UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.

Wealth

This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.

 

Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.

Comment

We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

The UK economy is doing pretty well but inflation is on the cards

Today is a day where we await a raft of UK economic data under what is called an improvement by the Office for National Statistics. I have learnt to be circumspect about such things as for example the recent online improvement by the Bank of England means that it is harder to find things. However the UK economy has started 2017 in apparently pretty good shape highlighted by this already today.

We had a record Christmas week, with over 30 million customer transactions at Sainsbury’s and over £1 billion of sales across the Group.

Of course that is only one supermarket but more generally we have been told this.

The British Retail Consortium said a strong Christmas week boosted spending growth in December to a year-on-year rate of 1.7 percent, up from 1.3 percent in November.

Like-for-like sales – which exclude new store openings – saw annual growth of 1.0 percent, up from 0.6 percent in November.

So it would appear that the consumer is still spending and you may not the gap between these figures and the official ones. This shows us I think how much spending these days bypasses conventional retailing. Along the way I found some perhaps Second Hand News on the Sainsbury’s twitter feed.

Rumours? No, it’s true! Rumours by Fleetwood Mac was our number 1 selling Vinyl of 2016.

Business Surveys

The Markit PMIs released last week were rather upbeat too.

“Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.”

Of course Markit still has some egg on its face from its post EU leave vote efforts singing along to an “it’s the end of the world as we know it” initial impact which turned out to be well if not fake news simply wrong.

The Bank of England

As well as issuing mea culpas the Bank of England is still running an extremely expansionary monetary policy. This afternoon it will purchase another £1 billion of UK Gilts ( government bonds) as part of its extra £60 billion of QE ( Quantitative Easing) as well as some Corporate Bonds. It also cut the official Bank Rate to 0.25% in August and let us not forget its latest bank subsidy the Term Funding Scheme which has provided them with £21.2 billion of cheap liquidity so far. No wonder bank deposit and savings interest-rates are so low.

Putting it another way if we use the old Bank of England rule of thumb the fall in the UK Pound £ has been equivalent to a 3% reduction in Bank Rate. This is why the “Sledgehammer” response in August was a mistake as it was in reality a minor addition to a powerful existing force, and was only likely to increase inflation this and next year.

Today’s figures

Production

These turned out to be strong as you can see.

In November 2016, total production was estimated to have increased by 2.1% compared with October 2016……..The monthly estimate of manufacturing increased by 1.3% in November 2016

This monthly surge was also reflected in the comparison with a year ago.

The month-on-same month a year ago estimate of total production increased by 2.0% in November 2016, with increases in all 4 main sectors; the largest contribution came from manufacturing, 1.2%.

In case you are wondering about the last bit the reason is that manufacturing is the largest sector (~70%) and therefore was responsible for 0.8 of the 2% but other ( smaller) sectors grew more quickly.

Looking at this we learn too things. Firstly the North Sea Oil & Gas maintenance period has faded ( the Buzzard field mostly) with output up 8.2% on the month. Secondly the pharmaceutical industry continues to be very volatile in 2016 being some 11.4% up on the month and as it has done so it has mostly taken the overall manufacturing numbers with it.

Also it is hard not to think of the different German performance which I looked at only on Monday when reading this.

both production and manufacturing output have steadily risen but remain well below the pre-downturn peak.

They seem suddenly shy about providing the exact numbers.

Trade

We saw a marginal improvement here if we look at the rolling quarterly data.

Between the 3 months to August 2016 and the 3 months to November 2016, the total trade deficit for goods and services narrowed by £0.4 billion to £11.0 billion, with exports increasing more than imports.

If we look further we see something of a hopeful sign.

The 3-monthly narrowing of the deficit is attributed to an increase of the trade in services surplus,

We need to be cautious on two fronts here as the decrease is small and the services numbers are not that reliable over even a quarter. Also the media seems already to be concentrating on the poor monthly numbers for November forgetting that they can be particularly influenced well be factors like this.

Imports of machinery and transport equipment rose by £1.4 billion, and were the largest contributors to the increase in imports.

The theme is continued by the fact that not so long ago some £20 billion or so was lopped off the estimates for the 2015 deficit. Even in these inflated times that is a fair bit more than just a rounding error! Also we do get contradictions in the data sets as pharmaceuticals surge in the manufacturing numbers but lead to more imports from Europe. They should be a positive influence for December bit let’s see.

Construction

Here the news was more downbeat as you can see.

In November 2016, construction output fell by 0.2% compared with October 2016, largely due to a contraction in non-housing repair and maintenance….The underlying pattern as suggested by the 3 month on 3 month movement shows a slight contraction of 0.1%.

These numbers sadly are quite a shambles so take them with plenty of salt or as it is officially put.

On 11 December 2014 the UK Statistics Authority announced its decision to suspend the designation of Construction output and new orders as National Statistics due to concerns about the quality of the Construction Price and Cost Indices used to remove the effects of inflation from the statistics.

A major theme of my work is the official inability and at time unwillingness to measure inflation from the housing sector properly and thus we see something of a confession. More than 2 years later it is still broken even according to the official measure.

Comment

So far the UK economy has done rather well post the EU leave vote as the storm predicted in the mainstream media never happened. Indeed if you are a fan of official data something has been going well for quite some time. From the twitter feed of the economics editor of the Financial Times Chris Giles.

UK income inequality at its lowest since height of Thatcherism

Another U-Turn? After all he led the Piketty charge for er inequality did he not? It is a bit like much of the Desert War in the 1940s when the British army had a phase of “order, counter-order, disorder”. My personal view is that there are lots of issues here such as inflation measurement which varies amongst groups as well as other problems and the fact that we need to look at assets as well.

Looking forwards we are likely to see some what might be called “trouble,trouble,trouble” around the summer/autumn as the increase in inflation impacts on us and via real wages looks set to slow the economy. Meanwhile the rhythm section to the UK economy continues to hammer out a trade deficit beat like it has for quite some time.

The big problem that is little productivity growth in the western world

It was only yesterday that we found ourselves looking at an apparent productivity miracle in China, or perhaps if official statistics are true! Yet in the western world we find ourselves wondering what has happened to it? I recall the Bank of England publishing a paper looking at an 18% productivity gap. Some care ( as ever ) is needed with their work as it assumed that we could carry on as we did before the credit crunch whereas some industries like banking were clearly misleading us. But the truth is that it does look like there has been a change even if we discount the projection of past performance forwards.

In some places it exists

This caught my eye as I was doing some research on the subject.

Welcome to 2017! The future is here. Workers at Fukoku Mutual Life Insurance are being replaced with an artificial intelligence system. ( @izzyroberts )

So we can see changes in service industries as well where 34 employees are to be replaced by an AI ( artificial intelligence) system . This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment. The more conventional view is the use of robots and automation in the manufacturing and industrial sector.

The apparent problem

This has been highlighted by John Fernald of the US Federal Reserve and here is a summary from the Wall Street Journal.

His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps……..Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

This type of view changes things and is a critique of the Bank of England projecting the past forwards work but the immediate impact is to move productivity falls from a consequence of the credit crunch to one of the causes of it. Also as we look forwards it has its own consequence which is something we have discussed many times here.

He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005.

Again care is needed as a clear challenge here is how we measure productivity. There is clearly a large amount of technical innovation going on right now but it has shifted into areas that do not feature in conventional productivity analysis. These days most of the gains come for leisure rather than business.

Today’s UK data

Firstly let is have some good news which is that we have some productivity growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.4% from Quarter 2 (Apr to June) 2016 to Quarter 3 (July to Sept) 2016;

Although it has been driven not by what might be expected.

Productivity grew in the services industries but not in the manufacturing industries; services productivity is estimated to have grown by 0.3% on the previous quarter, while manufacturing productivity is estimated to have fallen by 0.2% on the previous quarter.

So heartening in itself although an old problem may be resurfacing as you see this from an accompanying release.

Tower Hamlets (79% above the UK average) was the local area with the highest labour productivity in 2015

Welcome back the City of London, let us hope the gains are genuine and not just an illusion this time around.

As to the overall issue the UK ONS seems as keen as the Bank of England to try to assume that the credit crunch was some form of blip.

Productivity in Quarter 3 2016, as measured by output per hour, stood 15.5% below its pre-downturn trend – or, equivalently, productivity would have been 18.4% higher had it followed this pre-downturn trend.

This is what is called the “productivity puzzle” but a bit like the Bitcoin price moves over the past 24 hours or so we can again consider the genius of the simple “It’s Gone” from South Park on the banking crisis. For those who have not followed it the bull market surge in Bitcoin was followed by a plunge in an hour which put it in a bear market, then a rebound then another drop. Of course I need to add so far to that……

Does the type of innovation in these alternative electronic currencies show up anywhere in the productivity data?

Andy Haldane

The Bank of England’s Chief Economist had some thoughts on productivity yesterday. Of course he has his own issues as he confessed to past mistakes – although not yet about his “Sledgehammer” which will hit many people in 2017 – yet again. If we measured his own productivity it would be very negative but let us move onto his analysis.

He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity. He said the lack of numeracy skills was stark in comparison with other countries, which placed more emphasis on workers having more than a basic level of maths……….He added that the UK’s lack of numeracy skills across more than half the working population was a key reason for its lack of productivity growth since the financial crisis.

This raises a wry smile with me because I feature fairly regularly in the business live section of the Guardian and the original contact point was my pointing out that an article was innumerate. Perhaps it made a change from people pointing our spelling errors! In broad terms I welcome this issue although we need to decide in this technological era what level of numeracy people actually need. I remember reading a report from the 1860s where we were unhappy with our education system though and we did not do too bad back then.

Sadly the Bank of England has not provided a speech but we do have his past views which in their bi-modal, bifurcated day are a sort of tale of two cities. From 2014.

The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery.

Productivity as well? It is hard to avoid that thought.

A feature of our times

I will simply ask you to look at the time period here and will leave you to draw your own conclusions.

 

Comment

There is much to consider here. But it is clear to me that the problem for us in what we like to call the first world began well before the credit crunch. Secondly as so often we find ourselves with data simply unfit for the task. We can look at that several ways of which the technical one is that if we do not bother to put the earnings of the self-employed into the average earnings numbers then we are likely to be clueless about their productivity. More hopefully we need to include the technological changes in the area of leisure in some form as other wise we are likely in the future to get another “surprise” when a big move happens in the business world as a result.

Meanwhile if we return to Andy Haldane the media have failed to point out that he has been directly responsible for a fall in productivity. I do not mean the reduction in annual Bank of England meetings from 12 to 8 as that was the “improvement” driven by its dedicated follower of fashion Mark Carney. What I mean is the way that zombie companies have been propped up by his Sledgehammer QE and even worse corporate bond QE which also props up foreign companies. This contributes to situations like this having a particular dark side.

Despite having fallen by almost 10% since the crisis, real wages among the top 10% are still over 20% higher than in 1997. But wages for the bottom 20% have fallen by almost 20% since 2007 and are essentially back to where they were in 1997.

What about the 0.1%?

 

 

 

 

What are the prospects for UK house prices?

This year has the potential to be one where there are ch-ch-changes in the UK housing market. What I mean by that is that the rise in house prices looks set to fade and be replaced by house price falls. Even the estate agent sector has shifted to suggesting only minor price increases and of course they have a large moral hazard of never being keen to forecast price declines! Back on November 4th last year I offered a critique of this as Savills told us this.

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.

They were telling us this in my opinion because otherwise the forecast below would not do business much good.

Savills said (house) prices would be flat in 2017 in the capital and elsewhere…

Actually as I pointed out on the 8th of December house prices in central London had already gone from the only way is up to fallin’.

On Monday, property firm Knight Frank said prices in prime London postcodes had fallen by 4.8% in the year to November, and were set to end the year 6% down. In Chelsea, prices have dropped by 12.6% over the past year, it said, while around Hyde Park values are down by 11.2%. It forecast that across the market prices will remain flat in 2017.

I plan to cycle past the large Nine Elms development later which stretches from Battersea Dogs Home to Vauxhall and includes the new American and Dutch embassies and it will provide food for further thought. I would like to know for example the exact numbers behind this being reported by the Foxtons estate agency.

Property prices in Nine Elms have increased by 3.58% over the past year.

Should someone want to take the advice of Blur below there are also challenges ahead.

City dweller, successful fella
Thought to himself oops I’ve got a lot of money
I’m caught in a rat race terminally………….

He lives in a house, a very big house in the country

That plan seems to have trouble ahead if this from KnightFrank is any guide.

Prime country property values fell by 0.4% between October and December, the third consecutive quarter in which prices have fallen……As a result values ended 2016 marginally lower, falling by around 0.4% on average compared with the 12 months to December 2015.

Will this spread wider?

I think so although there are different issues as we move from prices which are in effect set internationally these days to ones which are much more domestic.

Inflation and hence real wages

The likely trend for real wages is down this year and that will pose its own problems for house prices and affordability. We got quite a strong hint from Germany yesterday as shown below from Destatis.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2016. Compared with November 2016, consumer prices are expected to increase by 0.7%.

As you can see there was quite a pick-up and whilst there are domestic issues the international ones will be stronger for the UK because the UK Pound fell against the Euro overall last year. Accordingly unless wages can increase we will see real wage falls in 2017 in the UK putting a squeeze on budgets.

Mortgage Rates

Last year we one of record lows for mortgage rates in the UK as the Bank of England under Governor Carney added further to the measures reducing them. The ongoing £60 bank mortgage lending subsidy called the Funding for Lending Scheme (FLS) found itself accompanied by a 0.25% Bank Rate cut, an extra £60 billion of QE ( Quantitative Easing) and some corporate bond QE. Thus Mark Carney and his colleagues had a go at emptying the house price support cupboard. Actually they also added the Term Funding Scheme to give another bank subsidy which so far has provided some £20.7 billion to them.

But the winds of change have blown as we note the international trend to higher bond yields and hence mortgage rates. This has been led by the impact of the expected policies of President-Elect Trump and the December interest-rate rise of the US Federal Reserve. As ever the short-term picture is complex as a bond market rally at the end of 2016 was followed by falls this week but the UK ten-year Gilt yield was driven down to nearly 0.5% by the “Sledgehammer” of the Bank of England is now 1.32% which gives the bigger picture of rises. Also it means that our “dedicated follower of fashion” Mark Carney picked an out of date line.

Government policy

This has shifted in a couple of ways. Firstly we saw changes in Stamp Duty on second homes then we saw changes in affordability criteria for buy-to-let mortgages. In April we will see tax relief on mortgage interest payments reduced to being only at the basic rate as well. More generally much of the Help To Buy policy ended with 2016.

We do not know how the new government would respond to house price falls but so far it does not seem as obsessed with the housing market as its predecessor.

Starter Homes

One area where the current government is following past policy is in the rehash and reannouncement of the Starter Homes policy and the announcement of the new Garden Villages. The simple truth is that governments of all types in the UK have made loads of similar proclamations but very little extra building if any has actually taken place.

Today’s data

The latest Bank of England numbers show that the market is trying to hang on in there.

The number of loan approvals for house purchase was 67,505 in November, compared to the average of 64,178 over the previous six months…….Lending secured on dwellings increased by £3.2 billion in November, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively

That would not be far off a steady as she goes position if we missed that this was for November and so the main changes are still in the future.

Unsecured credit

Here we find yet another side-effect of the housing friendly policies of the Bank of England. Please do not adjust your sets and I hope you are sitting comfortably.

Consumer credit increased by £1.9 billion in November, compared to an average monthly increase of £1.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.4% and 10.8% respectively.

This is a clear consequence of the Bank of England opening the monetary taps and in the past has led us into trouble. We do not get a breakdown of what the lending if for but I believe a lot of it goes into the record numbers for motor car registrations. Although I do recall the claim a while back that this was in fact secured credit. An odd description where the first drive alone is accompanied by a boot full of depreciation.

Comment

We see that it is not just the weather which is producing some chill winds right now as the outlook for the housing market is the same. Not perhaps the plummet predicted by our £30,000 a speech former Chancellor but a fading then stagnation then fall. Even the Consumer Price Index is likely to exceed house price growth this year.

However I am someone who would welcome a phase of mild house price falls. Why? Well the official house price series explains as I note that an average house price of £150,633 in January 2005 was replaced by one of £216,674 last October. There are of course many regional differences with Central London leading and Northern Ireland lagging but overall we see an asset price which has completely decoupled from the real economy. Of course this is Bank of England policy and an area where I strongly disagree with them. Actually as this from Mark Carney implies they are trying to have their cake and eat it.

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters.

Why have you pushed them further up then Mark?

The “Sledgehammer” of Mark Carney raises the UK National Debt

Firstly welcome to the winter solstice and the realisation that the only way is up for the length of the day although the coldest day is not due for a month. Of course I should not forget my readers on the underside of the world who have the benefit of the longest day but not the light prospects! Although the weather should get warmer for a while. As today updates us on the UK Public Finances let us continue in an end of year reflective vein. We can gain some wry amusement from looking back and noting where we were supposed to be now.

It is entirely appropriate that we should on the darkest day of the year pull out the forecasts of the UK Office for Budget Responsibility. Let us go back to the summer of 2010 as it emerged blinking into the sunlight.

public sector net borrowing (PSNB) to fall from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16;

There is more.

public sector net debt (PSND) to increase from 53.5 per cent of GDP in 2009-10 to a peak of 70.3 per cent in 2013-14, falling to 69.4 per cent in 2014-15 and 67.4 per cent in 2015-16;

Plus a coup de grace for this section.

the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16.

A surplus? Well even the OBR back then could only manage it by imposing an economic cycle. This is a politically inspired wheeze as you see by changing the cycle you can get pretty much any result you want whilst of course reality remains unchanged. As PM Dawn reminded us.

Reality used to be a friend of mine
Reality used to be a friend of mine
Maybe “why?” is the question that’s on you mind
But reality used to be a friend of mine
Reality used to be a friend of mine.
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.

Number Crunching

Taken independently, and on the basis of our central forecast, there is a greater than 50 per cent chance of this target being met in 2015- 16. There is also a greater than 50 per cent chance of it being met a year early, in 2014-15.

So that’s 100% +, do I have that right? Anyway let us move on from a world where wage growth is 5% and we are just about to eliminate the current account deficit, I kid you not.

Today’s data

Let us open with a cheery improvement.

Public sector net borrowing (excluding public sector banks) decreased by £0.6 billion to £12.6 billion in November 2016, compared with November 2015.

So we have an improvement showing that the public finances have not collapsed, at least so far, after the EU leave vote. That is of course awkward for the OBR new boy Professor Sir Charlie Bean who signed off an official forecast saying the UK economy would shrink by between 0.1% and 1% in the quarter following a leave vote. You could argue therefore that he was a perfect candidate to continue the past record of the OBR.

If we move to the more reliable quarterly numbers we see a familiar pattern.

Public sector net borrowing (excluding public sector banks) decreased by £7.7 billion to £59.5 billion in the current financial year-to-date (April to November 2016), compared with the same period in 2015.

We are a very long way from the surplus predicted by the OBR! That went to 2019/20 and now seems to have vanished in a puff of smoke. The real point here though is that whilst our deficit continues to decline it is doing so at a slower rate than you might expect as the official economic growth figures turned nearly four years ago.

You can compare the number above with what the OBR told us in March to see that it has retained its skill set.

In the Spring Budget (16 March 2016),OBR estimated that the public sector would borrow £55.5 billion during the financial year ending March 2017 (April 2016 to March 2017).

What is economic growth?

Not this time an existential style discussion what I intend to do is use the revenue and taxes numbers as a guide. After all tax receipts are an actual number as opposed to some of the imputations of GDP. On the face of it we seem to be doing reasonably well.

Central government receipts for the financial year-to-date (April to November 2016) were £421.8 billion, an increase of £17.8 billion, or 4.4%, compared with the same period in the previous financial year.

However we need to take care as the strongest numbers are from National Insurance where some rates were raised this year. But what we might consider the core numbers are not far off what we think economic growth is,especially if we recall that income tax receipts have been negatively influenced by the raising of the Personal Allowance.

VAT receipts increased by £2.5 billion, or 2.9%, to £89.1 billion…Income Tax-related payments increased by £2.1 billion, or 2.1%, to £101.9 billion

So a bit under 3% say as an estimate. Oh and there was a boost from an expected and an unexpected source.

Corporation Tax increased by £2.8 billion, or 9.7%, to £32.2 billion…….Stamp Duty on land and property increased by £0.7 billion, or 9.2%, to £8.2 billion

So we are collecting more Corporation Tax than many would like you to believe although we could do better. Also Stamp Duty per se has been on a bit of a tear.

Stamp Duty on shares increased by £0.5 billion, or 24.4%, to £2.5 billion.

National Debt

There is a little bit of statistical chicanery going on here as the improvement in the ratio compared to GDP has stopped.

At the end of November 2016, the provisional estimate of PSND (Public Sector Net Debt) ex as a percentage of GDP stood at 84.5%; an increase of 0.1 percentage points compared with November 2015.

But in the spirit of the OBR above we have apparently found a new “cycle” or something like that.

At the end of November 2016, the provisional estimate of PSND ex BoE as a percentage of GDP stood at 81.6%; a decrease of 0.5 percentage points compared with November 2015. This is the sixth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than PSND ex BoE.

One day perhaps we will have PSND excluding debt.

Mark Carney

You may wonder what he is doing here. Well two of his “Sledgehammer” policy decisions from August have increased the UK National Debt.

any private sector corporate bonds purchased will lead to an increase in public sector net debt equal to the total purchase price of the bonds as the bonds are not liabilities of the public sector.

Also this.

By the end of November 2016, the Bank of England had made £5.8 billion of loans through the Term Funding Scheme. These transactions have been financed by the creation of central bank reserves and so will increase public sector net debt accordingly.

Comment

So we find ourselves in a familiar position where the UK fiscal deficit is falling but more slowly than we would have hoped and expected in the circumstances. If we step back there were two decisions which have contributed to this. The largest influence was the so-called triple lock for increases to the basic state pension which has been especially expensive in real terms in recent times due to the low rate of the official consumer inflation number. Also on the revenue side there was the decision to push the Personal ( tax-free) Allowance substantially higher which has held income tax revenues back.

Meanwhile as we review the way that the Bank of England cut Bank Rate into a currency fall we see yet another side-effect. This is that the Term Funding Scheme and Corporate Bond purchases increase the National Debt. This is particularly ill-fated for the purchases of foreign companies like Maersk where they benefit but the UK taxpayer pays.

 

Of UK wages, robotics and the gig economy

Today we advance on the UK wages data knowing that the pick-up in inflation we have been expecting is now coming to fruition. Albeit that today’s wages numbers only bring us up to date of the 3 months to October so we will be experiencing lagged data. Yesterday also reminded us of two things. Firstly how poor the economics profession has become at predicting inflation and that there is invariably an “Early Wire” of them in currency markets as some find themselves being more equal than others. Interestingly the economist Douglas McWilliams has put up a defence this morning.

….and most people think Cebr forecasts are usually right!

Our Doug seems to be a passionate supporter of one of the new forms of measuring GDP or Gross Domestic Product if this from Business Insider in March 2015 is any guide.

Douglas McWilliams, one of the world’s leading economists and a former advisor to UK Chancellor George Osborne and London Mayor Boris Johnson, was allegedly filmed smoking crack in a drugs den in Britain’s capital city.

He is also is facing trial for allegedly assaulting a prostitute on New Year’s Eve after she refused to take crack with him.

Sometimes you really could not make it up.

Meanwhile we see two things from the world of football. Firstly that price inflation is rampant and secondly that capital controls in China may not being doing so well. From BBC Sport.

Chelsea have reportedly accepted a bid of £60m for Oscar – he’ll leave for China in January.

The war on cash

This seems to have developed a new front in what might be called the South China Territories but has been immortalised in song as a land down under. From news.com.au

Speaking to ABC radio on Wednesday, Revenue and Financial Services Minister Kelly O’Dwyer flagged a review of the $100 note and cash payments over certain limits as the government looks to recoup billions in unpaid tax……“The whole point of this crackdown on the black economy is to make sure we close down any potential loopholes,” she said. Despite the broad use of electronic forms of payment, Ms O’Dwyer warned there are three times as many $100 notes in circulation than $5 notes.

What could go wrong? Well there are echoes of the disaster that demonetisation has become in India here.

There are currently 300 million $100 notes in circulation, and 92 per cent of all currency by value is in $50 and $100 notes.

Also there is the issue that this is also presented as a boost to banks and savers will then have to put more money with them as another move favours the “precious”. Oh and I would wager that the unofficial economy in Australia is a lot more than 1.5% of GDP.

Robotics

As we look to the future of wages growth it is hard not to wonder about the effect of improved robots on the situation. Just over a year ago Bank of England Chief Economist Andy Haldane offered this view.

For the UK, that would suggest up to 15 million jobs could be at risk of automation.  In the US, the corresponding figure would be 80 million jobs.

For some jobs this will depress wages although of course it may well boost others. There is a cautionary note which is that Andy has a very poor forecasting record which I am sure any respectable AI style robot could improve. The Resolution Foundation has also considered possible benefits from this general trend and theme.

Given high employment, terrible productivity performance and low investment, the UK arguably needs more automation, not less.

Today’s UK numbers

There was in fact some good news from the wages series.

Between August to October 2015 and August to October 2016, in nominal terms, total pay increased by 2.5%, slightly higher than the growth rate between July to September 2015 and July to September 2016 (2.4%).

So both a higher number and an upwards past revision. This was driven by the fact that wages rose by 2.8% in the month of October alone driven by an 8.6% rise in construction wages and a 4.4% rise in the wholesale sector ( retail and hotels). This meant that real pay would have risen in October as inflation also dipped slightly but the more general pattern is stationary.

Over the same 3-month period, real AWE (regular pay) grew by 1.7%, the same as the growth seen in the 3 months to September

Of course the wages numbers look much worse if we use the RPI or Retail Price Index as our inflation measure where we find ourselves knocking around 1% off the numbers above.

The next number can be seen in two ways.

Total hours worked per week were 1.01 billion for August to October 2016. This was 5.0 million fewer than for May to July 2016 but 7.3 million more than for a year earlier.

Some are reporting this as a post EU vote hiring freeze. It does show a possible change in our previously booming employment position but of course with GDP growing does in fact show a rise in likely productivity.

Whilst the unemployment rate remained at 4.8% there was in fact a small but welcome fall in unemployment.

There were 1.62 million unemployed people (people not in work but seeking and available to work), 16,000 fewer than for May to July 2016 and 103,000 fewer than for a year earlier.

However the claimant count or registered unemployment did rise by 2400 in November which may be a sign of something but this number is not only experimental it comes from a series which no-one has any great faith in.

Comment

There is much to consider in all of this and the undercut to another pretty good set of UK labour market is those who are excluded such as the self-employed who do not appear in the average earnings numbers. Some insight into conditions in the gig industry have been provided by Izzy from FT Alphaville as shown below.

The interviewer stressed I would be earning a standard rate of £7 per hour plus a £1 per delivery bonus for every order completed, but frequently emphasised that I would probably be taking home as much as £12 per hour because of surge incentives. …………In total I did five shifts, and earned an average of £8.10 per hour. The London living wage is supposed to be £9.75, according to London authorities. The national required living wage is £7.20 but goes to £7.50 in April next year.

There were various other issues such as compulsory weekend shifts and Izzy’s view that to get surge wages you had to be available 24/7. As to efficiency the app drained her phone battery quickly and there was also this.

Outside of the office lay heaps of bikes atop of each other, most of them cast loosely aside the building. There appeared to be absolutely nowhere to secure a bike properly — which I thought strange for a cycling courier service.

Actually this resonated with me but from a different industry as my brother has worked as a driving instructor on as franchise basis where companies produce earnings forecasts which are somewhere between misleading and outright fantasy in practice. Both have a type of fixed cost as Deliveroo requires the rider to but branded corporate clothing and driving instructors have a period to which they must commit to pay the weekly franchise fee.

If we return to the official picture then the Resolution Foundation has provided some perspective with this.