UK real wage growth continues to disappoint

Today brings us back to the domestic beat and in fact the heartbeat of the UK economy which is its labour market. This has in recent years seen two main developments. The first is a welcome rise in employment which has seen the unemployment rate plunge. But the second has been that wage growth has decoupled from this leaving the Ivory Towers of the establishment building what might be called castles in the sky.  In that fantasy world wage growth would now be around 5% except it is not and in fact it is nowhere near it.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high? ( Ian Van Dahl)

Or if we look at the Bank of England Inflation Report from earlier this month.

A tightening labour market and lower unemployment is typically associated with higher pay growth  as it becomes more difficult for firms to recruit and retain staff.

This is another way of expressing the “output gap” theory which keeps needing revision as it keeps being wrong. As this from Geoff Tily shows that has been a consistent feature of Governor Carney’s term at the Bank of England.

In 2014, Bank of England Governor Mark Carney told the TUC Congress that wages should start rising in real terms “around the middle of next year” and “accelerate” afterwards” .

They did rise in the first half of 2015, but then decelerated afterwards.

Actually the Inflation Report does address the issue but only with what George Benson described as “hindsight is 20/20 vision”.

During the financial crisis, output fell and unemployment rose, as companies reduced hiring and increased redundancies. The number of additional hours people wanted to work also rose, perhaps in response to a squeeze in their real incomes. Taken together, these factors led to a substantial degree of spare capacity opening up in the labour market over this period. This, in turn, was a significant factor behind subdued wage growth during 2009–15.

It is a shame they did not figure that out at the time and looking forwards seems to be stuck on repeat.

Pay growth has risen over the past year  and tightness in the labour market is expected to push up pay growth slightly further in coming years.

At least there has been a slight winding back here but something rather familiar in concept pops up albeit that the specific number keeps changing.

This was broadly in line with the MPC’s judgement of the equilibrium rate of unemployment of 4¼%, suggesting little scope for unemployment to fall further without generating excess wage pressure.

The problem here is that an unemployment rate of 7% was supposed to be significant when Forward Guidance began although it went wrong so quickly that we then had a 6.5% equilibrium rate then 5.5% then 4.5%. The February Inflation Report gave us  “a statistical filtering model” which seems to have simply chased the actual unemployment rate lower. Along the way I spotted this.

The relationship between wage growth and
unemployment is assumed to be linear

You basically need to have lived the last decade under a stone to think that! Or of course be in an Ivory Tower.

Today’s data

This brought some excellent news so let’s get straight to it.

The unemployment rate (the number of unemployed people as a proportion of all employed and unemployed people) was 4.0%; it has not been lower since December 1974 to February 1975.

This of course has an implication for the Bank of England which has signaled an equilibrium rate of 4.25% as discussed above. Thus we can move on knowing that its improved models ( we know they are improved because they keep telling us so) will be predicting increased wage growth.

Returning to the quantity or employment situation we see that it looks good.

There were 32.39 million people in work, 42,000 more than for January to March 2018 and 313,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.6%, unchanged compared with January to March 2018 but higher than for a year earlier (75.1%).

This is good news but needs to come with some caveats. The first is that the rate of improvement looks to be slowing which is maybe not a surprise at these levels. The next issue is more theoretical which is the issue of how we record employment and the concept of underemployment where people have work but less than they want. We do get some flashes of this and this morning’s release did give a hint of some better news.

There were 780,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 104,000 fewer than for a year earlier.

But if we switch back to the unemployment rate we know from looking at Japan that it can drop to 2.2% which means that we cannot rule out that ours will go lower and maybe a fair bit lower. So there could be a fair bit of underemployment out there still which is backed up by the attempts to measure it.

By this measurement, the number of underemployed people in the three months to June 2018 stood at 2.39 million, down 121,000 when compared with the previous quarter.

This compares to under 2 million pre credit crunch although I am not clear why these numbers consider the working week to be 48 hours?

Wages

This should be a case of “the only way is up” if we look at the Bank of England analysis.

regular pay increased by 2.7%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.8%)……total pay increased by 2.4%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.5%)

There is an initial feeling of deja vu as we were told this last month so the past has seen an upwards revision but there is little or no sign of the “output gap” pulling it higher. In fact bonuses fell by 6.6% on a year ago in June meaning that total pay growth fell to 2.1%. This means that in the first half of 2018 the rate of total pay growth has gone from 2.8% to 2.1% via 2.6% (twice) and 2.5% (twice). Unless you live in an Ivory Tower that is lower and not higher.

The Bank of England response mirrors their response when inflation was a particular problem for them which is to keep breaking the numbers down until you find one that does work. In this instance it takes two steps moving first to the private-sector to eliminate the public-sector pay caps and then to regular pay eliminating the bonus weakness. On that road you can point out a 2.9% increase although attempts to say it is rising have the issue of it being 3% in February and 3.2% in March. If they want more they could point us to regular pay in construction which is rising at an annual rate of 5.6% ( which of course begs a question about the official output statistics there).

Comment

The credit crunch era has been one where we have found ourselves ripping whole chapters out of economics 101 textbooks. By contrast both the establishment and the Ivory Towers have clung  to them like a life raft in spite of the evidence to the contrary. Of course one day their persistent lottery ticker buying will likely bear fruit but there is little sign of it so far. Instead they have the Average White Band on repeat.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

For the rest of us we see that there is more work but that wage growth seems to get stuck in the 2% zone. Even at the extraordinary low-level of unemployment seen in Japan the wage position remains Definitely Maybe after plenty of real wage falls. I am not sure that the productivity data helps as much as it used to as we have switched towards services where it is much harder to measure and somewhere along the way capital productivity got abandoned and now it is just labour. Of course all of this simply ignores the self-employed as they are not in the earnings figures and nor are smaller businesses.

 

 

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Has Abenomics in Japan found what it is looking for?

This morning has brought news from Nihon the land of the rising sun and no I do not mean that the summer has been especially hot this year peaking at above 40 degrees centigrade around Tokyo. I mean this from The Japan Times.

Separate data showed workers’ real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.

We have been noting a change in the pattern and waiting for developments and the June numbers are good but come with a kicker. What I mean by this is that it is the month where around two thirds of the summer bonuses are paid so it is good for workers as the 2.8% is of a larger than normal amount as pay is 41% above average in the month. But the kicker is that the boost is mostly bonuses and therefore will fade.

Looking into the detail we see that nominal wage growth was 3.6% and was pulled higher by the manufacturing sector where the summer bonuses saw wage growth rise to 4.2%. It must have been party time in the wholesale and distribution sector as total wage growth rose at an annual rate of 10.7%. So there was an excellent bonus season as 3.6% growth replaced the 0.4% of this time last year.

What about base or regular pay?

This was by no means as good as contracted earnings rose at an annual rate of 1.5% and scheduled earnings at 1.3%. However these are better numbers than seen in 2017 or indeed in the Abenomics era. Just to give you the picture starting in 2014 annual growth has gone -0.1%, 0.2%,0.2% and 0.4% last year. When you consider that one of the Abenomics “arrows” was supposed to be higher wages that was quite a failure when you consider all the monetary easing.

Now the picture looks a little better as real wage rises have replaced falls albeit that they are small such that pressure is put on the accuracy of the data. They probably cannot take it but they are what we have.

Full employment

I get regularly asked what this concept is and if it is seen anywhere in practice Japan seems to be it. For example whilst the unemployment rate nudged higher to 2.4% in June it is extraordinarily low. The job applicant to vacancy ratio has been setting new highs at 2.47 according to Japan Macro Advisers. Thus economic theory would predict that wages would have been rising and frankly surging, after all the Bank of Japan estimated that the structural rate of unemployment was 3.5% as another Ivory Tower foundation bites the dust.

The blame game

At the end of last month the Bank of Japan published some new research on this issue. First we get something of a criticism of what is called Japan Inc.

Basically, the reason for this is that, under Japan’s
labor market structure, which is characterized by
different wage-setting mechanisms for regular and
non-regular employees, the increase in wages of
regular employees has been remarkably
sluggish.

This is pretty standard analysis world-wide of course except the degree of tightness of the labour market is exceptional in Japan. But the theme of employers being willing to do almost anything other than raising basic pay we have seen pretty much all over the world. However the next bit of research has more than a few implications.

With labor shortage intensifying recently, the pace
of increase in the labor force participation rate,
especially among women and seniors, is
accelerating.

Encouraging women to work has been a government objective and you can see the rise in older people working in two ways. One as a sign of good health in that they can but the second is not so positive as I have noted before some are forced to work because times are hard. A while back I noted the issue of retired women in Japan sometimes being very poor which is against its culture. Well if you throw all of these factors into the pot look what the Bank of Japan thinks you get.

In other words, among these groups,
there will be greater labor supply for the same rate
of increase in wages . As a result, as
labor demand increases (represented by a shift of
the labor demand curve to the right in the chart),
women and seniors will supply more labor, which
in turn suppresses wage increases.

So this has been a boost for Japan Inc which has increased its labour supply cheaply but not good for existing workers.

If the labor supply of women and seniors were not elastic,
wage increases likely would have been larger.

So it was them that done it if we look at it in tabloid terms but where the Bank of Japan does not go I will. You see if we go back to the critiques of the likely behaviour of Prime Minister Abe before he was elected there was the case that he would favour Japanese businesses and Japan Inc. Just like he had in his first term. Well is there anything they would like more than a cheap labour supply? Especially in a country which due to a shrinking population has a clear issue with labour supply.

Next comes the impact of a supply of cheap labour. This makes me think of the UK where the Ivory Towers tell us again and again that the increase in labour supply from net immigration did not affect wage growth. Now there are various factors to put in this particular melting pot but this research from the Bank of Japan is clearly heading in the opposite direction.

Productivity

Here is something you may not expect but I mention it from time to time so let me hand over to the Bank of Japan and the emphasis is mine.

One reason is that the productivity of
Japanese firms is relatively low and there is large
room to raise productivity, mainly in the
nonmanufacturing sector. In fact, Japan’s labor productivity remains at only 60 to 70 percent of the U.S. level.

Japan has been doing well in terms of growth recently but there are two issues. Firstly even 1.2% per annum is not great and secondly it has been forced on it as it looks to a future of labour shortages.

Comment

There is a fair bit to consider here. The rise in wages in June is welcome and the Yen in the workers pocket does not know whether it is a result of regular or bonus pay. But for now it looks like some icing on a similar cake. Combining this with the news on inflation that I discussed last time means that one area of Abenomics failure will in fact  be a positive here.

Another factor is that households are reluctant to
accept rises in housing rent and administered
prices given the low actual inflation rate and
inflation expectations ( Bank of Japan)

If we throw in imputed rent as well that is half the inflation measure. The Japanese do not know have lucky they are to have this and for all the Turning Japanese themes the Bank of Japan wants them to turn British in this respect. But if we move on from the detail we see that low inflation means this looks like a better year for real wages. Accordingly if we look back to my last update on this issue from a fortnight or so ago this from Gavyn Davies in the Financial Times looks even worse than it did then.

Even with very careful communication and forward guidance, monetary policy may not be sufficient, on its own, to reach the inflation target. Eventually, unconventional fiscal easing may also be needed, though this is not remotely on the horizon at present.

As ever the picture remains complex as so far the wages growth has yet to filter through.

Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines.

 

 

 

The economy of Italy returns to its former coma status

We are in a spell where there has been a burst of economic news about Italy and the headline brings back memories of my main theme. So let us take a look at why the idea of it being like a “girlfriend in a coma” is back.

In the second quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.2 per cent with respect to the first quarter of 2018 and by 1.1 per
cent in comparison with the second quarter of 2017. ( ISTAT)

Along the way I note that the statement below from only last week of European Central Bank President Mario Draghi does not seem to apply that well to his home country.

 the euro area economy is proceeding along a solid and broad-based growth path.

For newer readers my “girlfriend in a coma” theme comes from the fact that for quite some time now Italy has struggled to grow its economy at more than 1% per annum. So a fall to 1.1% reminds us of that especially as we note that annual growth only got as high as 1.7% in the “Euroboom” and since then has gone 1.6%,1.4% and now 1.1%. If we switch to the quarterly numbers then the trend is clearly not our friend as the peak of 0.5% at the end of 2016 was held in the opening quarter of 2017 but has since gone 0.4%, 0.3%,0.3%,0.3% and now 0.2%. Indeed there has also been a downgrade of the past as we had two 0.4% previously.

Perspective

The tweet below sums up the overall theme where Italy is not only still well below its pre credit crunch peak but has grown so little this century or if you prefer in the Euro era.

Also Italy has seen a fair bit of population growth meaning that the numbers on an individual or per capita basis are even worse and I have been waiting for them to rise back to where they were at the beginning of this century. Unfortunately growth has slowed to a crawl but they should be somewhere around them now.

Labour Market

We have seen in the credit crunch era that employment trends can be a leading indicator for an economy but get little solace here either.

In June 2018, 23.320 million persons were employed, -0.2% over May

The picture had been improving as the 330000 jobs gain over the past year illustrates but now the picture is not so clear. If we switch to unemployment we see that the sense of unease increases.

Unemployed were 2.866 million, +2.1% over the previous month.

This meant that the annual picture here was of only a fall of 8000 in the ranks of the unemployed. Also I have pointed out before that the unemployment rate falls below 11% to media cheers and then climbs back up to it as if it is on repeat. Well it has not yet gone back to 11% but not far off it.

unemployment rate was 10.9%, +0.2 percentage points over May 2018

The disappointing picture continues when we look at the bugbear which is youth unemployment.

Youth unemployment rate (aged 15-24) was 32.6%, +0.5 percentage points over the previous month and
youth unemployment ratio in the same age group was 8.6%, +0.2 percentage points over May 2018.

Inflation

If we switch to the other component of what used to be called the Misery Index ( where the annual rate of inflation was added to the unemployment rate) we see this.

In July 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) decreased by 1.4% compared with the previous month and increased by 1.9% with respect to July 2017 (from +1.4% in June).

So the Misery Index rose to 12.8% if we use the latest figures albeit that unemployment is for June and not July. Just for clarity the HICP above is the measure we use in the UK as Italy kept the CPI moniker for its own measure. Some of the inflation rise was due to the summer sales starting a week later than in 2017.

Wages

There was better news here but it comes with a bit of a kicker. So let us start with the good news.

In June 2018 the hourly index and the per employee index increased by 0.9 per cent from last month.

Compared with June 2017 both indices increased by 2.0 per cent.

That was something of a burst and meant that there was some real wage growth and the numbers cover a lot of the economy.

At the end of June 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 86.8 per cent in terms of employees and 87.4 per cent in terms of the total amount of wages.

In fact wage growth for most changed very little but it rose to an annual rate of 4% in the public administration sector driven by a 6.4% rise for the military and 6.1% for the police. Well I suppose that is one way of boosting defence spending to please President Trump! But returning to the economics we see that whilst higher wages in that sector should boost areas such as retail sales the ordinary Italian taxpayer may be nervous of higher taxes to pay for it. Also is it ominous that the government is seemingly getting the police and military onside?

Looking Ahead

This mornings private-sector survey or PMI for the manufacturing sector did not start well.

Manufacturing growth eases in July to lowest since October 2016

The detail in fact questioned whether there was any growth at all.

Growth rates of both output and new orders
weakened during July to near standstills amid
reports of an ongoing slowdown in underlying
market activity. There were reports that both
domestic and external market conditions were
faltering. Indeed, new export orders rose to the
weakest degree since August 2016 according to the
latest data.

Indeed the conclusion was downbeat when we try to add this report to the overall picture.

Based on the latest set of PMI survey data, and
with worries mounting over any escalation of global
trade tensions on export trade, Italy’s industrial
base may well struggle to meaningfully contribute to
wider economic growth in the second half of 2018

Comment

There is a familiar drumbeat about all of this as we see Italy slipping back into what is normal for it. For a start there is the still very expansionary monetary policy of the ECB with its -0.4% deposit rate although the monthly QE purchases are reducing which drives the thought that even at its height Italy gained only a little. Economic growth since the beginning of 2014 totals a mere 4.5%.

Next comes the issue of Italy’s high national debt which has risen above 2.3 trillion Euros and of course now faces higher bond yields  (ten-year is 2.76%) as it looks to refinance maturing debt and raise new finance. The essential issue here has not been one of overspending but much more one of lack of economic growth.

Italy is in many ways a delightful country so let us end with something more positive which I note from the purchase of Ronaldo by the grand old club Juventus. Like all football transfers it starts not so well as it the fee is an import and subtracts from GDP but more positively the hope is that he provides a boost via Champions League success. But I spotted something else. From CNBC.

Ronaldo fans can purchase children’s jerseys with his name for €84.95 ($98.90), women’s jerseys for €94.95 ($110.60), men’s jerseys for €104.95 ($122.20) and an authentic replica of the gear worn by Juventus playersfor €137.45 ($160.10).

There is a lot of poor analysis on this sort of thing as much of the money goes nowhere near Juve but my point is there must be money in Italy if Juve can charge that much for a football shirt. Of course there will be international fans buying but also plenty of Italian ones.

 

 

 

 

UK employment looks strong but wage growth less so

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

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

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

Which led to this.

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

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

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

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

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

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

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

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

In essence it comes down to this assumption.

as real incomes rise

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

What are wages doing?

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

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

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

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

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

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

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

The output gap

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

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

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

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

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

Productivity

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

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

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

Comment

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

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

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

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

James Hacker: Why?

Sir Humphrey Appleby: They will be incomplete.

James Hacker: But government figures are a nonsense anyway.

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

 

 

 

 

Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)

Unemployment

The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.

Comment

The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.

Greece is still in an economic depression meaning the debt remains

This morning the Greek Prime Minister flies to the UK for an official visit so let us welcome him, According to Alexis Tsipras it comes at a significant time.

After eight years, we managed to solve the problem of Greek debt. A debt that we did not create. A debt we inherited from the forces of the old regime. From the old Greece of oligarchy, corruption, interdependence, and offsets of power.

The debt is solved? But wait there is more.

With an honest and prudent fiscal policy that will respect our commitments, but at the same time put an end to the austerity and to all that we have experienced, to the injustices we have experienced in the past.

Austerity is over? Well that lasts two short paragraphs.

the fact that the primary surplus will remain at 3.5% for those years, ie from 2019 to 2022.

There is one more issue at hand.

With his Eurogroup decision yesterday, he creates new data for the day after, as Greek debt, Greek public debt, is at last sustainable.

As to the issue of austerity that does not appear to be going so well according to developments this morning.

Members of the union of Greek hospital workers, POEDIN, on Monday morning blocked the entrance to the Finance Ministry on Nikis Street near Syntagma Square, protesting austerity with a black banner bedecked with ties. ( Kathimerini)

What about the debt?

My long-running theme that this will be a case of “To Infinity! And Beyond” can take a bow as it gets ten years nearer. From the Eurogroup.

Further extension of the grace period for the loans of the European Financial Stability Facility (some 100 billion euros) by 10 years and an extension of the average maturing period by a decade.

This is more significant than it might seem as this particular can had already taken quite a bit kicking. But even that has turned out not to be enough. Let us remind ourselves that back at the time of the original “Shock and Awe” bailout the target for this was 120% of GDP ( Gross Domestic Product). Whereas now the latest public debt bulletin tells us the debt is not only 343.7 billion Euros but it rose by 15 billion Euros in the first quarter of this year. That being so we are looking at 187% now.

Next there was some good news but you may note it is being handed out in packets presumably in return for the correct behaviour.

Return to the Greek coffers of the profits that national central banks in the eurozone have from Greek bonds (ANFAs and SMPs), currently amounting to some 4 billion euros. This money will be returned to Athens in two equal tranches every year, starting in December 2018 up to June 2022

Whilst I am no great fan of these bailouts the paragraph above does allow me to point out some Fake News championed by former Finance Minister Yanis Varoufakis earlier this month.

It is now official: The only euro area country that will NOT benefit even by a single euro from the ECB’s 2.4tr QE program designed to defeat deflation will be the one country that suffered the worst deflation by far: Greece! The waterboarding never ends!

He was so incompetent that it is not impossible he is unaware that the ECB holds quite a bit Greek debt still and much of the rest of it is owned by the ESM/EFSF. So Greece had its own earlier equivalent of QE which regular readers will know was called the Securities Markets Programme or SMP. As of the end of last year it still held some 9.5 billion Euros of Greek debt. Then there are the two SPVs which sadly are not Spectrum Pursuit Vehicles from Captain Scarlet.

We have seen disbursements of €245 billion, when I add up the Greek Loan Facility, EFSF and ESM loans.

I am amazed that Yanis still gets so much airtime.

One way that this particular show is managing to stay on the road is this.

The ESM is prepared to disburse €15 billion to Greece after national procedures have been completed. €9.5 billion will go into a dedicated account for the cash buffer, and this will cover post-programme financing needs, until the year 2020. The remaining €5.5 billion will go to the segregated account to cover immediate debt servicing needs.

As you can see the wheels are being oiled so that the show can stay on the road for the next couple of years which is about how it goes, Triumph is proclaimed and then we go through it all again a couple of years later which of course is another triumph. Sadly that cycle has yet to end.

Meanwhile there is always European Commisioner Pierre Moscovici.

But I am also proud to have always been with the Greek people over the years, against austerity and Grexit.

He of course missed the soup kitchens bit and does he mean breath-taking rather than breathe below?

Like Ulysses back to Ithaca, Greece is finally reaching its destination today, ten years after the beginning of a long recession. She can finally breathe, look at the path she has traveled and contemplate again the future with confidence.

Of course it wouldn’t be Pierre without this.

The greatest danger of this odyssey has been the monster called Grexit!

Comment

Let me now introduce the most damning statistic of the so-called triumphs and it is provided by the Greek statistical agency. The pre credit crunch peak for Greece was the exactly 65 billion Euros of GDP ( 2010 prices) produced in the third quarter of 2007. This was replaced by just under 50 billion Euros a decade later and the third quarter last year remains the best since in total unadjusted GDP.  So a lost decade where there has been a great depression wiping out some 23% of output which of course has been the real “monster” which is why Commisioner Moscovici is so keen to create fake ones.

The consequences of this can be seen in many areas.

The seasonally adjusted unemployment rate in March 2018 was 20.1% compared to the 22.1% in March 2017 and the downward revised 20.6% in February 2018.

This compares with between 8% and 10% pre credit crunch. The youth (15-24) unemployment rate is 43.2% reminding us of how many must reach 24 having never had a job and even worse never had any hope of one. Another consequence is this.

According to the results of the 2017 Survey on Income and Living Conditions, persons at risk of poverty or social exclusion represent 34.8% of the total population (3,701,800 persons), recording a decrease compared to the previous year (3,789,300 persons representing 35,6% of
the total population).

Even worse that survey looks as though it is looking a relative poverty and of course the situation has shifted lower. In fact last week was a grim week at the statistics office.

Material deprivation for children aged up to 17 years, in 2017 amounts to 23.8%, in comparison with 11.9% in
2009.

The minor improvement needs to be set against the 11% for the measure below in 2009.

In 2017, 22.1% of the population aged 18-64 years was in severe material deprivation with
a decrease of 1.6 percentage points compared to 2016

Looking ahead even the rose-tinted spectacles of the European Commission are not especially upbeat.

Real GDP is now forecast to grow by 1.9% in
2018 and 2.3% in 2019, revised down compared to
the 2018 winter forecast.

This is a bigger issue than you might immediately think as following such a depression Greece should be having a “V” shaped recovery but instead has an “L” shaped one. The next bit really is from an Ivory Tower high in the clouds.

suggests that households may be more financially
stretched than previously assumed

For what it is worth ( they are in a bad run) the Markit PMI thinks that manufacturing is in a bad run. Next we have the issue of how much the ongoing Euro area slow down will affect things in Greece. We have seen the numbers fall apart before.

Let me finish by wishing Greece well and some ying and yang. First the extraordinary from Vicky Pryce.

Long-suffering Greek friends here in Athens puzzled by UK complacency about brexit economic hit

But next a reminder of the glorious beauty to be found there.

https://twitter.com/search?q=greece&src=typd

UK real wages resume their fall

This morning brings us to the UK labour market data and if it feels early you are right. You see the UK statistics bodies decided that our Members of Parliament needed more time to digest the numbers before Prime Ministers Questions on a Wednesday lunchtime. It is not that big a deal except perhaps for confidence in the mathematical ability of our MPs.

In terms of expectations the mood music for wages has been positive with the latest survey from Markit/REC leading the way.

Strong demand for staff and low candidate
availability underpinned further increases in starting salaries and temp pay. Notably, salaries awarded to successfully placed permanent workers rose at the
steepest rate for three years.

This was driven by this.

Growth of demand for staff strengthened to a sixmonth
high in May, with sharp increases in both
permanent and temporary roles signalled by the
latest data.

So according to them there was more demand for staff which ran into shortages.

Overall, candidate availability declined at a sharper
rate midway through the second quarter. Permanent
candidate numbers fell at the fastest rate for four
months, while short-term staff availability
deteriorated at the quickest pace since last
November

Hence the higher pay albeit that beating the last 3 years is not spectacular but it is an improvement. Of course after yesterday’s data we are likely to be more sceptical about surveys from Markit as I note that it contradicts that release in a coupe of ways. Firstly this.

Although growth of demand for both permanent and
temporary staff in the private sector edged down
slightly since April,

It seems unlikely that manufacturers were looking for extra staff in April after the decline in production but let us be optimistic for now and hope that there was a surge in May leading to this.

Engineering was the best performing sector in the
demand for permanent staff league table during May.

Retail

Even the Markit/REC report pointed out the signs of trouble here.

with the exception of Retail, which registered a further
decline.

Indeed this seemed to be on the march again only yesterday.

Discount retailer Poundworld has appointed administrators, putting 5,100 jobs at risk.

The move came after talks with a potential buyer, R Capital, collapsed leaving Poundworld with no option other than administration. ( BBC)

This morning brought news of a major factor driving this as the high street New Look fashion store had very weak figures and the online Boohoo very good ones. But even if we add in the job gains as for example Amazon announcing 2500 new jobs recently to deliver all this online business this is a sector with falling employment overall.

Today’s data

Let us start with wages.

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

That is not inspiring for the survey we looked at earlier although there is some better news if we look into the detail. This is because total wage growth was revised up to 2.5% in March which April matched. So the numbers are now holding on a monthly basis at a higher level than we though last month but they are not rising.

As ever many prefer to cherry pick the data as for example the BBC is using a sub set of the numbers.

Between February to April 2017 and February to April 2018, in nominal terms, regular pay increased by 2.8%, slightly lower than the growth rate between January to March 2017 and January to March 2018 (2.9%).

This poses a problem as bonus pay matters to many so why does it get ignored? For example if you get the number quoted for average regular pay of £484 per week would you ignore the £32 of bonuses? At a time of pressure on real wages surely bonuses are more important.

If we stick with cherry pickers it was a dreadful month for the Bank of England as it has guided us towards private-sector regular wages which rose by 3.2% in March and 2.5% in April! Ooops and time for that to be redacted and replaced by a new measure like the unemployment rate was in the first phase of Forward Guidance. On a 3 monthly comparison it only falls from 3% to 2.9% but the catch is that April will be in the next two versions of that.

Moving to real wages we see sadly yet more cherry-picking. From the official release.

Between February to April 2017 and February to April 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.1%.

They use the woeful CPIH for this which assumes that owner occupiers rent their property to themselves when they do not. Whereas if they used the CPI for example as the casual reader might assume then real wages fell by 0.1% if compared to total pay. Fan of the Retail Price Index or RPI will continue to see falling real wages.

This is a familiar issue and seems to be something of a never-ending story.

Employment and Unemployment

The number below continues to be rather stellar.

There were 32.39 million people in work, 146,000 more than for November 2017 to January 2018 and 440,000 more than for a year earlier.

This does confirm at least part of the recruiters survey above. Let me just point out for newer readers that this is a quantity measure not a quality one and we have already had an issue with the quality number called wages. As another example the definition of full-time employment is of the chocolate teapot variety in my opinion. We may be getting a hint of an issue here from this alternative measure.

but total hours worked decreased by 4.1 million to 1.03 billion. (the number of people in employment increased by 146,000)

Maybe this was an impact of the cold snap we got in February/March but it is a rare sign of weakness in these section of data as hours worked per full-time employee fell.

Meanwhile there was more good news on unemployment

There were 1.42 million unemployed people (people not in work but seeking and available to work), 38,000 fewer than for November 2017 to January 2018 and 115,000 fewer than for a year earlier.

We have had loads of forecasts that unemployment will rise in the UK and even sectoral examples of it ( Retail) but overall it continues to fall even though it includes the recent weaker period if we look at the GDP numbers.

Also I get asked on here from time to time about the residual sector in these numbers which has been improving too.

The inactivity rate (the proportion of people aged from 16 to 64 years who were economically inactive) was 21.0%, lower than for a year earlier (21.5%) and the joint lowest since comparable records began in 1971.

Comment

Let me open with  piece of good news which is that it looks like UK productivity is currently improving as we may not have had much economic growth in 2018 but it is divided by a falling number of hours worked.

That is something although if we switch to the Ivory Towers things are going from bad to worse. After all the Office for Budget Responsibility switched about 9 months ago to projecting weaker productivity growth. That is before we get to the output gap theories it and the Bank of England hold so dear. As unemployment falls below what the Bank of England considers to be the equilibrium rate wages should be soaring except when you climb out of its dark,dank and dusty bunker they are not growing at the 5% per annum suggested by the OBR back in the day.  Forward Guidance and all that.

Let me finish by pointing out that rather shamefully the self-employed are excluded from the average earnings data. The numbers need some Coldpaly.

Lights will guide you home
And ignite your bones
And I will try to fix you