies on two types of cherry-picking to also be good. Firstly you have to ignore what people actually get and concentrate on regular pay which may seem sensible at the Bank of England as on its performance bonuses must be thin on the ground but many rely on them. Next you have to use the lowest measure of inflation you can find which relies on fantasy rents and except for this purpose is usually roundly ignored.

I hope the number for March is revised higher and we can expect some pick-up in public-sector pay but as we stand total pay growth is seems to be following the lower inflation data. Also there is the issue of whether European economies pick up after a slower first quarter for 2018.

 

UK wage growth picks up but so does unemployment

Today brings us up to date or rather more up to date on the official average earnings or wages data for the UK. So far it has not really picked up the optimism shown by private-sector surveys like this on Monday from Markit.

In particular, latest data indicated one of the fastest
rises in income from employment in the nine-year
survey history (exceeded only by the upturn
reported in July 2016).

That looks good until we note that those nine years have been ones of relative struggle especially for real wages. Also if we look back to the summer of 2016 for the apparent wages boom we see that on the official rolling three-month measure wages growth peaked at 2.7% as autumn turned to winter. So not a great amount to write home about.

Also at least some of the pick-up was due to the rise in the National Living Wage which has welcome features but of course wage rise by diktat is different to wage rise by choice.

People aged 25-34 were the most likely to report an
increase in their earnings. This provides a signal
that pay rises ahead of changes to the National
Living Wage threshold had helped to boost the
income from employment index in March.

However the Markit summary was very upbeat.

The strength of the survey’s employment figures in
March is an advance signal that wage pressures
are starting to build. While higher salary payments
will help offset sharply rising living costs faced by
consumers, it also adds to the likelihood of
additional interest rate rises in 2018.

So in their view the Bank of England is targeting wage rises rather than the CPI measure of inflation it claims that it is. In which case no wonder Bank Rate is still at its “emergency” 0.5% level. This morning has seen some support for this in the markets as short sterling futures ( an old stomping ground of mine) have been falling as for example the June 2019 contract has fallen 0.05 to 98.74. Also open interest has done this.

the ICE Three Month Short Sterling Futures contract achieved two consecutive open interest records of 3,896,252 contracts on 16 March 2018 and 3,867,976 contracts on 15 March 2018. The previous open interest record was 3,801,867 contracts set in July 2007.

So people have placed their bets so to speak and as this contracts run ahead they are forecasting a Bank Rate of 1% in a year and a bit. Of course if they were always right life would be a lot simpler than it is.

Retail

A possible troubling consequence of this has popped up the news this morning. From the Financial Times.

Trouble on the UK high street: Carpetright, Mothercare and Moss Bros all report strains

As retail is a low payer in relative terms are the rises in the NLW something which has put it under further strain? Of course there are plenty of other factors but in a complicated world something good could also be the straw that broke the camel’s back.

Employment

Intriguingly the Markit survey was bullish on this front too.

At the same time, UK households are the least
gloomy about their job security for at least nine
years, which provides a further indication of tight
domestic labour market conditions.

This of course contradicts the last set of official data which hinted at a turn in the long-running improvement in employment. Ironically the official data with its swing in employment growth will have helped the recent renaissance in productivity growth which you will recall started more of less about when the Office for Budget Responsibility downgraded forecasts for it.

NHS pay rise

There has been quite a bit of speculation on this front today with the BBC reporting this.

More than a million NHS staff, including nurses, porters and paramedics, could expect average pay increases of over 6% over three years, the BBC understands.

The deal, expected to be formally agreed by unions and ministers later, could cost as much as £4bn.

If approved, workers in England could see their pay increase almost immediately.

The deal is tiered – with the lowest paid getting the biggest annual rises.

Although as we have noted before the position is much more complex than it may look.

Last year, half of staff received rises worth between 3% and 4% on top of the 1% annual pay rise.

Public sector pay seems to have been rising anyway as the 1.4% of the end of 2016 gets replaced with the 2% of the end of 2017.

Today’s data

There was finally some better news for wages growth which backed up the Markit survey.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier.

This means that the official view on the real wage picture is this although I have to object to the way that an inflation index depending on fantasy numbers ( Imputed Rent) or CPIH is used here.

Between November 2016 to January 2017 and November 2017 to January 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain fell by 0.2% while total pay for employees in Great Britain was unchanged.

If we look back we see that past months have been revised higher so that the last report was 2.7% and not the 2.5% reported back then. So we see that real wages look set to move back into positive territory and may already have done so using the CPI style inflation measures but not the RPI measure the establishment so dislikes.

In addition the employment situation continued to improve.

There were 32.25 million people in work, 168,000 more than for August to October 2017 and 402,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.3%, higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971.

Whereas unemployment provided first good and then not so good news.

The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 4.7% for a year earlier and the joint lowest since 1975.

However the labour force must have grown as we are also told this.

There were 1.45 million unemployed people (people not in work but seeking and available to work), 24,000 more than for August to October 2017 but 127,000 fewer than for a year earlier.

Comment

Let me type the next bit using a part of my keyboard that is used so little it is covered with dust. There may be some evidence that the Bank of England view on wages may be at least partially correct. Care is needed as you see if the past had not been revised higher then January would have looked really good whereas now the overall sequence is a little better. Thin pickings maybe but when you record is as bad as theirs any port in a storm is welcome.

Also we see that employment has continued to rise as we observe a double whammy of better news. Ironically I guess that may bring back a flicker of productivity worries as we mull a falling unemployment rate but rising unemployment. Maybe the short sterling futures market was ahead of the game although of course it is relying on an unreliable boyfriend to back up his promises.

Meanwhile let me give you my regular reminder that the average earnings numbers ignore firms of less than 20 employees which means that for it the 4.78 million self-employed disappear into a black hole.

 

 

 

The UK has seen no real wage growth since 2005

Today we find ourselves addressing two parts of the UK economic situation as for some reason we get official data on the public finances and the labour market which of course means wages. The latter subject is something the Bank of England has assured us is about to pick up. Here is the report from its Business Agents from last week.

The survey indicated that companies expected an average pay settlement rate of 3.1% in 2018, compared with 2.6% in 2017 . The 2017 outturn was higher than the 2.2% that had
been expected in last year’s survey, reflecting larger
settlements across a broad range of sectors. The increases in pay settlements in 2018 are also expected to be broad-based,with only the construction sector expecting pay settlements in 2018 to be the same as in 2017.

This would be good news if true because as the inflationary impact of the lower UK Pound £ fades and in fact is replaced by a higher level against the US Dollar (approximately 15 cents on a year ago) we can hope for an end to falling real wages and some rises. It would be nice to see wages rise as well as inflation dipping.

Although the rises come from something which is both good and bad.

The biggest expected increase in pay settlements is seen in
consumer services. That is because many firms in this sector will have to increase pay to meet the National Living Wage (NLW). Companies also reported an increased tendency to pay above the NLW, due to competitive pressures.

Whilst it is welcome that the lower paid get a boost this is not the same as businesses choosing to pay more because conditions are good so we will need to see how this plays out. Some responses were not what might be hoped.

However, many firms were planning to limit management pay increases to 1%–2% in order to hold down their overall pay settlement.

Today’s data

There was little sign of the Bank’s forecasted improvement in the numbers.

Between October to December 2016 and October to December 2017, in nominal terms, total pay increased by 2.5%, unchanged compared with the growth rate between September to November 2016 and September to November 2017…….average total pay (including bonuses) for employees in Great Britain was £512 per week before tax and other deductions from pay, up from £498 per week for a year earlier

There was an increase in regular pay from 2.3% to 2.5% which many places are reporting as a rise in wages but overall what was given in regular pay increases was taken back from bonuses. It is hard to know what to make of the single month figures for December which showed a rise in private-sector wage growth to 3% which might be evidence for the Bank of England case until we notice that it was 3.1% in September and 3.2% in June in an erratic series.

As for real wages we are told this.

Comparing the three months to December 2017 with the same period in 2016, real AWE (total pay) fell by 0.3%, 0.1 percentage points more than the three months to November 2017.

Those who prefer their inflation index not to have made up or Imputed Rents in it will think that real wages have fallen by more like 0.5/6% and those who follow the Retail Price Index more like 1.5%. If you want a longer-term perspective there is plenty of food for thought here.

Looking at longer-term movements, average total pay for employees in Great Britain in nominal terms increased from £376 per week in January 2005 to £512 per week in December 2017; an increase of 36.1%. Over the same period, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) increased by 34.1%.

Getting quite tight back to 2005 now isn’t it? In that time people have completed school seen children grow up and so on. Indeed if you use what was until recently the inflation measure favoured by the UK establishment ( CPI) your wages have not risen at all and if in spite of the barrage of official propaganda against it you still like the RPI it tells you real wages have fallen by 11%.

Those differences are why I spend so much time and effort on inflation measures as the impact is material and official moves always seem to have the same (lower) result whereas rel life is to say the least much more nuanced.

Productivity

There was good news on this front announced this morning.

Output per hour – Office for National Statistics’ (ONS’s) main measure of labour productivity – increased by 0.8% in Quarter 4 (Oct to Dec) 2017. This follows a 0.9% increase in the previous quarter (July to Sept) 2017 .

Well good news for nearly everyone.

The main reason for lowering our GDP forecast since March is a significant downward revision to potential productivity growth, reflecting a reassessment of the post-crisis weakness and the hypotheses to explain it.

Yes that was the Office for Budget Responsibility or OBR in another stunning success for my first rule of OBR club. They are a reverse indicator of nearly Dennis Gartman style proportions.

Speaking of seers one may have had a wry smile earlier at this.

Oil, coal, gas and non-fossil fuels will each account for a quarter of the energy mix by 2040, leading to increased competition across fuels, says BP’s chief economist Spencer Dale. ( h/t @sarasjolin )

Yes the same Spencer Dale who could not see beyond the end of his nose when Chief Economist at the Bank of England can now see all the way to 2040 it is claimed. We get some perspective by the fact he went to BP as presumably he was not considered good enough for the OBR which is a terrifying thought if you think about it.

There is a kicker to the good productivity news and it is something that I have pointed out before. There is something of an admittal here.

Growth in Quarter 4 was the result of a 0.5% increase in gross value added (GVA) (using the preliminary gross domestic product (GDP) estimate) accompanied by a 0.3% fall in total hours worked (using the latest Labour Force Survey data).

So some of it was related to this.

There were 1.47 million unemployed people (people not in work but seeking and available to work), 46,000 more than for July to September 2017 but 123,000 fewer than for a year earlier.

Some of the employment growth has come from the quantity numbers from the labour market not being quite so good. Some of the quantity surge which has seen record employment and plummets in unemployment depressed measured productivity and now a flicker the other way has raised it.

Comment

The opening salvo today is for those who think things are not as good as we are assured which is that since 2005 we have had very little ( CPIH), no ( CPI) or -11% (RPI) real wage growth in the UK. We should gain ground later this year but for now we continue slip-sliding away. If we had known this back then more of us would have been singing along with Natalie Imbruglia.

I shiver, I shiver,
Cos I shiver, I just break up when I’m near you it all gets out of hand
Yes I shiver I get bent up there’s no way that I know you’ll understand

Meanwhile we see productivity rise but wonder if it is because there is less work in terms of hours worked and maybe employment? These days things are rarely clear-cut as with GDP growth and productivity picking up in quarterly terms things look good. But on the side of the coin there has been a nudge higher in unemployment and this.

Self-assessed Income Tax and Capital Gains Tax receipts (combined) were £18.4 billion in January 2018, which is £0.9 billion less than in January 2017.

Confused? You will be! As we were told by the comedy series Soap. Also I have to confess that this troubles me.

and a share buyback of up to £1 billion ( Lloyds bank)

How quickly the theme changes from needs more capital to less.