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.

 

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Wages finally rise in Japan but are such small rises the future for us too?

This morning has brought news from the land of the rising sun or Nihon. Actually it is news that much of the media has been churning out over the Abenomics era when they have tried to report wage growth when there has not been any. However today the Ministry of Labor published some better news of the real variety.

Nominal cash earnings rose 2.1 percent year-on-year in March, the fastest annual gain since June 2003. It followed a revised 1.0 percent gain in February.

Regular pay, which accounts for the bulk of monthly wages, grew 1.3 percent in the year to March, the biggest gain since July 1997, while special payments jumped 12.8 percent as many firms offered their employees end-of-the-year bonuses.

Overtime pay, a barometer of strength in corporate activity, rose an annual 1.8 percent in March versus a revised 0.4 percent increase in February. (Reuters)

As you can see these numbers are something of a landmark in the lost decade era as we note the best overall earnings numbers since 2003 and the best regular pay data since 1997. Overtime pay was up too which is intriguing as the Japanese economy has not had the best start to 2018 and may even have shrunk in the first quarter ending a run of growth. Maybe this year Japanese employers are actually fulfilling their regular promises to raise wage growth.

Care is needed in that this is only one monthly number but after some revisions we see that 2018 so far has recorded annual wage growth of 1.2%,1% and 2.1%. These are low numbers but in the context are a shift higher. This can be explained if we look at the index for such numbers which is still only 101.9 after being set at 100 in 2015. We get an idea as it was 100 in 2014 as well and 100.6 in 2016 and 101 in 2017. Also we need to be aware that the main months for pay in Japan come in June/July and particularly December as for example pay in December is around double that for March but for now let us move on with a flicker of spring sunshine.

Is this the revenge of the Phillips Curve?

No doubt it is party time at the Ivory Towers although many may not have spotted this yet as of course news reaches them slowly. However I am still something of a “party pooper” on this subject as it still does not really work. Here is a tweet from a discussion I was involved in yesterday.

As you can see the state of play is very different between the American situation which we have looked at many times and the Japanese one. Female participation in the labour force changed with the onset of the lost decade era and male participation has picked up in the era of Abenomics although it had started around the beginning of the credit crunch.

If we look at the Abenomics impact I will let you decide if a major swing is good or bad. You see in the age group 55-64 the female participation rate is up by 10.2% in the past 6 years and the male one by 6.6%. I have written in the past that Japan looks after it older citizens well but there have been more and more suggestions that this is if not forced due to difficult circumstances. From the Independent on the 23rd of April.

For decades prior to this trend, it was a tradition for families and communities to care for their older citizens, but a lack of resources is making that harder to do so.

With the older population feeling more and more isolated as a result of this, women especially have turned to a life of crime in the hope that prison will provide them with a refuge and a home.

Returning to conventional economics there is also this to consider.

The number of unemployed persons in March 2018 was 1.73 million, a decrease of 150 thousand or 8.0% from the previous year.   The unemployment rate, seasonally adjusted, was 2.5%. ( Japan Statistics Bureau).

These are extraordinary numbers as it was 3.9% in 2007 so it has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

We cannot rule out the possibility it will fall even further as it was 2.4% in January. Also it is being combined with rising employment.

The number of employed persons in March 2018 was 66.20 million, an increase of 1.87 million or 2.9% from the previous year.

Inflation

I though I would add this into the mix as it provides something of an irony. The view of the Bank of Japan has been for so long that an annual inflation rate of 2% is just around the corner. Yet in its last report it lost the faith.

In terms of the outlook for prices, most members shared the view that the year-on-year rate of change in the CPI was likely to continue on an uptrend and increase
toward 2 percent, mainly on the back of the improvement in the output gap and the rise in medium- to long-term inflation expectations.

And later this.

the momentum of
inflation was not yet strong enough to achieve the price stability target of 2 percent at an
early stage.

Of course now with an oil price of US $77 for a barrel of Brent Crude they may see an inflationary push bringing them nearer to their objective. Of course they think inflation at 2% per annum is a good thing whereas I do not. After all even the recent better wage data would leave real wages flat in such a scenario.

We will have to see if oil prices remain here but for now the news just coming through that Saudi Arabia has intercepted two ballistic missiles seems set to support it.

Comment

Let me start with some good news for Japan which is that on what used to be called the Misery Index it is doing very well. It used to add the unemployment rate ( 2.5%) to the inflation rate ( 1%) and as you can see it is rather low. Very different to the double-digit numbers from the UK when it was a popular measure.

But for economic theory and for the Phillips Curve in particular this is much less satisfactory.  This comes partly from asking where has it been? Let me hand you over to the Bank of Japan.

(1) the actual unemployment rate had been substantially below 3.5 percent, which had formerly been regarded as the structural unemployment rate,

So wage growth should have been surging for ages and it has not. Now we face a situation which may be more like a cliff-edge that the smooth Phillips Curve. This is because on every measure Japan has been approaching full employment and in the mad world of economics 101 has in fact passed it.

(2) the recruitment rate of new graduates and the employment rate of women had risen
considerably.

In fact if you look at the demographic situation full employment seems set to be lower than it was due to the aging population as so far rising participation has offset it. But here is the rub if participation had not changed then unemployment would be below 2% now as we are left wondering what level would generate some real wages growth?

Meanwhile if we look back at the US participation data there were some chilling responses as to the cause. They looked at something which has troubled us before on here.

https://www.bbc.co.uk/programmes/b09yfqsy#play

 

Is this something of a Goldilocks scenario in the UK labour market?!

Today brings us to the latest official wages and labour market data for the UK . If that feels wrong you are indeed correct and the rationale for switching from a Wednesday is both breathtaking and probably true. From City AM in February.

The ONS said today: “Publication of labour market statistics on the day of Prime Minister’s Questions – one of the most important and most widely covered parliamentary occasions – means there is a risk that these detailed statistics are not fully understood by Parliamentarians on both sides of the House before they can be debated. This reduces the public value of these statistics.

Of course recent events suggest that they still will not understand them!

If we move to wages then the mood music generally is that they are rising. This is an international theme as anecdotes from the US are accompanied by talk of rises in Japan. The particular problem with Japan is that seems to come each year with the flowering of the Cherry Blossoms and usually lasts about as long as the flowers. Switching back to the UK we were told this last week. From the Recruitment and Employment Confederation.

March data signalled a further sharp increase in permanent staff placements across the UK, with the pace of expansion edging up fractionally since February. In contrast, temp billings expanded at the weakest pace for over a year.

So we see what is in labour market terms signs of a mature phase of the expansion. Jobs growth cannot boom for ever so employers may well be switching from offering temporary to permanent work in response to fears that they may find it harder to get temporary workers. If we look back for some perspective we see that the rally in UK employment began at the end of 2011 and the around 29,300,000 of then has been replaced by around 32,300,000 now. Frankly it told us something was changing well before the output or GDP data with the caveat being the question around what does employment actually mean these days?

Moving to wages the REC told us this.

Pay pressures remain marked

 

Average starting salaries continued to increase sharply in March, despite the rate of inflation softening to a ten-month low. Pay for temporary/contract staff rose at the quickest pace since last September.

Let us hope so as we have a lot of ground to regain as the Office for National Statistics suggested last week. Some of you have been kind enough to suggest its production of income data minus the imputed numbers is a success for my efforts but either way it have given some food for thought.

Cash real household disposable income (RHDI) per head fell for the second successive year, both on a national accounts and cash basis. Cash RHDI per head fell, by 0.7% year on year, whereas national accounts RHDI per head fell 0.3% year on year.

This is an interesting result although I am not sure that they have the numbers under control as they rose by 5% in 2015 perhaps excluding the fantasy numbers is proving more problematic than they thought. They also give a great definition of fantasy or made-up numbers though!

 it is not expenditure (or income) directly observed by homeowners. As a result, the national accounts measure of RHDI can differ from the perceived experience of households.

Today’s data

Having noted earlier the way that the level of employment turned out to be a better signal than GDP back in 2011/12 lets us go straight to it.

There were 32.26 million people in work, 55,000 more than for September to November 2017 and 427,000 more than for a year earlier.

which leads to this.

The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.4%, higher than for a year earlier (74.6%) and the highest since comparable records began in 1971.

So our labour market has continued in quantity terms to improve and for perspective here is the low on these figures.

The lowest employment rate for people was 65.6% in 1983, during the economic downturn of the early 1980s.

On this measure we are doing extraordinarily well and if we look into the detail we see that over the past year the gains have been mostly in full-time work (280,000) at least according to the ONS as its definition of this is a bit of a chocolate teapot. Also perhaps confirming points made by many of you in the comments section we are finally shifting back away from self-employment as it fell by 30,000 to 4.76 million as employment rose by 427,000.

Wage growth

This is both better and something of a curate’s egg.

Between December 2016 to February 2017 and December 2017 to February 2018, in nominal terms, both regular pay and total pay increased by 2.8%.

The better bit comes from the fact that on this measure it has improved over the past few months and according to our official statisticians it has done this.

regular pay for employees in Great Britain increased by 0.2% while total pay for employees in Great Britain increased by 0.1%.

Of course that relies on the really rather woeful ( we are back to imputed rent) headline inflation measure they use as we are still slightly below on their previous measure and more than 1% below using the measure before that ( RPI). Is there a trend there?

Where it is a curate’s egg is two-fold. Firstly given the employment situation it should be much higher if the past is any guide and will have many Ivory Towers gasping for air. Secondly the last three months from December to February have gone 3.1% then 2.8% and now 2.3%. Best of luck finding an upwards trend in that! Your only hope is that the numbers are erratic.

Unemployment

This looked set to rise and indeed we had seen some flickers and hints of that but it was replaced this time around by this.

For December 2017 to February 2018, there were: 1.42 million unemployed people, 16,000 fewer than for September to November 2017, 136,000 fewer than for a year earlier and the lowest since June to August 2005.

For some reason the ranks of unemployed men are shrinking much faster than that of women for which I have no good explanation.

Inactivity

This is a subject often ignored but we do seem to have a difference with the US and its participation rate issue.

the economic inactivity rate for people was 21.2%, lower than for a year earlier (21.6%) and the joint lowest since comparable records began in 1971.

Comment

The UK performance on the quantity measures of the labour market would be described as “outstanding” by the now sadly departed Drill Sargeant in the film Full Metal Jacket. But as we have observed so many times the relationship between it and wages growth has broken down. There has been some new research on this subject from David Bell and David ( Danny) Blanchflower.

We also provide evidence that the UK Phillips Curve has flattened and conclude that the UK NAIRU has shifted down. The underemployment rate likely would need to fall below 3%, compared to its current rate of 4.9% before wage growth is likely to reach pre-recession levels. The UK is a long way from full-employment.

I have a lot of sympathy with those who argue that under employment is an issue although it is sad to see the Phillips Curve being resurrected from its grave yet again. Also whilst it is about the UK it is hard not to think of Japan and its lack of wage growth with unemployment under the threshold. Of course the mention of an unemployment threshold will send a chill down the spine of the Bank of England economics department as we wonder if 3% will be the new 7%?

The reality is that for all the economic good news the state of play is this and remember this involves what we might call a favourable definition of inflation plus puts self-employed wages under the floorboards.

average total pay (including bonuses) for employees in Great Britain was £486 per week before tax and other deductions from pay, £36 lower than the pre-downturn peak of £522 per week recorded for February 2008

 

 

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.

 

 

 

What are the prospects for those who rent their homes?

We often look at what the state of play is regarding UK house prices but I think that it is past time for us to look at those finding themselves singing along with Gwen Guthrie.

Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Rather oddly if you take Gwen literally you may well live in Kensington and Chelsea.

 Kensington and Chelsea was the least affordable English local authority in 2016 with a median monthly rent making up almost 100% of median monthly salary.

Of course data from there begs all sorts of questions as it is heavily influenced by foreign purchases hence the nickname Chelski. Although it does show that if you work there you are extremely unlikely to be able to afford to  rent from a private source there. For a wider perspective here are the numbers which were produced by the Office for National Statistics last November.

 In 2016, median monthly private rent for England was 27% of median gross monthly salary. This means that someone working in England could expect to spend 27% of their monthly salary on private rent. London, the South East, East of England and the South West, all had percentages above this level. Overall, median monthly private rent as a percentage of median monthly salary ranged from 23% in the North East, to 49% in London.

Some local authorities are particularly cheap in relative terms.

The most affordable local authority was Copeland in the North West (12%) followed by Derby in the East Midlands (18%).

Although in the former case you may have to glow in the dark to get it ( and perhaps save on lighting and heating too).

 Higher median monthly salaries in Copeland are likely to be the result of a large number of relatively high-paid, skilled jobs at the Sellafield nuclear power station in this local authority.

What about social housing?

People also rent via this route and to the question how much? We are told this.

Average weekly cost of social renting for England in 2016 was £97.84, an increase of 2% since 2015. This is a smaller increase than in previous years, although the cost of social renting has risen by 40% since 2008. The average cost of social renting in Wales has increased at a similar rate, by 39% since 2008.

Which in affordability terms translates to this.

Average weekly social rent cost as a percentage of 10th percentile weekly salary in England for 2016 was 31.5%, a decrease of 0.7 percentage points since 2015. This means that someone earning at the lowest 10% of earnings could expect to spend 31.5% of their weekly earnings on social rent. In Wales for the year ending March 2017, weekly social rent cost as a percentage of 10th percentile weekly salary was 28.1%, a decrease of 0.4 percentage points since the year ending March 2016.

It is a shame that we do not get figures which are directly comparable. I take the point that those in social housing tend to have lower incomes as that is of course one of the main reasons they are likely to be there, but not always. On the measuring stick we are presented with it has got more expensive.

Social rent has become less affordable for both England and Wales since 2003. The differences between average weekly social rent costs as a percentage of 10th percentile weekly salary for England and for Wales have been within 2.3 and 3.9 percentage points since 2003.

What is happening now?

The latest official data on private rents is shown below.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

That reduction in the rate of growth has been in place for a while now since the peak at 2.7% in the autumn and winter of 2015. This should not be a surprise as rents tend to move with wages and in particular real wages although sometimes there can be quite a lag.I will come to London which is both something of a special case and a leading indicator in a bit but if we exclude it then lagged rents and real wages fit reasonably well in recent times.

Thus in the current scenario with real wages having been falling we would expect lower rental values. This of course is a possible explanation for the rush to include rents ( which of course do not exist) as a measure of owner occupied housing inflation  in the CPIH. If you were wondering why it gives a lower answer that is it.

What about London?

The official data tells us that it has a different picture to the rest of the UK.

London private rental prices grew by 0.2% in the 12 months to January 2018, that is, 0.9 percentage points below the Great Britain 12-month growth rate.

So it has been pulling the rate of growth lower and there should be “no surprises” as Radiohead would put it about that if we look at the numbers earlier in this article.

Actually others think that the situation is even more different in London.

Average rental values in prime central London fell 2.1 per cent in the year to February according to Knight Frank – and the letting agency says rents in that area have been dropping now for two full years. ( Letting Agent Today).

Fascinatingly we are told this by Knight Frank.

“As new supply moderates and demand strengthens, we expect to see continued upwards pressure on rental values” claims the agency.”

Continued? Anyway we have of course seen if we are polite what might be called over optimism before. This is me quoting the Financial Times on the 4th of November 2016.

Rents in Britain will rise steeply during the next five years as a government campaign against buy-to-let investing constrains supply, estate agencies have forecast.

Actually it got worse.

London tenants face a 25 per cent increase to their rents during the next five years, said Savills, the listed estate agency group. Renters elsewhere in the country will not fare much better, it said, with a predicted 19 per cent rise.

I was far from convinced.

 We know that lower real incomes are correlated and usually strongly correlated with rents which means that a reduction in the rises and maybe some falls are on the horizon (2019 or so if my logic holds).

Comment

As we survey the situation we see a complex picture but a theme is that things have been getting tougher for many. I wonder how much worse things look for younger renters as for example even if the numbers above are the same some of them have student loans to repay? Another cautionary note can be provided by the official data which is far from complete and some statisticians think may be too low by around 1% per annum due to its flawed nature.

If we look ahead then the general trend is as I pointed out in November 2016 but as this year progresses there will be winds of change. There are ever more surveys suggesting a pick-up in wage growth but even if understandable caution is applied here due to element of deja vu inflation should fall back meaning real wages will stop falling and then should rise. After a lag that should affect rents.

Meanwhile I would like to remind you that the UK statistics establishment uses the rental data it knows is far from complete to measure owner-occupied housing inflation. This morning they have decided that a fantasy number based on troubled data is better than this.

this means that the RPI is heavily influenced by house prices and interest rates,

Not everyone is convinced this is a bad idea.

 

Me on Core Finance

 

 

 

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.

 

 

How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.

Wages

There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)

Comment

As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV