The Italian economic job has led us to the current mess

After looking at the potential plans of the new Italian coalition government, assuming it gets that far yesterday let us move onto the economic situation. Let us open with some news from this morning which reminds us of a strength of the Italian economy. From Istat.

The trade balance in March 2018 amounted to +4.5 billion Euros (+3.8 billion Euros for non EU area and +0.7
billion Euros for EU countries).

There is an immediate irony in having joined a single currency ( Euro ) to boost trade and find that your main surplus is elsewhere. However some 55.6% of trade is with the European Union and 44.4% outside so there is a sort of balance if we note we are not being told the numbers for the Euro area itself. If we do an annual comparison then it is not a good day for economics 101 either as the relatively strong Euro has not had much of an effect at all as the declines are mostly within the European Union.

Outgoing flows fell by 2.2% for non EU countries and by 1.5% for EU countries. Incoming flows increased by 0.4% for EU area and decreased by 0.5% for non EU area.

Actually both economic theory and Euro supporters will get some more cheer if we look at the year so far for perspective as exports with the EU ( 5.5%) have grown more quickly than those outside it (0,5%). The underlying picture though is of strength as in the first quarter of 2018 a trade surplus of 7.5 billion Euros has been achieved. If we look back and use 2015 as a benchmark we see that exports are at 114.1 and imports at 115.9 so Italy is in some sense being a good citizen as well by importing.

The main downside is that Italy is an energy consumer ( net 9.4 billion Euros in 2018 so far) which is not going to be helped by the current elevated oil price.


This is an intriguing number as you might think with all the expansionary monetary policy that it was a racing certainty. But reality as so often is different. If we look at the trading sector we see this.

In March 2018 the total import price index decreased by 0.1 % compared to the previous month ; the total twelvemonth
rate of change increased by 1.0%.

So quite low and this is repeated in the consumer inflation data series.

In April 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) increased by 0.5% compared with March and by 0.6% with respect to April 2017 (it was +0.9% in the previous month).

Just for clarity that is what we call CPI in the UK and is not called that in Italy because it has its own measure already called that. Apologies for the alphabetti spaghetti. Such a low number was in spite of a familiar influence in March.

The increase on monthly basis of All items index was mainly due to the rises of prices of Non-regulated energy products (+1.1%) ( from the CPI breakdown).

Although there was also a reduction in regulated energy prices. But in essence the theme here is not much and personally I welcome this as I think that driving inflation up to 2% per annum would be likely to make things worse if we note the sticky nature of wage growth these days.

If we move to an area where we often see inflation after expansionary monetary policy which is asset prices we again see an example of Italy being somewhat different.

According to preliminary estimates, in the fourth quarter of 2017: the House Price Index (IPAB) increased by 0.1% compared with the previous quarter and decreased by 0.3% in comparison to the same quarter of the previous year (it was -0.8% in the third quarter of 2017);

The numbers are behind the others we have examined today but the message is loud and clear I think. Putting it another way Mario Draghi is I would imagine rather disappointed in the state of play here as it would help the struggling Italian banks by improving their asset base especially as such struggles draw attention to the legal basis for them known as the Draghi Laws which have been creaking.


The good news is that there is some as you see there is a case to be made that the trend rate of growth for Italy is zero which is not auspicious to say the least.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

If we stick with what Chic might call “Good Times” then Italy beat the UK and drew with Germany and France in the quarter just gone. However it was more their woes than Italian strength sadly as I note that even with this economic growth over the past four years has been 4.3%. This is back to my theme that Italy grows at around 1% per annum in the good times that regular readers will be familiar with and the phrase girlfriend in a coma. Less optimistic is how quarterly GDP growth has gone 0.5% (twice), 0.4% (twice) and now 0.3% (twice).

Labour Market

Here is where we get signs of real “trouble,trouble,trouble” as Taylor Swift  would say.

unemployment rate was 11.0%, steady over February 2018…..Unemployed were 2.865 million, +0.7% over the previous month.

The number has fallen by not by a lot and is still a long way above the 6-7% of the pre credit crunch era. So whilst it is good news that 190,000 more Italians gained jobs over the preceding 12 months that is very slow progress. Also wage growth seems nothing to write home about either.

At the end of March 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 65.1 per cent in terms of employees and 62.1 per cent in terms of the total amount of wages.

In March 2018 the hourly index and the per employee index increased by 0.2 per cent from last month.

Compared with March 2017 both indices increased by 1.0 per cent.

So a very marginal increase in real wages.


One thing that has struck me as I have typed this is the many similarities with Japan. Let me throw in another.

According to the median scenario, the resident population for Italy is estimated to be 59 million in 2045 and 54.1 million in 2065. The decrease compared to 2017 (60.6 million) would be 1.6 million of residents in 2045 and 6.5 million in 2065.

A clear difference can be seen in the unemployment rate and of course even Italy’s national debt is relatively much smaller although not as the Japanese measure such things.

The bond yield is somewhat higher especially after yesterday’s price falls and the ten-year yield is now 2.12% but here is another similarity from a new version of the proposed coalition agreement.

I imagine this would mean asking banks to hold less capital for the loans they give to SMEs. This would make banks more fragile and – in the 5 Star/League world – could lead to more “public gifts” to private banks. ( @FerdiGuigliano )

The Bank of Japan had loads of such plans and of course the Bank of England modified its Funding for Lending Scheme in this way too. Neither worked though.

Meanwhile we cannot finish without an apparent eternal  bugbear which is the banks.

League and 5 Star also have plans for Monte dei Paschi, which has been recently bailed out by the Italian government. They want to turn it into a utility, where the State (as opposed to an independent management) decides the bank’s objectives.

Me on Core Finance TV




UK real wages fell again in March

Today brings us to an area of the UK economy where the trend has remained positive and frankly amazingly so. Regular readers will be aware that back in the “triple-dip” ( hat tip to Stephanie Flanders then of the BBC now of Bloomberg for the phrase) days of 2011/12 that the employment data moved first and was followed by GDP in 2013. Thus employment trends have become something of a leading indicator as again we face a phase where they tell us one thing whereas other signals head south.

An example of other signals was seen only yesterday.

Much could be made of the adverse impact on April’s footfall of Easter shifting to March, but even looking at March and April together – so smoothing this out – still demonstrates that footfall has plummeted.  A -3.3% drop in April, following on from -6% in March, resulted in an unprecedented drop of -4.8% over the two months. (Springboard)

They then made a somewhat chilling comparison and the emphasis is mine.

 Not since the depths of recession in 2009, has footfall over March and April declined to such a degree, and even then the drop was less severe at -3.8%.

This added to this from KPMG a few days before.

April’s figures show retail sales growth falling off a cliff, with sales down -3.1 per cent on last year, but we must exercise caution and remember that the timing of Easter makes meaningful month-on-month comparisons difficult. That said, the three-month average is more helpful to assess, but this too points to sales only growing modestly

As you can see there are poor numbers there but two factors are at play. Firstly there is the impact of the period we have been through where real wages fell and I mean that in two senses. We have seen a recent dip which we have at best only begun to emerge from backing up an overall fall which again depends how you measure it but is more than 5%. Next is the decline of the high street which if the ones by me are any guide is ongoing.


Another signal of a slow down that is much wider than in the UK was seen earlier as Germany reported this.

The Federal Statistical Office (Destatis) also reports that the gross domestic product (GDP) increased 0.3% – upon price, seasonal and calendar adjustment – in the first quarter of 2018 compared with the fourth quarter of 2017.

For perspective there is also this.

This is the 15th quarter-on-quarter growth in a row, contributing to the longest upswing phase since 1991. Last year, there were higher GDP growth rates (+0.7% in the third quarter and +0.6% in the fourth quarter of 2017).

So the slow down is much more than just the UK and we will have to see what develops next. I would remind you of yesterday’s subject which was hints of a fiscal stimulus in the Euro area as it becomes clearer why that might be doing the rounds. Also as I had started with leading indicators I am afraid it is yet another bad day for the Markit business surveys or PMIs which told us this in January.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

That was for the Euro area and Germany had a higher reading so for them to have been right the German economy shrank in February and March.

UK Real Wages

There are signs of trouble here so let us go straight to the numbers.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.9% excluding bonuses, and by 2.6% including bonuses, compared with a year earlier.

In the rather odd world of Mark Carney and the Bank of England those are excellent figures especially if you look at the March figures alone which showed 3% growth on a year before. Let us continue on that sort of theme for a moment.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.4% excluding bonuses, but were unchanged including bonuses, compared with a year earlier.

This has been copied and pasted across the media as showing real wage growth yet that is somewhat misleading. This is because if you actually look at what people get in they pay packets March actually showed a slowing to an annual rate of 2.3%. Now at absolute best the UK inflation rate was 2.3% according to the CPIH measure but that of course relies on imputed rents to bring it down from the 2.5% of CPI and is lower than the 3.3% of the RPI. According to the official data which you have to look up as it is not ready for copy and pasting real wages fell by 0.1% on the most friendly measure which is using CPIH.

Let me put this another way UK single month wage growth has now gone 3.1%, 2.8%, 2.6% and now 2.3%. I will not insult you by pointing out the trend here but will show you how this is being reported with the one strand of hope being that February has been revised up by 0.3% and fingers crossed for March on that front. From @katie_martin_fx

ING: “Rising UK wage growth points to summer rate hike”

Meanwhile the back picture is along the lines of this.

Actually it is worse than that in the longer-term because for some reason they use an inflation measure with imputed rents in it ( CPIH) which lowers the numbers. Secondly they are using regular pay which as I have explained above flatters wage growth at the moment.


This is the ying to the yang above as the numbers remain very good.

There were 32.34 million people in work, 197,000 more than for October to December 2017 and 396,000 more than for a year earlier………..Between October to December 2017 and January to March 2018, total hours worked per week increased by 6.6 million to 1.03 billion.

There was a dip at the opening of this year in hours worked per person but that may be the ides of March. However there was further credence to the view that the productivity issue is being measured badly and is often just the flipside of employment growth especially when GDP growth is low.

Output per hour – The Office for National Statistics’ (ONS’) main measure of labour productivity – decreased by 0.5% in Quarter 1 (Jan to March) 2018.


As you can see the strong employment growth seen in the UK for some time has fed into strong wages growth which meant that the Bank of England raised interest-rates in May. Oh hang on………

Sorry there must have been some strands of the Matrix style blue pill in my tea this morning. Returning to reality the UK’s employment numbers are excellent and the improvement as in fall in unemployment has continued. But the simple truth is that the wages data relies on two types of cherry-picking to also be good. Firstly you have to ignore what people actually get and concentrate on regular pay which may seem sensible at the Bank of England as on its performance bonuses must be thin on the ground but many rely on them. Next you have to use the lowest measure of inflation you can find which relies on fantasy rents and except for this purpose is usually roundly ignored.

I hope the number for March is revised higher and we can expect some pick-up in public-sector pay but as we stand total pay growth is seems to be following the lower inflation data. Also there is the issue of whether European economies pick up after a slower first quarter for 2018.


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

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

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

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

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

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

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

Is this the revenge of the Phillips Curve?

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

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

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

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

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

Returning to conventional economics there is also this to consider.

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

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

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

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

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


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

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

And later this.

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

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

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


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

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

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

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

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

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

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


The economy of Italy continues to struggle

It is past time for us to revisit the economy of Italy which will no doubt be grimly mulling the warnings of a Euro area slow down from ECB ( European Central Bank) President Draghi and Italians will be hoping that their countryman was not referring to them.

When we look at the indicators that showed significant, sharp declines, we see that, first of all, the fact that all countries reported means that this loss of momentum is pretty broad across countries. It’s also broad across sectors because when we look at the indicators, it’s both hard and soft survey-based indicators.

We know that Bank of Italy Governor Visco will have given his views but at this stage we have no detail on this.

 All Governing Council members reported on the situation of their own countries.

This particularly matters for Italy because its economic record in the Euro era has been poor. One different way of describing those has been released this morning by the Italian statistical office.

In March 2018, 23.134 million persons were employed, +0.3% over February. Unemployed were 2.865 million, +0.7% over the previous month.

Employment rate was 58.3%, +0.2 percentage points over the previous month, unemployment rate was 11.0%, steady over February 2018 and inactivity rate was 34.3%, -0.3 percentage points in a month.

Youth unemployment rate (aged 15-24) was 31.7%, -0.9 percentage points over the previous month and youth unemployment ratio in the same age group was 8.3%, -0.3 percentage points over February 2018.

The long-term picture implied by an unemployment rate that is still 11% is not a good one as we note that even in the more recent better phase for Italy it has not broken below that level. Actually Italy has regularly reported that it has ( to 10.8% or 10.9%) but the number keeps being revised upwards. Now whether anyone really believed the promises of economic convergence given by the Euro founders I do not know but if we look at the unemployment rate released by Germany last week there have to be fears of divergence instead,

The adjusted unemployment rate was 3.4% in March 2018.

The database does not allow me to look back to the beginning of the Euro area but we can go back to January 2005. Since then employment in Italy has risen by 722,000 but unemployment has risen by 977,000 which speaks for itself.

If we look at the shorter-term it is hardly auspicious that unemployment rose in March although better news more in tune with GDP ( Gross Domestic Product) data in 2017 is the employment rise.


The warning from ECB President Draghi contained this.

 Sharp declines were experienced by PMI, almost all sectors, in retail, sales, manufacturing, services, in construction.

We can say that this continued in the manufacturing sector according to the Markit PMI.

The recent growth slowdown of the Italian
manufacturing sector continued during April as
weaker domestic market conditions limited order
book and production gains. Business sentiment
softened to an eight-month low.

The actual number is below.

declined for a third successive month
in April to reach a level of 53.5 (from 55.1 in
March). The latest PMI reading was the lowest
recorded by the survey since January 2017.

So a fall to below the UK and one of Mario’s sharp declines which seems to be concentrated here.

The slowdown was centred on the intermediate
goods sector, which suffered a stagnation of output
and concurrent declines in both total new orders
and sales from abroad.

If we try to peer at the Italian economy on its own this is hardly reassuring.

There were widespread reports of a
softening of domestic market conditions which
weighed on total order book gains.

Also it seems a bit early for supply side constraints to bite especially if we look at Italy’s track record.

“On the contrary, anecdotal evidence in recent
months has pointed to global supply-side
constraints as a factor limiting growth, and these
issues in April were exacerbated by increased
weakness in domestic market conditions


This morning’s official release is a bit of a curate’s egg so let us go straight to it.

In the first quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the fourth quarter of 2017 and by 1.4 per
cent in comparison with the first quarter of 2017.

So the good news is that the last actual quarterly contraction was in the spring of 2014 and since then there has been growth. But the problem is something we have seen play out many times. From February 12th 2016.

The ‘good’ news is that this is above ‘s trend growth rate of zero

It is also better than this from the same article.

The number below was one of the reasons why the former editor of the Economist magazine Bill Emmott described it as like a “girlfriend in a coma”.

between 2001 and 2013 GDP shrank by 0.2%. (The Economist)

So better than that but the recent experience in what has been called the Euroboom brings us back to my point that Italy has struggled to maintain an annual economic growth rate above 1%. The latest numbers bring that to mind as the annual rate of GDP growth has gone 1.8%, 1.6% and now 1.4%. The quarterly numbers have followed something of a Noah’s Ark pattern as two quarters of 0.5% has been followed by two of 0.4% and now two of 0.3%. Neither of those patterns holds any reassurance in fact quite the reverse.

Why might this be?

There are many arguments over the causes of the problems with productivity post credit crunch but in Italy it has been a case of Taylor Swift style “trouble,trouble,trouble” for some time now. From the Bank of Italy in January and the emphasis is mine.

Over the period 1995-2016 the performance of the Italian
economy was poor not only in historical terms but also and more importantly as compared with its
main euro-area partners. Italy’s GDP growth – equal to 0.5 per cent on an average yearly basis against
1.3 in Germany, 1.5 in France and 2.1 in Spain – was supported by population dynamics, entirely due to
immigration, and the increase in the employment rate, while labor productivity and in particular TFP
gave a zero (even slightly negative) contribution,


The main issue is that the economy of Italy has barely grown in the credit crunch era. If we use 2010 as our benchmark for prices then the 1.5 trillion Euros of 1999 was replaced by only 1.594 trillion in 2017. So it is a little higher now but the next issue is the decline in GDP per capita or person from its peak. One way of looking at it was that it was the same in 2017 as it was in 1999 another is that the 28700 Euros per person of 2007 has been replaced by 26,338 in 2017 or what is clearly an economic depression at the individual level.

It is this lack of growth that has led to the rise and rise of the national debt which is now 131.8% of annual GDP. It is not that Italy is fiscally irresponsible as its annual deficits are small it is that it has lacked economic growth as a denominator to the ratio. Thus it is now rather dependent on the QE bond purchases of the ECB to keep the issue subdued. Of course the best cure would be a burst of economic growth but that seems to be a perennial hope.

Looking ahead deomgraphics are a developing issue for Italy. From The Local in March.

Thanks to the low number of births, the ‘natural increase’ (the difference between total numbers of births and deaths) was calculated at -134,000. This was the second greatest year-on-year drop ever recorded.

On this road a good thing which is rising life expectancy also poses future problems.

As to the banking system well we have a familiar expert to guide us. So far he has had an accuracy rate of the order of -100%!




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

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

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

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

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

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

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

Moving to wages the REC told us this.

Pay pressures remain marked


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

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

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

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

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

Today’s data

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

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

which leads to this.

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

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

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

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

Wage growth

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

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

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

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

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

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


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

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

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


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

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


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

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

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

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

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



UK wage growth picks up but so does unemployment

Today brings us up to date or rather more up to date on the official average earnings or wages data for the UK. So far it has not really picked up the optimism shown by private-sector surveys like this on Monday from Markit.

In particular, latest data indicated one of the fastest
rises in income from employment in the nine-year
survey history (exceeded only by the upturn
reported in July 2016).

That looks good until we note that those nine years have been ones of relative struggle especially for real wages. Also if we look back to the summer of 2016 for the apparent wages boom we see that on the official rolling three-month measure wages growth peaked at 2.7% as autumn turned to winter. So not a great amount to write home about.

Also at least some of the pick-up was due to the rise in the National Living Wage which has welcome features but of course wage rise by diktat is different to wage rise by choice.

People aged 25-34 were the most likely to report an
increase in their earnings. This provides a signal
that pay rises ahead of changes to the National
Living Wage threshold had helped to boost the
income from employment index in March.

However the Markit summary was very upbeat.

The strength of the survey’s employment figures in
March is an advance signal that wage pressures
are starting to build. While higher salary payments
will help offset sharply rising living costs faced by
consumers, it also adds to the likelihood of
additional interest rate rises in 2018.

So in their view the Bank of England is targeting wage rises rather than the CPI measure of inflation it claims that it is. In which case no wonder Bank Rate is still at its “emergency” 0.5% level. This morning has seen some support for this in the markets as short sterling futures ( an old stomping ground of mine) have been falling as for example the June 2019 contract has fallen 0.05 to 98.74. Also open interest has done this.

the ICE Three Month Short Sterling Futures contract achieved two consecutive open interest records of 3,896,252 contracts on 16 March 2018 and 3,867,976 contracts on 15 March 2018. The previous open interest record was 3,801,867 contracts set in July 2007.

So people have placed their bets so to speak and as this contracts run ahead they are forecasting a Bank Rate of 1% in a year and a bit. Of course if they were always right life would be a lot simpler than it is.


A possible troubling consequence of this has popped up the news this morning. From the Financial Times.

Trouble on the UK high street: Carpetright, Mothercare and Moss Bros all report strains

As retail is a low payer in relative terms are the rises in the NLW something which has put it under further strain? Of course there are plenty of other factors but in a complicated world something good could also be the straw that broke the camel’s back.


Intriguingly the Markit survey was bullish on this front too.

At the same time, UK households are the least
gloomy about their job security for at least nine
years, which provides a further indication of tight
domestic labour market conditions.

This of course contradicts the last set of official data which hinted at a turn in the long-running improvement in employment. Ironically the official data with its swing in employment growth will have helped the recent renaissance in productivity growth which you will recall started more of less about when the Office for Budget Responsibility downgraded forecasts for it.

NHS pay rise

There has been quite a bit of speculation on this front today with the BBC reporting this.

More than a million NHS staff, including nurses, porters and paramedics, could expect average pay increases of over 6% over three years, the BBC understands.

The deal, expected to be formally agreed by unions and ministers later, could cost as much as £4bn.

If approved, workers in England could see their pay increase almost immediately.

The deal is tiered – with the lowest paid getting the biggest annual rises.

Although as we have noted before the position is much more complex than it may look.

Last year, half of staff received rises worth between 3% and 4% on top of the 1% annual pay rise.

Public sector pay seems to have been rising anyway as the 1.4% of the end of 2016 gets replaced with the 2% of the end of 2017.

Today’s data

There was finally some better news for wages growth which backed up the Markit survey.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier.

This means that the official view on the real wage picture is this although I have to object to the way that an inflation index depending on fantasy numbers ( Imputed Rent) or CPIH is used here.

Between November 2016 to January 2017 and November 2017 to January 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain fell by 0.2% while total pay for employees in Great Britain was unchanged.

If we look back we see that past months have been revised higher so that the last report was 2.7% and not the 2.5% reported back then. So we see that real wages look set to move back into positive territory and may already have done so using the CPI style inflation measures but not the RPI measure the establishment so dislikes.

In addition the employment situation continued to improve.

There were 32.25 million people in work, 168,000 more than for August to October 2017 and 402,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.3%, higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971.

Whereas unemployment provided first good and then not so good news.

The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 4.7% for a year earlier and the joint lowest since 1975.

However the labour force must have grown as we are also told this.

There were 1.45 million unemployed people (people not in work but seeking and available to work), 24,000 more than for August to October 2017 but 127,000 fewer than for a year earlier.


Let me type the next bit using a part of my keyboard that is used so little it is covered with dust. There may be some evidence that the Bank of England view on wages may be at least partially correct. Care is needed as you see if the past had not been revised higher then January would have looked really good whereas now the overall sequence is a little better. Thin pickings maybe but when you record is as bad as theirs any port in a storm is welcome.

Also we see that employment has continued to rise as we observe a double whammy of better news. Ironically I guess that may bring back a flicker of productivity worries as we mull a falling unemployment rate but rising unemployment. Maybe the short sterling futures market was ahead of the game although of course it is relying on an unreliable boyfriend to back up his promises.

Meanwhile let me give you my regular reminder that the average earnings numbers ignore firms of less than 20 employees which means that for it the 4.78 million self-employed disappear into a black hole.




Portugal hopes to end its lost decade later this year

It is time for us once again to head south and take a look at what is going on in the Portuguese economy? The opening salvo is that 2017 was the best year seen for some time. From Portugal Statistics.

In 2017, the Portuguese Gross Domestic Product (GDP) increased by 2.7% in real terms, 1.1 percentage points higher than the rate of change registered in 2016, reaching, in nominal terms, around 193 billion euros. In nominal terms, GDP increased 4.1% (3.2 in 2016),

So both economic growth and an acceleration in it from 2016. In essence the performance was an internal thing.

The contribution of domestic demand to GDP growth increased to 2.9 percentage points (1.6 percentage points in 2016), mainly due to the acceleration of Investment. Net external demand registered a negative contribution of 0.2 percentage points (null in 2016),  with Imports of Goods and Services accelerating slightly more intensely than Exports of Goods and Services.

It is hard not to feel a slight chill down the spine at the latter section as it has led Portugal to go cap in hand to the IMF ( International Monetary Fund) somewhat regularly over the past decades. But to be fair the last quarter was better on this front.

The contribution of net external demand to GDP quarter-on-quarter growth rate shifted from negative to positive, due to the significantly higher acceleration of Exports of Goods and Services than of Imports of Goods and Services.

Indeed the last quarter was good all round.

Comparing with the previous quarter, GDP increased by
0.7% in real terms.

Also whilst it fell from the heady peaks of earlier in the year investment had a good year.

Investment, when compared with the same quarter of
2016, increased by 5.9% in volume in the last quarter of
2017, a 4.4 percentage points deceleration from the
previous quarter.

This was particularly welcome as it needed it as I pointed out on the 6th of July last year the economic depression Portugal has been through saw investment collapse.

 A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.


The national accounts brought a hopeful sign on this front too.

In the fourth quarter of 2017, seasonally adjusted
employment registered a year-on-year rate of change of
3.2%, (3.1% in the previous quarter)

Of course this does not have to mean unemployment fell but in this instance as we learnt at the end of last month the news is good.

The December 2017 unemployment rate was 8.0%, down by 0.1 percentage points (p.p.) from the previous month’s
level, by 0.5 p.p. from three months before and by 2.2% from the same month of 2016…………The provisional unemployment rate estimate for January 2018 was 7.9%.

This means that the statistics office was able to point this out.

only going back to July 2004 it
is possible to find a rate lower than that.

The one area that continues to be an issue is this one.

The youth unemployment rate stood at 22.2% and
remained unchanged from the month before,

Is Portugal ending up with something of a core youth unemployment problem?

The latest Eurostat handbook raises another issue as it has a map of employment rate changes from 2006 to 2016. For Portugal this was a lost decade in this sense as in all areas apart from Lisbon (+1.1%) it fell from between 2.5% and 3,8%. Rather curiously if we divert across the border to a country now considered an economic success Spain it fell in all regions including by 7.2% in Andalucia. So whilst both countries will have improved in 2017 we get a hint of a size of the combined credit crunch and Euro area crises.

Is Portugal’s Lost Decade Over?

No it still has a little way to go and the emphasis below is mine. From the Bank of Portugal economic review.

economic activity will maintain
a growth profile over the projection horizon,
albeit at a gradually slower pace (2.3%, 1.9%
and 1.7% in 2018, 2019 and 2020 respectively)
. At the end of the projection horizon,
GDP will stand approximately 4% above the level
seen prior to the international financial crisis.

So it will be back to the pre credit crunch peak around the autumn. We will have to see as the Bank of Portugal got 2016 wrong as I was already pointing out last July that the first half of 2016 had the economic growth it thought would arrive in the whole year. Maybe its troubles like so many establishment around the world is the way it is wedded to something which keeps failing.

Projected growth rates are above the average
estimates of potential growth of the Portuguese
economy and will translate into a positive output
gap in coming years.

Actually that sentence begs some other questions so let me add for newer readers that the economic history of Portugal is that it struggles to grow at more than 1% per annum on any sustained basis. In fact compared to its peers in the Euro area 2017 was a rare year as this below shows.

interrupting a long period of negative annual
average differentials observed from 2000
to 2016 (only excluding 2009).

This is unlikely to be helped by this where like in so many countries we see good news with a not so good kicker.

The employment growth in the most recent
years, which was fast when compared with activity
growth, has resulted in a decline in labour
productivity since 2014, a trend that will continue
into 2017. ( I presume they mean 2018).

House Prices

It would appear that there is indeed something going on here. From Portugal Statistics.

In the third quarter of 2017, the House Price Index (HPI) increased 10.4% in relation to the same period of 2016 (8.0% in the previous quarter). This rate of change, the highest ever recorded for the series starting in 2009, was essentially determined by the price behaviour of existing dwellings, which increased 11.5% in relation to the same quarter of 2016………….The HPI increased 3.5% between the second and third quarters of 2017

The peak of this was highlighted by The Portugal News last November.

Portugal’s most expensive neighbourhood is, perhaps unsurprisingly, the heart of Lisbon, where buying a house along the Avenida da Liberdade or Marquês de Pombal costs around €3,294 per square metre; up 46.1 percent in 12 months.

Time for the Outhere Brothers again.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

The banks

Finally some good news for the troubled Portuguese banking sector as their assets ( mortgages) will start to look much better as house prices rise. If we look at Novo Banco this may help with what Moodys calls a “very large stock of problematic assets” which the Portuguese taxpayer is helping with a recapitalisation of  3.9 billion Euros. Yet there are still problems as this from the Financial Times highlights.

Portuguese authorities last year launched a criminal investigation into the sale of €64m of Novo Banco bonds by a Portuguese insurance firm to Pimco that occurred at the end of 2015. A week later, the value of the bonds sold to Pimco were in effect wiped out by the country’s central bank.

This is an issue that brings no credit to Portugal as Novo Banco as the name implies was supposed to be a clean bank that was supposed to be sold off quickly.


So we have welcome economic news but as ever in line with economics being described as the “dismal science” we move to asking can it last? On that subject we need to note that an official interest-rate which is -0.4% and ongoing QE is worry some. Also Portugal receives quite a direct boost in its public finances from the QE as the flow of 489 million Euros  of purchases of its government bonds in February meaning the total is now over 32 billion means it has a ten-year yield of under 2%. Not bad when you have a national debt to GDP ratio of 126.2%.

To the question what happens when the stimulus stops? We find ourselves mulling the way that Portugal has under performed its Euro area peers or its demographics which were already poor before some of its educated youth departed in response to the lost decade as this from the Bank of Portugal makes clear.

The population’s ageing trend partly results from
the sharp decrease in fertility in the 1970s and

So whilst some may claim this as a triumph for the “internal competitiveness” or don’t leave the Euro model 2017 was in fact only a tactical victory albeit a welcome one in a long campaign. Should some of the recent relative monetary and consumer confidence weakness persist we could see a slowing of Euro area economic growth in the summer/autumn just as the ECB is supposed to be ending its QE program and considering ending negative interest-rates. How would that work?