Are we measuring the wrong type of productivity?

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

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 Whereas according to Bank of England Chief Economist Andy Haldane that happy situation has been replaced by this.

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

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

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

In case you were wondering it compares to this.

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

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

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

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

The United States

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

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

This is true of others as well.

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

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

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

Is it the service sector?

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

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

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

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

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

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

Today’s data

Not the cheeriest I am afraid to say.

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

My explanation given above may well work though.

was a result of hours worked growing faster than output;

What about wages?

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

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

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

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

Comment

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

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

Number Crunching

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

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

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

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The march of the UK services-sector continues. Is this the 4th industrial revolution?

Today we find out whether the UK economy is seeing a continuation of the fading of its economic growth spurt. The trend up to now was summarised in the January Economic Review.

GDP grew by 0.4% in Q3 2015, revised down from the previously published estimate of 0.5%. Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014…… this represents something of an easing in GDP growth compared to 2013 and 2014. ………GDP is now 6.1% higher than its pre-downturn level.

As you can see we have seen a fading although the good news is that the growth spurt pushed us above the pre credit crunch peak in aggregate terms. Although a bit less than 1% per annum are levels associated over time more with the record of Italy and Portugal.

If we move to the individual level then we did cross a Rubicon in 2015 and it was welcome. However you can see below why it is argued that the total economic growth seen does not tell the full story.

GDP per head increased by 0.3% over this period compared to the previous quarter and was 0.3% above its pre-downturn level, having initially surpassed it in Q2 2015.

Per person we have only just pushed our nose ahead of where we were pre credit crunch so that in this respect the last seven years or so represent stagnation. On this road to nowhere we see where there is dissatisfaction with the economic growth seen. The good news is that we have to opportunity to advance to new heights but we need to keep growing. Also I am typing this before the release and felt the need to point this out on Twitter.

Don’t forget that UK GDP is due at 9:30 am today and that some people have known it for the last 23 hours

It is a sad indictment of the times that the UK ONS (Office for National Statistics) is investigating the issue of some people being more equal than others in this regard.

The good news

In terms of economic output the UK is seeing two influences push momentum forwards. The first is something that I described just under a year ago on the 29th of January 2015 as I pointed out that disinflationary pressure would boost real wages and help consumption. We have seen more good news on this front only this morning. From the BBC.

The UK’s second biggest energy supplier SSE is to cut its standard gas tariff for domestic customers by 5.3%.

SSE is the second of the big six suppliers to announce price cuts this winter.

If we note petrol and diesel prices at the pump they fell again last week with petrol now some 4.9 pence per litre cheaper than a year ago and diesel some 12.2 pence cheaper. So the heat is still on in this area although for perspective I did have a wry smile when an American reported that she had just paid per gallon what we pay per litre! Also whilst the gas price cut is good news it is also true that it starts at the end of  March as in when you would expect consumption to be lower after the winter peak.

Next is the ongoing influence of the Bank of England Funding for (Mortgage) Lending Scheme. An example of this was highlighted last week by This Is Money.

The lowest ever five-year fixed rate mortgage is back. HSBC kicked off the New Year with a bang with the return of its 1.99 per cent five-year fix.

That particular one requires a 40% deposit so let us look at the other end of the scale. From Mortgage Strategy

Selfcert.co.uk has bypassed an FCA ban on self-cert mortgages by setting up in Prague and using the ecommerce directive to write business in the UK.

It is offering a tracker loan set at 2 per cent above base rate and will lend up to £500,000 at 85 per cent loan-to-value with fees of around £600.

There was so much demand that its website crashed! Plenty of work there for the new head of the FCA (Financial Conduct Authority) Andrew Bailey (please see yesterday’s article) as it claims to have banned self certification mortgages. It all feels a bit like when The Terminator declares “I’m back” doesn’t it?

Headwinds

In essence this is the international environment which the US Federal Reserve described last night like this.

The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

In other words they are worried by them and such thoughts led to this.

economic growth slowed late last year.

The UK faces many of these issues although ut is also true to say that our nearest neighbour the Euro area has perked up over the past year. The problem though is that we have had a consistent problem with our trade position where if we were a bath the plug never fits and frankly sometimes we might wonder if there is a plug at all. From the January Economic Review.

This has largely been driven by the absence of growth in the export of goods, which in Q3 2015 were 1.7 percentage points lower than the average level in 2008 (as a percentage of nominal GDP), while the import of goods increased by 1.1 percentage points over the same period.

This problem in the good sector is in contrast to our performance in the services sector which is far better but being smaller has been unable to offset it.

Today’s numbers

Firstly let us welcome the fact that we continue to see economic growth in the UK as we need it.

GDP is estimated to have increased by 0.5% in Quarter 4 (Oct to Dec) 2015 compared with growth of 0.4% in Quarter 3 (July to Sept) 2015.

We need to take care with the 0.1% rise as it is well within the margin of error but one of the themes of this website has been illustrated by the detail.

Services increased by 0.7%, contributing 0.52 percentage points to Quarter 4 (Oct to Dec) 2015 GDP growth

Yes it was the growth in fact more than it which I shall return to in a moment but we saw growth in all service sectors with a particular change shown below.

Growth in business services and finance increased from 0.6% in Quarter 3 (July to Sept) 2015 to 0.9% in Quarter 4 (Oct to Dec) 2015.

It must now be 80% of our economy and the official number of 78.6% from 2012 is sorely in need of an update. We should welcome out success in this area even as we wonder what happened to the “rebalancing” of former Bank of England Governor Mervyn King and the “March of the Makers”

In contrast, production decreased by 0.2%, while construction output decreased by 0.1%…….. manufacturing growth was flat, following a decrease of 0.4% in Quarter 3 (July to Sept) 2015.

If we step back from the detail for some perspective then we find that we have seen a slowing of economic growth overall.

GDP was 1.9% higher in Quarter 4 (Oct to Dec) 2015 compared with the same quarter a year ago. GDP in 2015 as a whole increased by 2.2% on 2014……This compares to an increase of 2.9% between 2013 and 2014.

Is 0.5% growth per quarter the “new normal”?

Comment

There is good news here as the UK continues to grow albeit with something of a dip on the previous heights. But as we look at the way that recent economic growth has been driven pretty much entirely by the service sector let me quote this. From the World Economic Forum.

Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.

Any revolution poses its challenges so let me offer two. Firstly what do we want to do and what are our objectives? Secondly we have the issue of how we measure all this as we switch from actual products which can be measured objectively towards areas where this is much harder? The establishment want the numbers to surge whereas as I replied to the Bean Economic Review we need to think and consider as much as cheerlead. I will welcome your thoughts on this as ever.

For those of you who prefer to listen to economic analysis I will be on Share Radio after the 1 pm news today.

 

 

 

 

What if UK GDP growth is revised up after the General Election?

Today is the last look at significant UK economic data before many people go to the polls to vote in tomorrow’s General Election. Of course a major part of the economic backdrop was set back on the 28th of March when we were told this which was a story of two halves.

GDP is estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2015 compared with growth of 0.6% in Quarter 4 (Oct to Dec) 2014.

GDP was 2.4% higher in Quarter 1 (Jan to Mar) 2015 compared with the same quarter a year ago.

So although care is needed with the preliminary estimate we saw that economic growth continued to fade away but also that in the post credit crunch era we had over the previous year put in one of our better performances. After all the overall position is of a modest gain.

In Quarter 1 (Jan to Mar) 2015, GDP was estimated to have been 4.0% higher than the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008.

Even this modest gain erodes if we look at the numbers in the light of the population increase that the UK has had over the same period although we remain in doubt as to the exact size of this. But it is per capita GDP and its influence on real wages which leads to many people wondering if we have indeed had much of a gain at all.

Business Surveys

The Purchasing Manager’s Indices reinforced this theme for manufacturing and construction.

UK manufacturing growth slows as intermediate goods sector falls back into contraction.

This was not an especially auspicious headline as we had become unused to contraction themes over a better period for UK manufacturing although it remains some 4.9% weaker than the credit crunch peak.

The construction report was disappointing too.

Construction output growth slows in April amid weakest rise in new work since June 2013…..Business activity growth hits 22-month low

However there is a nuance here as the slow down was blamed on uncertainty before the General Election. Intriguing as whilst we often report this else where  it has so rarely got a mention in the UK this time around! Also the whole sector is mired in uncertainty due to problems with the official data.

Taken as a whole, the latest survey presents a far more upbeat picture than the curiously weak official construction output data for the first quarter of 2015.

In case you have not followed it UK official construction data is in quite a mess and whilst the business surveys have their problems they are likely to be more reliable for the immediate future.

Boom!

A completely different view of the UK economy was provided by a very upbeat survey on the UK service sector from Markit this morning.

Business activity increased at the fastest rate since August 2014, driven by a further marked rise in new business….Activity in the sector has now risen for 28 successive months, the longest sequence of growth in seven years.

The reading of 59.5 is high but the context is that the long-term average is 55.2 for this sector and we should perhaps use that rather than 50 as a benchmark. But the boom is put into the paragraph heading by this.

“The PMI surveys suggest the economy is showing robust growth momentum, expanding at a rate of 0.8% at the start of the second quarter.

Of course it is only one month out of three and we were told this at the end of the first quarter by the same source.

The three PMI surveys collectively indicate that the economy grew by 0.7% in the first quarter, reviving from the slowdown seen late last year.

Were they right to be optimistic?

Today’s Economic Review from the Office for National Statistics does poses this question if you read between the lines a little. Let me open with its published view which coincides with the GDP numbers above.

Figure 1 shows that total services output fell by 0.2% in January, following relatively robust growth of 0.6% in December 2014. This fall was driven by a broad decline in the ‘business services & finance’ industries, with the largest contribution coming from a 1.4% fall in ‘professional services’ (such as architectural, management consultancy and legal services).

Okay so that is clear with one sector driving services output lower in January. But then look at this.

However, February saw a return to growth in services output at a similar rate to that seen in much of 2014.

That makes January look like an outlier or to put it another way odd. This is reinforced by this section.

Looking over 2014 as a whole, services output grew in 11 of the 12 months, and by 3.7% in the 12 months to December 2014.

There were no contractions as the twelfth month was a zero and yet suddenly we had one which then disappeared in the blink of an eye! I am reminded of Andrew Baldwin pointing out that an election in his province in Canada took place based at least partly on  changes in the unemployment data which were then revised away. There are grounds for wondering if something similar may be happening in the UK and that a change to services output will return economic growth to 0.5% or so. Or as David Bowie put it.

Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Don’t want to be a richer man
Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Just gonna have to be a different man
Time may change me
But I can’t trace time

This is especially awkward at election time!

The Balance of Payments Crisis

This continues except it is an almost silent crisis as markets so far have chosen to ignore it. As I have regularly pointed out the exchange-rate of the UK Pound has risen over the past year. But as today’s Economic Review points out.

the (current account) deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.

This made us the worst in the G7 group of countries. It also should sober up some of those who keep telling us that we have to be in the European Union for the trade benefits. Although to be fair to them there are some who do indeed benefit from this trade.

In contrast, Germany experienced the largest current account surplus in 2014.

What about a sterling crisis?

In spite of the what you might call sterling efforts of the Daily Telegraph there are no signs of a sterling crisis at all so far anyway.

What about a Gilts crisis?

Here the are signs of initial hope for the doomsayers which in this instance are being led by the Financial Times.

Investors are rapidly selling off UK government bonds, as jitters about future economic policy a day before an election

If you want such a theme then the UK ten-year Gilt yield has nudged above 2% this morning for the first time in 2015. However the situation changes when I note that the ten-year yield of Germany has risen by 0.1% to 0.56%! I did reply in such fashion to the FT on twitter and will let you know if it replies to this.

Is there an election in too as their bonds have taken a pounding recently?! In spite of

Neither a saver nor a saver be

With apologies to William Shakespeare the Economic Review confirmed something which savers have been complaining about.

While the rate of interest received on savings from deposits with financial institutions has declined since the beginning of 2013, the rate paid by households on loans has remained relatively stable. Savings rates in some cases have fallen by over a third since 2013.

Actually I think that they are confusing stock with flow a little on the impact of falling mortgage rates but it is also true that volumes there are of course much lower than pre credit crunch.

Comment

So in summary the UK has had a good spell of economic growth but at the familiar price of pumping up house prices and a worsening balance of payments. All very deja vu if you look at our economic history. Missing this time has been a rise in inflation and indeed wages but the former I think has been singing along to the Beatles.

Please, don’t wake me, no, don’t shake me
Leave me where I am, I’m only sleeping

Inflation in the services sector remains above the target and as for goods inflation well the oil price (Brent Crude) is continuing to rebound higher and has moved over US $68 now. Thus headline inflation will pick-up and the economic boost provided will fade.

If I come across a party at this election that looks likely to deal with our economic problems I will let you know!