Retail Sales continue to be a bright spot for the UK economy

Today brings us up to date on the UK retail sector but before we get to it there is something that will have the full attention of the Bank of England. Let me hand you over to City-AM.

The Royal Bank of Scotland was hit this morning on the news that two brokers had lowered their forecasts for the company’s shares.

Analysts at Macquarie downgraded the company from buy to neutral this morning, slashing its target price to 201p, from 246p.

Meanwhile, Goldman Sachs reiterated its buy rating on the stock, but lowered its target price to 325p from 360p.

Shares were trading down around eight per cent to 182.5p.

Firstly at least I warned you as those who read my post on the sixth of this month will be aware. The theme of the credit crunch era has been that RBS is always about to turn a corner ( as in a way highlighted by a 360p price target) but the path turns out to be this one.

We’re on a road to nowhere
We’re on a road to nowhere
We’re on a road to nowhere

If you believed Brewin Dolphin on the 6th you may be wondering what happened to the ” path to redemption”? Also those with longer memories may be wondering about the “nest egg”

City Minister Lord Myners yesterday claimed that the ownership of RBS and LBG – which were both rescued from collapse by the Treasury in the credit crisis – represented a “nice little nest egg” for the taxpayer. ( Evening Standard September 2009)

I have picked this out for a reason because the Ivory Tower of the Bank of England has trumpeted the “Wealth Effects” of its policies whereas RBS has been a spectacular case of wealth destruction. I can widen this out as Barclays is at a recent low at 138 pence reminding me that the chairman who promised to double the share price has gone I think, which is for best because it has halved. The Zombie Janbouree continues with HSBC below £6 and Lloyds at 59 pence.

This is way beyond just a UK issue as for example the European banks are in quite a mess headlined by Deutsche Bank falling back below 6 Euros this morning. Or in some ways more so by the Spanish banks as the economy is still doing well but they look troubled too. Here is Mike Bird of the Wall Street Journal.

Japanese regional bank share prices have now broken below their Feb 2016 lows. The sector is, to use the technical terminology, completely screwed.

This is quite a change of approach from Mike who is something of the order of my doppleganger on Japan. Anyway my point is that the them here is that there have been no wealth effects from the banks and more seriously they cannot be supporting the economy.

The official Bank of England view is that banks are “resilient” and it is “vigilant”

Bond Yields

On the other side of the coin support is being provided by another surge in the UK Gilt market. These are extraordinary times with the UK having a ten-year yield of 0.44% and a five-year yield of 0.35%. Those who have owned UK Gilts have seen extraordinary gains and this includes the ordinary person with pension savings. However this is no silver bullet as we would be in a better place than we are if it was, But it does support the economy.

Whilst I am looking at this area let me deal with all the inverted yield curve mania going on via a tweet that proved rather popular yesterday.

Some worry about the yield curve ( 2s/10s) being inverted but I am sanguine about that. This is because when it bought £435 billion of UK Gilts the Bank of England distorted the market giving us an example of Goodhart’s Law.

It does not buy two-year Gilts thereby distorting the market and making past signals unreliable.

The Bank (as agent for BEAPFF) purchases conventional gilts with a minimum residual maturity of greater than three years in the secondary market.

Retail Sales

This morning has brought another good set of retail sales figures for the UK.

The quantity bought in July 2019 increased by 0.2% when compared with the previous month, with strong growth of 6.9% in non-store retailing.

The duff note there is the implication for the high street but the numbers below confirm that the situation for the UK economy overall remains positive.

In the three months to July 2019, the quantity bought in retail sales increased by 0.5% when compared with the previous three months, with food stores and fuel stores seeing a decline…….Year-on-year growth in the quantity bought increased by 3.3% in July 2019, with food stores being the only main sector reporting a fall at negative 0.5%.

The positive spin in the decline of the high streets is provided by this.

In July 2019, online retailing accounted for 19.9% of total retailing compared with 18.9% in June 2019, with an overall growth of 12.7% when compared with the same month a year earlier.

The flipside is that less money flows through the high street and sadly I suspect this is not a new trend.

Department stores’ growth increased for the first time this year with a month-on-month growth of 1.6%; this was following six consecutive months of decline.


Let me shift now to why is this happening? The situation regarding the UK consumer is strong and has been supported by several factors. The first is in the numbers themselves and repeats a theme I first highlighted on the 29th of January 2015.

Both the amount spent and the quantity bought in the retail industry reported strong growth of 3.9% and 3.3% respectively when compared with a year earlier.

That gives us an ersatz inflation measure of the order of 0.6% which made me look it up and the official deflator is 0.8%. That is very different to the ordinary inflation measures we see which are 2%-3%. So in a sense your money goes further ( strictly declines in value more slowly) and is compared to this.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.7% for total pay (including bonuses) and 3.9% for regular pay (excluding bonuses).

So in real terms there are gains in this sector. Thus it is no great surprise it has done well.

Also there is the fact that whilst the annual rate of growth has slowed we are still on something of an unsecured credit orgy.

The additional amount borrowed by consumers to buy goods and services was £1.0 billion in June, compared with £0.9 billion in May…….The annual growth rate of consumer credit continued to slow in June, falling to 5.5%

Is anything else growing at an annual rate of 5.5%.


There seems to be something of a media mania here as this from BBC Essex illustrates.

“Customers I’ve never seen before are coming in just for cauliflowers” Great Baddow greengrocers Martin and George Dobson are selling imported cauliflowers at cost price as Britain experiences a shortage. Prices have reached £2.50

I checked in two local supermarkets and they were selling then for £1 albeit they were from Holland. Then I went to Lidl and they were selling UK cauliflowers for 75 pence. Maybe a bit smaller than usual but otherwise normal so I bought one.

Good news on UK real wage growth reminds us they are still in a depression

One of the features of the UK economic recovery post credit crunch has been the strong growth in employment. This has had the very welcome side effect of bringing unemployment down to levels that on their own would make you think we have fully recovered. However yesterday produced a flicker of a warning on this subject from the official survey on well-being.

Expectations for higher unemployment for the year ahead have been climbing and are now higher than at any point for the past five and a half years.

Of course with so many elements of the media and “think tanks” singing along with REM it is hard to know whether people actually think this or feel they should.

It’s the end of the world as we know it
It’s the end of the world as we know it

Intriguingly though the next line includes the words “I feel fine” which were also replicated at a time ( Brexit D-Day 1.0 ) you might nor expect this.

Anxiety in the UK remained stable in the year ending March 2019, with no significant decrease in the proportion of people who reported the highest anxiety ratings.

Meanwhile the Bank of England will be expecting the economy to improve.

Net financial wealth per head increased by 3.0% for the quarter ending March 2019 compared to the same quarter a year ago, led by increases in equity and investment fund shares.

The only disappointment for it will be that it has not managed to keep house prices rising in real terms as well.


If we stay with that this morning’s release shows that the expectations had at least some basis in reality.

The UK unemployment rate was estimated at 3.9%; lower than a year earlier (4.0%); on the quarter the rate was 0.1 percentage points higher.

So there was a nudge higher in the unemployment rate. I have looked into the numbers as the release is shall we shall a bit light in this area. The rise in unemployment was by 37,000 to 1,329,000 but there is a nuance to this.

90,000 people from economic inactivity to unemployment

This is for a different time period as we are comparing the first three months of this year with the latest three but you can see that the shift is people joining the labour force. Over this period it is just about treble the change in unemployment of 31,000.

How can this be? We find it in the definition of employment that includes those above retirement age as over the same period it has risen by 104,000 which as the ordinary employment level only rose by 34,000 then 70,000 “retirees” have found work.


I have pressed the numbers hard here so do not take them to the last thousand. But in a broad sweep it looks as though more “retirees” have looked for work and many of them have found jobs. But some others have not and because they are looking for work have been switched from not being in the numbers to raising both unemployment numbers and the rate. Awkward.

So we are not sure what this actually tells us.


I have stolen my own thunder to some extent in the previous section but these numbers were good again and took us to a joint record high in employment rate terms of 76.1%. But let me go wider as I have above as we reached what ELO might call A New World Record. Or rather a UK record because if we include those above retirement age we have a new record employment rate of 61.6% and have 32.8 million.

The catch is that whilst some of this is good in terms of older people being heathier and able to work some will be forced to by needing the money and we have no way of determining the split. Also there was this.

There were an estimated 896,000 people (not seasonally adjusted) in employment on zero-hour contracts in their main job, 115,000 more than for a year earlier, but 8,000 fewer than the same period in 2016. This represents 2.7% of all people in employment for April to June 2019.

So a rise in a number which had been falling and again we lack the nuance. These contracts suit some people but others only take them because it is all they can get and we do not know the split. Frankly to my mind if you do not get work in a week or maybe only a few hours then the numbers should be discounted into “full-time equivalents.”

Oh and there was something which contradicted a lot of the rhetoric we see flying around.

EU nationals working in the UK increased by 99,000 to 2.37 million.non-EU nationals working in the UK increased by 34,000 to 1.29 million


These were a bright spot.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.7% for total pay (including bonuses) and 3.9% for regular pay (excluding bonuses).

If we look at total pay the monthly pattern has improved going, £530,£534,£536 and now £538 for weekly wages. Pay in construction has risen at an annual rate of 5.9% although the monthly pattern was better in April and May than June. The fly in the ointment is the public sector which had a really good April due to the rise in the minimum wage and this.

Public sector annual pay growth has accelerated to 3.9% and is now at its highest since May 2010; this is driven in large part by the health and social work sub-sector in which the timing of pay rises for some NHS staff is different in 2019 compared with 2018.

As April drops out of the three monthly average next time we could see quite a dip in this area.

Real Wages

The official view is this.

In real terms (after adjusting for inflation), total pay is estimated to have increased by 1.8% compared with a year earlier, and regular pay is estimated to have increased by 1.9%.

Sadly it is not that good as they use the imputed rent driven CPIH for this measure. As an example of the issue RPI was 1% higher in June. So if we split this down the middle real wage growth is 1.3%.

This sort of thing matters and let me highlight it with this.

For June 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at:

  • £505 per week in nominal terms
  • £469 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£460 per week), but £4 (0.8%) lower than the pre-recession peak of £473 per week for April 2008

The equivalent figures for total pay are £499 per week in June 2019 and £525 in February 2008, a 5.0% difference.

Firstly on both readings that is a depression. But many press the regular pay numbers which ignores the fact that the depression has been raging most in bonus pay. If we move to total pay we see why many people think they are poorer, it is because they are. That is before we get to the highly favourable inflation measure used here.


There is an element of good UK bad UK here so let me start with the good. Employment growth has been excellent and so overall has been the fall in unemployment. This month’s rise in the latter may be older people thinking they can get a job which many are but those that do not now count as unemployed. Wage growth is now pretty good and in fact is stellar for the credit crunch period.

The other side of the coin is that real wages are still in a depression and even at current rates of growth with take around 3 years to get back to the previous peak. Also if you have rising employment and falling (-0.2% GDP) you get this.

Data from the latest labour market statistics and GDP first quarterly estimate indicate that output per hour fell by 0.6% compared with the same quarter in the previous year….Output per worker in Q2 2019 also fell by 0.1%, compared with the same quarter in the previous year. This was the result of employment (1.3%) growing faster than gross value added (1.2%).


Recession forecasts for the UK collide with stronger wage growth

As we arrive at UK labour market day the mood music around the UK economy has shifted downwards. For example the Resolution Foundation has chosen this week to publish this.

Technical recessions (where economic output contracts for two consecutive quarters) have come along roughly once a decade in the UK. With the current period of economic
expansion now into its tenth year, there is therefore concern that we are nearer to the next recession than we are to the last.

At this point we do not learn a great deal as since policy has been to avoid a recession at almost nay cost for the last decade then the surprise would be if we were not nearer to the next recession.Also they seem to be clouding the view of what a technical recession ( where the economy contracts only marginally) is with a recession where it contracts by more. But then we get the main point.

Indeed, a simple model based on financial-market data
suggests that the risk of a recession is currently close to levels only seen around the time of past recessions and sharp slowdowns in GDP growth, and is at its highest level since 2007.

Okay so what is it?

One indicator that is often cited as a predictor of future recessions is the difference between longer-term and shorter-term yields on government bonds, often referred to as the ‘slope’ of the yield curve……..If shorter-term rates are above longer-term ones (negative slope), it suggests markets are expecting looser monetary policy in future than today, implying expectations of a deterioration in the outlook for the economy.

Okay and then we get the punchline.

It shows that this indicator has increased significantly in the run up to the previous three recessions. And it has risen from close to zero in 2014 to levels only seen around recessions and sharp slowdowns in GDP growth by 2019 Q2, reflecting the flattening of the yield curve……..


The problem with this type of analysis is that it ignores all the ch-ch-changes that have taken place in the credit crunch era. For example because of all the extraordinary monetary policy including £435 billion of purchases of UK government bonds by the Bank of England there is very little yield anywhere thus the yield curve will be flatter. That is a very different situation to market participants buying and selling and making the yield curve flatter. The danger here is that we record a false signal or more formally this is a version of Goodhart’s Law.

Also frankly saying this is not much use.

Our simple model suggests, therefore, that there is an elevated chance of the UK facing a recession at some point in the next three years.


UK Labour Market

The figures themselves provoked a wry smile because the downbeat background in terms of analysis collided with this.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 3.4% for total pay (including bonuses) and 3.6% for regular pay (excluding bonuses)……..Annual growth in both total pay (including bonuses) and regular pay (excluding bonuses) accelerated by 0.2% in March to May when compared with February to April.

The rise for the latter was the best in the credit crunch era and provoked some humour from Reuters. At least I think it was humour.

The pick-up in pay has been noted by the Bank of England which says it might need to raise interest rates in response, assuming Britain can avoid a no-deal Brexit.

The good news section of the report continued with these.

The UK unemployment rate was estimated at 3.8%; it has not been lower since October to December 1974. The UK economic inactivity rate was estimated at 20.9%, lower than a year earlier (21.0%).

So higher wage growth and low unemployment.


Actually as the two factors above are lagging indicators you could use them as a recession signal. But moving to nuance we found that in the employment data. This has just powered away over the past 7 years but found a bit of a hiccup today.

The UK employment rate was estimated at 76.0%, higher than a year earlier (75.6%); on the quarter, the rate was 0.1 percentage points lower, the first quarterly decrease since June to August 2018.

At this stage in the cycle with the employment rate so high it is hard to read especially when we notice these other measures.

Between March to May 2018 and March to May 2019: hours worked in the UK increased by 1.9% (to reach 1.05 billion hours)…….the number of people in employment in the UK increased by 1.1% (to reach 32.75 million)

We gain a little more insight from looking at just the month of May which was strong in this area.

The single month estimate of the employment rate, for people aged 16 to 64 years in the UK, for May 2019 was 76.2%

But not as strong as April which was at 76.4%! Oh and in case you are wondering how the three-month average got to 76% it was because March was 75.5%. You could press the Brexit Klaxon there but no-one seems to be doing so, perhaps they have not spotted it yet. Anyway barring a plunge in June the employment rate should be back.


We can fig deeper into these as well as we note something we have been waiting for.

the introduction of the new National Living Wage rate (4.9% higher than the 2018 rate) and National Minimum Wage rates which will impact the lowest-paid workers in sectors such as wholesaling, retailing, hotels and restaurants.

When we note who that went to we should particularly welcome it although it is different to wages being higher due to a strong economy as it was imposed on the market. There was also this.

pay increases for some NHS staff which will impact public sector pay growth

That provokes a few thoughts so let me give you some number crunching. Public-sector pay is at £542 per week higher than private-sector pay ( £534) and is growing slightly more quickly at 3.6% versus 3.4%. However if we look back to the year 2000 we see that pay growth has been remarkably similar at around 72%. Actually in the categories measured the variation is very small with manufacturing slowest at 69.3% and construction fastest at 74.8%.

If we look at the case of real wages we get a different picture.

In real terms (after adjusting for inflation), total pay is estimated to have increased by 1.4% compared with a year earlier, and regular pay is estimated to have increased by 1.7%.

It starts well although even here it is time for my regular reminder that the numbers rely on the official inflation series and are weaker if we use the Retail Price Index or RPI. But even so the credit crunch era background remains grim.

For May 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at:

£503 per week in nominal terms

£468 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£460 per week), but £5 (1.0%) lower than the pre-recession peak of £473 per week for April 2008


The equivalent figures for total pay are £498 per week in May 2019 and £525 in February 2008, a 5.0% difference.

Again that relies on a flattering inflation measure. But the grim truth is that real wages are in a depression and have been so for a bit more than a decade.


So there you have it in spite of the fears around this sector of the UK economy continues to perform strongly and give quite a different measure to say economic output or GDP. Also as we note the increase in hours worked and that GDP growth is fading we are seeing a wage growth pick-up with weak and probably negative productivity growth. We will have to see how that plays out but let me show you something else tucked away in the detail and let us go back to the Resolution Foundation.

Real pay growth grew by more than 3.5% for the real estate sector but fell by more than 1.0% in the arts and entertainment sector.

A bit harsh on luvvies who have been one of the strongest sectors in the economy. But I have spotted something else which may be a factor in why estate agents and the like are doing so well.

The proportion of UK mortgage lending at (LTV) ratios of 90% or higher was 18.7% of all mortgage lending in 2019 Q1. ( @NobleFrancis )

Odd that as I recall out political class singing along with Depeche Mode.

Never again
Is what you swore
The time before
Never again
Is what you swore
The time before






The Bank of Japan begins to face its failures

The last couple of weeks have seen two of the world’s main central banks strongly hint that the path for interest-rates is now lower, or perhaps I should say even lower. So as we open this week my thoughts turn eastwards to what the Shangri-Las would call the leader of the pack in this respect, Nihon or Japan. If we look at the Nikkei newspaper we see that Governor Kuroda of the Bank of Japan has also been conducting some open mouth operations.

TOKYO — Bank of Japan Governor Haruko Kuroda said extra stimulus would be an option if prices refuse to keep rising toward the central bank’s 2% inflation target.

The BOJ “will consider extra easing measures without hesitation” if the economy runs into a situation where momentum toward reaching stable inflation is lost, Kuroda said at a news conference on Thursday in Tokyo after keeping monetary policy unchanged.

There are various problems with this which start with the issue of inflation which has simply not responded to all the stimulus that the Bank of Japan has provided.

  The consumer price index for Japan in May 2019 was 101.8 (2015=100), up 0.7% over the year before seasonal adjustment,   and the same level as the previous month on a seasonally adjusted basis. ( Statistics Bureau).

This has been pretty much a constant in his term ( the only real change was caused by the rise in the Consumption Tax rate in 2014) and as I have pointed out many times over the years challenges Abenomics at its most basic point. If we stick to the monthly report above the situation is even worse than the overall number implies. This is because utility bills are rising at an annual rate of 3.2% but this is offset by other lower influences such as housing where the annual rate of (rental) inflation is a mere 0.1%. Also the services sector basically has virtually no inflation as the annual rate of change is 0.3%. Even the Bank of Japan does not think there is much going on here.

On the price front, the year-on-year rate of change in the
consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations have been more or less unchanged.


On Friday we got the latest wages data which showed that real wages fell at an annual rate of 1.4% in April, This meant that so far every month in Japan has seen real wages lower than the year before. If we look back we see that an index set at 100 in 2015 was at 100.8 in 2018 so now may well be back where it started.

This matters because this was the index that Abenomics was aimed at. Back in 2012/13 it was assumed by its advocates that pushing inflation higher would push wages even faster. Whereas that relationship was struggling before the credit crunch and it made it worse. Indeed so strong was the assumed relationship here that much of financial media has regularly reported this it has been happening in a version of fake news for economics. The truth is that there has been an occassional rally such as last summer’s bonus payments but no clear upwards trend and the numbers have trod water especially after Japan’s statisticians discovered mistakes in their calculations.

Problems for economics

Back when QE style policies began there was an assumption that they would automatically lead to inflation whereas the situation has turned out to be much more nuanced. As well as an interest-rate of -0.1% the Bank of Japan is doing this.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual
pace of about 80 trillion yen……….The Bank will purchase exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively…….As for CP and corporate bonds, the Bank will maintain their amounts outstanding at
about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Yet we have neither price nor wage inflation. If we look for a sign of inflation then it comes from the equity market where the Nikkei 225 equity index was around 8000 when Abenomics was proposed as opposed to the 21,286 of this morning. Maybe it is also true of Japanese Government Bonds but you see selling those has been something of a financial widow maker since around 1990.

Misfire on bond yields

2019 has seen yet another phase of the bond bull market which if we look back has been in play since before the turn of the century. But Japan has not participated as much as you might think due to something of a central planning failure.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices.

That was designed to keep JGB yields down but is currently keeping them up. Ooops! We see that bond yields in Germany and Switzerland have gone deeper into negative territory than in Japan. If we compared benchmark yields they go -0.31% and -0.51% respectively whereas in Japan the ten-year yield is -0.15%.

Economic Growth

On the face of it the first quarter of this year showed an improvement as it raised the annual rate of economic or GDP growth to 0.9%. That in itself showed an ongoing problem if 0.9% is better and that is before we get to the fact that the main feature was ominous. You see the quarterly growth rate of 0.6% was mostly ( two-thirds) driven by imports falling faster then exports, which is rather unauspicious for a trading nation.

If we look ahead Friday’s manufacturing PMI report from Markit posted a warning.

June survey data reveals a further loss of momentum
across the manufacturing sector, as signalled by the
headline PMI dropping to a three-month low. Softer
demand in both domestic and international markets
contributed to the sharpest fall in total new orders for
three years. A soft patch for automotive demand…..

The last few words are of course no great surprise but the main point here is the weaker order book. So Japan will be relying on its services sector for any growth. Also there is the issue of the proposed October Consumption Tax hike from 8% to 10% which would weaken the economy further. So we have to suspect it will be delayed yet again.


To my mind the Abenomics experiment never really addressed the main issue for Japan which is one of demographics. The population is both ageing and shrinking as this from the Yomiuri Shimbun earlier this month highlights.

The government on Friday released a rough calculation of vital statistics for 2018, revealing that the number of deaths minus births totaled 444,085, exceeding 400,000 for the first time.

The latest numbers on Thursday showed yet another fall in children (0-15) to 12.1% of the population and yet another rise in those over 85 to 4.7%. In many ways the latter is a good thing which is why economics gets called the dismal science. The demographics are weakening as Japan continues to borrow more with a national debt of 238% of GDP.

The size of the national debt is affordable at the moment for two reasons. The first is the low and at times negative level of bond yields. Next Japan has a large amount of private savings to offset the debt. The rub is that those savings are a buffer against the demographic issue and there is another problem with Abenomics which I have feared all along. Let me hand you over to a new research paper from the Bank of Japan.

The reversal interest rate is the rate at which accommodative monetary policy
reverses and becomes contractionary for lending. Its determinants are 1) banks’
fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of passthrough to deposit rates, and 4) the initial capitalization of banks.

So it looks like they are beginning to agree with me that so-called stimulus can turn out to be contractionary and there is more.

The reversal interest rate creeps up over time, making steep but short rate cuts preferable to “low for long” interest rate environments.

Exactly the reverse of what Japan has employed and we seem set to copy.


Bank of England Forward Guidance ignores the falls in UK real wages

Yesterday evening Michael Saunders of the Bank of England spoke in Southampton and gave us his view on our subject of today the labour market.

 the output gap is probably closed……….. The labour
market continued to tighten, and the MPC judged in late 2018 that the output gap had closed, with supply
and demand in the economy broadly in balance.

As you can see we quickly go from it being “probably closed” to “had closed” and there is something else off beam. You see if there is anyone on the Monetary Policy Committee who would think it is closed is Michael via his past pronouncements, so if he is not sure, who is? This leads us straight into the labour market.

In general, labour market data suggest
the output gap has closed. For example, the jobless rate is slightly below the MPC’s estimate of equilibrium,
vacancies are around a record high, while pay growth has risen to around a target-consistent pace (allowing
for productivity trends).

Poor old Michael does not seem to realise that if pay growth is consistent with the inflation target he does not have a problem. Of course that is before we hit the issue of the “equilibrium” jobless rate where the Bank of England has been singing along to Kylie Minogue.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this

In terms of numbers the original Forward Guidance highlighted an unemployment rate of 7% which very quickly became an equilibrium one of 6.5% and I also recall 5.5% and 4.5% as well as the present 4.25%. Meanwhile the actual unemployment rate is 3.8%! What has actually happened is that they have been chasing the actual unemployment rate lower and have only escaped more general derision because most people do not understand the issue here. Let’s be generous and ignore the original 7% and say they have cut the equilibrium rate from 6.5% to 4.25%. What that tells me is that the concept tells us nothing because on the original plan annual wage growth should be between 5% and 6%.

What we see is that an example of Ivory Tower thinking that reality has a problem and that the theory is sound.  It then leads to this.

This would reinforce the prospect that the
economy moves into significant excess demand over the next 2-3 years, and hence that some further
monetary tightening is likely to be needed to keep inflation in line with the 2% target over time.

Somebody needs to tell the Reserve Bank of India about this excess demand as it has cut interest-rates three times this year and also Australia which cut only last week. Plus Mario Draghi of the ECB who said no twice before the journalist asking him if he would raise interest-rates last week finished his question and then added a third for good measure.

Wage Data

We gain an initial perspective from this. From this morning’s labour market release.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.1%, before adjusting for inflation, and by 1.2%, after adjusting for inflation, compared with a year earlier.

If we start with the economic situation these numbers are welcome and let me explain why. The previous three months had seen total weekly wages go £530 in January, but then £529 in both February and March. So the £3 rise to £532 in April is a welcome return to monthly and indeed quarterly growth. As to the number for real wages it is welcome that we have some real wage growth but sadly the official measure used called CPIH is a poor one via its use of imputed rents which are never paid.

Ivory Tower Troubles

However as we peruse the data we see what Taylor Swift would call “trouble, trouble trouble” for the rhetoric of Michael Saunders. Let us look at his words.

Wage income again is likely to do better than expected.

That has been something of a hardy perennial for the Bank of England in the Forward Guidance era where we have seen wage growth optimism for just under 6 years now. But whilst finally we have arrived in if not sunlit uplands we at least have some real wage growth there is a catch. Let me show you what it is with the latest four numbers for the three monthly total wages average. It has gone 3.5% in January then 3.5%, 3.3% and now 3.1%. Also if we drill into the detail of the April numbers I see that the monthly rise was driven by an £8 rise in weekly public-sector wages to £542 which looks vulnerable to me. Was there a sector which got a big rise?

Thus as you can see on the evidence so far we have slowing wage growth rather than it picking up. That would be consistent with the slowing GDP growth yesterday. So we seem to be requiring something of a “growth fairy” that perhaps only Michael is seeing right now. This is what he thinks it will do to wage growth.

Pay growth has recently
risen to about 3% YoY and the May IR projects a further modest pickup (to about 3.5% in 2020 and 3.75% in 2021). That looks reasonable in my view: if anything, with the high levels of recruitment difficulties, risks may
lie slightly to the upside.

Real Wages

There is a deeper problem here as whilst the recent history has been better the credit crunch era has been a really poor one for UK real ages. Our official statisticians put it like this.

£468 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £5 lower than the pre-recession peak of £473 per week for April 2008.

As you can see even using their favoured ( aka lower) inflation measure real wages are in the red zone still. I noted that they have only given us the regular pay data so I checked the total wages series. There we have seen a fall from the £512 of January 2008 to £496 in April so £16 lower and just in case anyone looks it up I am ignoring the £525 of February 2008 which looks like the equivalent of what musicians call a bum note.

We see therefore that the closed output gap measured via the labour market has left us over a decade later with lower real wages!


If we view the UK labour market via the lenses of a pair of Bank of England spectacles then there is only one response to the data today.

Between February to April 2018 and February to April 2019: hours worked in the UK increased by 2.4% (to reach 1.05 billion hours) the number of people in employment in the UK increased by 1.1% (to reach 32.75 million).

From already strong numbers we see more growth and this has fed directly into the number they set as a Forward Guidance benchmark.

For February to April 2019, an estimated 1.30 million people were unemployed, 112,000 fewer than a year earlier and 857,000 fewer than five years earlier.

It is hard not to have a wry smile at falls in unemployment like that leading to in net terms the grand sum of one 0.25% Bank Rate rise. Also even a pair of Bank of England spectacles may spot that a 2.4% increase in hours worked suggests labour productivity is falling.

But the Forward Guidance virus is apparently catching as even the absent-minded professor has remembered to join in.

BoE’s Broadbent: If Economy Grows As BoE Forecasts, Interest Rates Will Probably Need To Rise A Bit Faster Than Market Curve Priced In May ( @LiveSquawk )

My conclusion is that we should welcome the better phase for the UK labour market and keep our fingers crossed for more in what look choppy waters. Part of the problem at the Bank of England seems to be that they think it is all about them.

Second, why should growth pick up without any easing in monetary or fiscal policies? ( Michael Saunders)

Of course that may be even more revealing…..



Japan adds sharply falling imports to its continuing real wages problem

Today gives an opportunity to head east and look at what is sometimes considered to be the engine room of the world economy looking forwards. We can do so via an old friend which is Nihon the land of the rising sun. It is facing a situation where central banks in Malaysia, New Zealand and the Philippines have cut interest-rates this month. The latter cut was a reminder of different perspectives as we note this from The Business Times.

Gross domestic product (GDP) expanded 5.6 per cent in the first three months of the year, dragged by a slowdown in government spending, farm output, exports and the country’s budget deadlock. The pace was slower than the previous quarter’s 6.3 per cent and also the 6.1 per cent forecast in a Reuters poll…….On a seasonally adjusted basis, the economy grew 1.0 per cent in the January-March period from the previous quarter, far slower than the upwardly revised 1.8 per cent in the fourth quarter of 2018.

Of course Japan would get out it’s party hats and best sake for anything like that rate of growth but for it today’s story started well with this. From Reuters.

Japan’s economic growth unexpectedly accelerated in January- March, driven by net contributions from exports and defying forecasts for a contraction in the world’s third-largest economy.

At this point things look really rather good as in a time of trade wars growth from net exports is especially welcome. Before I get to that we may note that the forecasts were wrong by quite a wide margin but as we have a wry smile I would just like to add that initial GDP data in Japan is particularly unreliable. I know that goes against the national stereotype but it is an ongoing problem. The Bank of Japan thinks that the numbers have been consistently too low but the catch is that it is hardly an impartial observer after all its extraordinary monetary policies. For the moment,however we have been told this.

Japan’s economy grew at an annualized 2.1% in the first quarter, gross domestic product (GDP) data showed on Monday, beating market expectations for a 0.2% contraction. It followed a revised 1.6% expansion in October-December.

The Rub

The problem with growth from net exports as Greece discovered is that it can be a sign of contraction as it is here. Fortunately someone at Reuters seems to have learnt from my style of analysis.

The headline GDP expansion was caused largely by a 4.6% slump in imports, the biggest drop in a decade and more than a 2.4% fall in exports.

As imports fell more than exports, net exports – or shipments minus imports – added 0.4 percentage point to GDP growth, the data showed.

If we look further into the detail we see that this quarter exports knocked some 0.5% off GDP with their fall, although not everyone seems to think that if this from @fastFT is any guide.

 the world’s third-largest economy was boosted by better-than-expected exports.

Let us be kind and assume they though they would be even worse.

Returning to the main point we are now left wondering why imports were so weak. We get a partial answer from this.

Private consumption slid 0.1% and capital expenditure dropped 0.3%, casting doubt on policymakers’ view that solid domestic demand will offset the pain from slowing exports.

Lower consumption will have been a factor although I am much less sure about investment because public investment rose by 1.5% and total investment added 0.1% to the GDP growth figure. So as Japan needs basic materials and is a large energy importer we face the likelihood that industry is nervous about the prospects for late spring and summer and has adjusted accordingly. This from will not help.

The slump in China, which is the center of production and consumption in Asia, has spread to other countries in the region. Trade statistics for March 2019 show that exports to Asian countries (including China) fell by 5.5% compared to the same month the previous year, marking the fifth straight monthly decline since November 2018.


If you want a scare story the Japanese way of annualising numbers creates one because on this basis exports fell by 9.4% and imports by 17.9%.

Industrial Production

There was some better news on this from earlier as the preliminary report of a monthly fall of 0.9% in March was revised up to a 0.6% fall. But even so this meant that production was 4.3% lower than a year before. Thus we see why imports have dropped as the official views has gone from “Industrial Production is pausing.” to “Industrial Production is in a weak tone recently.”

The index is at 102.2 where 2015 = 100 but as recently as last October it was 105.6.


Low wage growth and at times declining real wages has been a theme of the “lost decade” era in Japan and January produced bad news for confidence in this area for both the numbers and the official data series. From the Nikkei Asian Review in late January.

A data scandal at Japan’s labor ministry has created further headaches for the Abe government in its protracted attempts to spur inflation.

The ministry’s Monthly Labor Survey overstated nominal pay increases in the first eleven months of 2018. Corrected monthly results released on Wednesday saw year-on-year wage growth drop by between 0.1 and 0.7 percentage point. Officials revised data for every month.

The new series has seen real wage growth accelerate downwards in 2019 so far starting with an annual fall of 0.7% in January then 1% in February followed by 2.5% in March. If we switch to wage growth on its own we see that the real estate sector was ht hardest in March with an annual fall of 5.9% followed by the finance and insurance sector where it fell by 4.6%.

The highest paid sector ( 446,255 Yen) in March was the utility one (electricity, heat and water).

This weaker set of data also has worries for those on us following at least partly on the same road as Japan as The Vapors once again remind us.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so


So far I have avoided financial aspects and only briefly referred to the Bank of Japan. It of course has been pursuing the policy of Abenomics for some time now but some of the arrows have misfired. Actually the case of currency depreciation may boomerang in some areas as we see a falling Chinese Yuan. Indeed the Japanese Yen has been rallying against the UK Pound £ which has been pushed back to the 140 level. Signs of economic weakness and trouble give us a stronger Yen as markets adjust in case the Japanese decide to take some of their large foreign investments home.

It is unclear how the Bank of Japan can help much with the current series of problems. For example its role of being the Tokyo Whale and buying Japanese equities on down days for the market is unlikely to do much about the real wages problem or the aging and shrinking population. Although the rhetoric of “powerful monetary easing” continues.

In addition, the Bank decided to consider the introduction of a facility for lending exchange-traded funds (ETFs) that it holds to market participants.  ( Governor Kuroda)

In reality that seems to be forced because it is on its way to buying them all!

While I will not explain these measures in detail today, they all will provide support for continuing with powerful monetary easing through the Bank’s smooth fund-provisioning and securing of market functioning.

Also if fiddling at the margins like this worked Japan would have escaped its lost decade years and years ago.




UK wage growth shows the first sign of weakness for a while

Today brings the UK labour market into focus as we hope for more good news. However we have seen over the past day or so some reminders that the credit crunch era left long lasting scars for some. In isolation the UK has recovered well in terms of employment and getting people back to work but has done much less well overall in terms of what they are paid for it. In particular the Resolution Foundation has taken a look at one rather unfortunate group.

This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were.

These individuals were of course guilty of nothing and were only involved via an accident of the timing of their birth. The Resolution Foundation discovered these effects.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low paying occupation rises.

The find something which resonates with past Bank of England research on this subject.

The chance of a graduate working in a lowpaid occupation rose by 30 per cent, and remained elevated a full seven
years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering
the labour market in a recession.

The issue I have with this is that we are looking at a period when being a graduate was not what it had been in the past due to the expansion of numbers in the Blair era. So that may well also have been in play but not fully considered. Whatever the cause there was a strong effect on wages.

This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn).

Thus not only did wages fall they took longer to recover to levels seen by those lucky enough not to start work and graduate as the credit crunch hit. A clear issue for thos affected.

However we did get one thing right in the sense that pre credit crunch we wanted to be what was considered to be more Germanic. In this instance that meant more flexible wages ( as in potentially down) in return for a better employment trajectory.

On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Many now seem to have forgotten that as it has turned out to be a success but at a price in terms of wages especially for those unlucky enough to be born at the wrong time. Although as this from BBC economics correspondent Andy Verity illustrates some are keener on lower unemployment than others.

The unemployment rate is now down to 3.8%. But is lower unemployment always a good thing? Not necessarily – if eg you’re a business and you can’t get the staff.

Today’s Data

The drumbeat of the UK data series for around the last seven years continues to beat out its tune.

Estimates for January to March 2019 show 32.70 million people aged 16 years and over in employment, 354,000 more than for a year earlier. This annual increase of 354,000 was due entirely to more people working full-time (up 372,000 on the year to reach 24.11 million). Part-time working showed a small fall of 18,000 on the year to reach 8.59 million……..The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.6%) and the joint- highest figure on record.

The bass line was in tune as well.

For January to March 2019, an estimated 1.30 million people were unemployed, 119,000 fewer than for a year earlier and 914,000 fewer than for five years earlier…….

the estimated unemployment rate: for everyone was 3.8%; it has not been lower since October to December 1974 (for men was 3.9%; it has not been lower since March to May 1975, for women was 3.7%, the lowest since comparable records began in 1971)

As you can see the unemployment performance is a case of lets hear it for the girls.

Also as I regularly get asked here is the other category.

The UK economic inactivity rate was estimated at 20.8%, lower than for a year earlier (21.1%) and close to a record low.


Here there was a more nuanced version of better news.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.2%, before adjusting for inflation, and by 1.3%, after adjusting for inflation, compared with a year earlier.

If we put to one side for a moment the attempt to sugar coat the real wages numbers, there is a fading of nominal wage growth here. We should welcome the fact that the annual rate of growth is still above 3% but there is an issue as it has fallen back from 3.5%. Why? Well weekly wages peaked at £530 in January and fell to £529 in February and £528 in March. Various areas contributed to this as the annual rate of pay growth in finance fell from 5% to 1.8% over the same period and growth in the wholesaling,retail and hotel sector actually went negative ( -0.3%). This was due to weak and in some cases negative bonus payments ( I am not sure how that works…) being recorded so it is a case of what that space.

I did say I would return to real wage growth and let me present it in chart form to illustrate the issue.

Those who have had a hard time in the credit crunch provide yet another reason to make the case for an RPI style measure of inflation I think. It also shows that choosing your inflation measure is a genuinely big deal and something that establishment’s love to manipulate.


One of the ironies of the credit crunch era is that the economics establishment regularly gets worked up about things it wanted. Of course some of those reporting the situation are too young to remember that but not all. We see that we got the better employment situation we wanted but that especially for those who joined the job market at what turned out to be the wrong time real wages shifted onto a lower path from which they have yet to recover. Sadly the main response from government has been to try to change the numbers via the use of the fantasies involved in Imputed Rents which are never paid, rather than dealing with reality. Also the way that the self-employed are ignored in the wages data is becoming a bigger and bigger issue.

4.93 million self-employed people (15.1% of all people in employment), 180,000 more than a year earlier.

As to the current situation it may no longer be quite so Goldilocks as whilst employment growth continues we face the possibility that wage growth is slowing again. Perhaps in spite of its many fault as a measure it is related to this.

In contrast, output per worker in Quarter 1 2019 increased by 0.7% compared with the same quarter in the previous year.

If you want the full picture it is the difference between the two numbers here.

It indicates that in Quarter 1 2019, all three economic indicators were above their pre-downturn levels, with GDP being 12.7% higher while both hours and employment were equally 10.2% higher.

Putting all this another way it is yet another punch hammered home on output gap style theories which must now be in boxing terms on the canvas again. What happened to the three knockdowns and you are out rule?