UK real wages fell in January ending over 2 years of growth

Today sees us receive the latest UK labour market data with the main emphasis being on wages as we mull how they will compare with inflation as 2017 progresses. The phase where low inflation boosted real wages is over for now at least as we cross our fingers and hope it will not rise too far. On that front we have had some better news from the recent dip in the price of crude oil but as a ying to that particular yang there has also been this.

In case you missed it, iron ore in China is up 10% since Monday. Cheers ( @DavidInglesTV )

On the usual pattern we would know the latest inflation data but that is not due until next week whilst our statisticians perhaps drink gin, play jigsaws whilst wearing a base layer and a cycle helmet.

Public-Sector Pay

This is something which has perhaps been too much in the background. For many who work in the public-sector wages have been under an austerity style squeeze for some time now. The area has also got more complex as many such jobs have been outsourced to private companies as for example many of the staff in Battersea Park work for a company called Enable now rather than Wandsworth Council. In terms of scale here are the numbers involved.

There were 5.44 million people employed in the public sector for December 2016. This was little changed compared with September 2016 and with a year earlier. Public sector employment has been generally falling since December 2009.

Although the picture gets ever more complex.

The Institute of Fiscal Studies has looked into the wages trend and point out that it is more complex than it may initially appear.

Public sector pay has been squeezed since public spending cuts began to take effect from 2011, and it looks set to be squeezed even further up to 2020. However, this comes on the back of an increase in public sector wages relative to those in the private sector during the Great Recession.

They think that this is set to continue for the rest of this decade.

On the basis of current forecasts and policy, we expect public sector pay to fall by 5 percentage points relative to private sector pay between 2015 and 2020. This would take the raw wage gap to its lowest level for at least 20 years.

However the starting point may not be what you would have expected.

In 2015–16, average hourly wages were about 14% higher in the public sector than in the private sector, according to the Labour Force Survey. After accounting for differences in education, age and experience, this gap falls to about 4%.

This is a complex area as we mull the usefulness of some type of education. For example by interest (athletics) I know people who specialise in the physiotherapy area where attainment is higher in that graduates are recruited but some for example have never manipulated someone’s back. Of course there is also the issue of pensions.

Reforms to public sector pensions have reduced the value of the pension public sector workers can expect to enjoy in retirement, though this is still probably more than private sector workers can expect

I do not know what the IFS has been smoking here as public sector pensions look ever more valuable in relative if not absolute terms to me.

Good News

This as so often these days comes from the quantity numbers in the labour market report.

There were 31.85 million people in work, 92,000 more than for August to October 2016 and 315,000 more than for a year earlier……..There were 23.34 million people working full-time, 305,000 more than for a year earlier. There were 8.52 million people working part-time, 10,000 more than for a year earlier.

The extra number of people in work helped reduce unemployment as well, oh and in case you assumed it was an obvious link it is not always that simple due to a category for inactivity.

There were 1.58 million unemployed people (people not in work but seeking and available to work), 31,000 fewer than for August to October 2016 and 106,000 fewer than for a year earlier………….The unemployment rate was 4.7%, down from 5.1% for a year earlier. It has not been lower since June to August 1975.

 Bad News

This was demonstrated by this on the wages front.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.2% including bonuses, and by 2.3% excluding bonuses, compared with a year earlier.

So we see a slowing from the 2.6% reported last time. If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

Ugly News

This comes from the position regarding real wages.

Comparing the 3 months to January 2017 with the same period in 2016, real AWE (total pay) grew by 0.7%, which was 0.7 percentage points smaller than the growth seen in the 3 months to December 2016.

There has been something of a double whammy effect at play here as inflation has risen as we expected but sadly wage growth has dipped as well. So the period since October 2014 when real wages on the official measure began to rise is certainly under pressure and frankly seems set to end soon.

If we look at January alone then real wages were 0.1% lower than a year before as inflation was 1.8% and using the new headline measure ( from next month) they fell by 0.3% on a year before. Using the Retail Price Index or RPI has real wages falling at an annual rate of 0.9% in January.


There are quite a few things to laud about the better performance of the UK economy over the past few years as employment has risen and unemployment fallen. Although of course we would like to know more ( indeed much more…) about the position relating to underemployment which is one of the factors at play in the situation below.

The number of people employed on “zero-hours contracts” in their main job, according to the LFS, during October to December 2016 was 905,000, representing 2.8% of all people in employment. This latest estimate is 101,000 higher than that for October to December 2015 (804,000 or 2.5% of people in employment).

For a while this was also true of real wages although to be fair the situation here mostly improved due to lower levels of recorded consumer inflation. Sadly if the data for January is any guide that happier period is now over even using the official inflation data.Of course this also omits the ever growing self-employed sector.


Here are my views on US interest-rates from today’s City-AM newspaper



The relationship between ECB policy and the economic performance of France

Today the Governing Council of the ECB (European Central Bank) meets to announce its monetary policy decisions. It does so in a very different environment to its more recent meetings because of the way that the economic winds of change have blown. What I mean by this is that the economic outlook is the brightest it has seemed for a while now. Also consumer inflation has risen to pretty much on target which poses a question for ECB policy going forwards as I have been pointing out for a while now, most recently last Friday. There is a clear contrast with the United States where expectations of an interest-rate rise this month are pretty much 100% now. Yet there is a problem as we note this from @fwred on the Atlanta Fed forecast for US economic growth.

Potentially HALF the growth rate of the euroarea in Q1.

This has led to hints of a change today this morning.

doesn’t plan to announce a new round of TLTROs, according to people familiar with the matter” ( @bondzilla )

So if true it will scrap a bank subsidy.

However I wish to take the opportunity of the second anniversary of the major QE program of the ECB to take a look at the impact it has had on France and its economy. It has provided a deposit rate of -0.4% a balance sheet heading towards 4 trillion Euros and thereby a lower level for the Euro although of course we can never judge any policy in isolation. The QE purchases have meant that 269 billion Euros of French government bonds have been bought easing its fiscal policy via the fact that it has some negative bond yields and only has a ten-year bond yield of 1,03%. So whilst that has become increasingly expensive vis a vis Germany it is also as Middle of the Road pointed out some years ago.

Chirpy, Chirpy, Cheep, Cheep, Chirp

The French economy

Lets look at it with a different twist as the particularly francophile Financial Times has looked at the French economic situation. It has done so on a political beat but for me the issue is monetary policy as over the period in question ( since 2012) it has been monetary policy that has been the main economic player in town.

The winner of this year’s election will inherit an economy that has been growing slowly but steadily since the 2008 financial crisis……..However, as the chart below shows, despite modest growth the country has underperformed relative to the likes of Germany, the UK and the US. Nevertheless, towards the end of Mr Hollande’s term things began to pick up. Growth last year reached 1.1 per cent, the fastest pace during his tenure — though it still fell well below the EU average of 1.8 per cent.

Let me just correct a factual error with this from the French statistical office.

On average over the year, GDP rose by 1.1%, practically as much as in 2015 (+1.2%).

So in annual terms not the fastest rate although it is quicker than 2012,13 and 14. In a way cheering an economic growth rate of ~1% poses its own question in an era where we have tentatively described the new normal as 2%. But if we skip the UK and US there is an issue in a currency union where growth is consistently below the average and the country which is considered with France at the heart of the Euro project which is Germany. The solution for that would be regional policy but quite how that would manifest itself I am not sure.


The numbers here continue to be awkward to say the least.

unemployment continued to creep up to a high of more than 10 per cent, prompting the president — late in his tenure — to take more decisive steps to tackle what he labelled an “economic emergency”……..unemployment figures have shown only marginal improvements over the past year,

There are other worrying features of the French labour market as well.

The reforms have so far failed to break France’s two-tier labour market. Last year, 86.4 per cent of total hiring was into temporary jobs — and of those, 80 per cent were for contracts shorter than one month. Meanwhile, long-term unemployment remains stubbornly high: more than 45 per cent of the unemployed in France have been without a job for more than a year, the highest proportion since records began in 2003.

It is not a good time to be young in the French labour market either.

France’s youth unemployment rate is roughly double that of the UK and continues to rise — in contrast with a decline in most advanced economies. The story is similar for foreigners and those with lower levels of education.

Accordingly the quantity number unemployment remains poor in spite of all the monetary easing and a chill wind blows through if we add in the reforms promised because the situation has not changed all that much. Also “emergencies” seem to last these days don’t they as I think also of the UK “emergency” Bank Rate of 0.5% which somehow went even lower to 0.25%!

If you are employed in a permanent job in France you have better conditions and perhaps better pay than in the UK. But for those outside such a position the outlook is worse, although some aspects seem the same as “contracts for less than one month” are not a million miles away from zero hours contracts in principle.

The state

This is larger in France than in many other places.

But France still has one of the highest public spending ratios among advanced countries — at 57 per cent of GDP. Within that, health, social and pensions expenditure as a share of GDP remain comparatively high and have risen since 2012.

Of course there are beneficial consequences of this as many French people are proud of their health system. Whilst the ECB continues with its QE bond purchases the fact that the national debt to GDP ratio is 97.5% matters little but of course unless France finds some economic growth we are left with what happens if the ECB stops buying?

House Prices

Let me throw in something which is not mentioned by the FT. If you look at French houses prices they were in the autumn of 2016 where they were in the last quarter of 2007. I do not know about you but with all that has gone on in the credit crunch era that seems so much healthier than the UK situation. What do readers think?

There is a catch though ( as ever…) as we consider the mortgage books of the French banks.

Regulation and Taxation

The Financial Times struggled here to present an optimistic picture.

Despite attempts at simplification, French companies “are still faced with a high regulatory burden and fast-changing legislation”, according to a recent European Commission report………At 48 per cent, the labour tax wedge was the fifth highest in the OECD in 2015 and French corporation tax remains the highest in Europe.


There is much to consider here and there are of course problems with using GDP as a yardstick. It is a long way from perfect but in essence monetary policy in the Euro area has been trying to drive it higher using the excuse that it is bringing inflation back on target. But for France there has been an improvement but only to a growth rate of around 1% so far. The opening of 2017 looks better but can that be sustained for the several years required? Along that road the ECB would have all sorts of questions to answer if it maintained its stimulus.

Something that should particularly benefit French business is the corporate bond buying program but as it has bought more than 10% of Euro area corporate bonds already how long can it go on? For a start it is anti-competitive especially if you do not qualify.


The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.


There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.


With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.


I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

The recent economic success of Spain makes a refreshing change

Back in the days of the Euro area crisis Spain found itself being sucked into the whirlpool. The main driver here was its housing market and the way that it had seen an enormous boom which turned to dust. Pick your theme as to whether you prefer empty towns or an airport that was never used. If we look back to my post yesterday on GDP I immediately find myself thinking that developments which are never used should be counted in a separate category. Of course the housing problems also caused trouble for the Spanish banks.


We do not yet have the data for the latest quarter but in recent times short-term forecasts by the Bank of Spain have been pretty accurate.

In Spain, economic activity has continued to post a high rate of increase in recent months. Specifically, in Q4, GDP is expected to have grown by 0.7%, unchanged on the rate observed in Q3 (see Chart 1) and underpinned by the strength of domestic spending.

We do have a link in that Spain seems to follow the pattern of the UK economy more than many of its Euro area neighbours and hence there might be for once some logic in using the same currency. But the main point is that such growth would continue what has been a much better phase for Spain. This meant that the official data for the third quarter told us this.

 Growth in relation to the same quarter of the previous year stood at 3.2%,

If we look back we see that the Spanish economy was hit hard by the initial impact of the credit crunch with the peak quarterly contraction being of the order of 1.5% of GDP. Then the economy bounced back but was then sent into decline as the Euro area crisis raged and quarterly economic growth did not turn positive again until 2013 moved in to 2014. However since then economic growth has been strong. If the fourth quarter does turn out to be 0.7% then it will follow 0.7%, 0.8%,0.8%,0.8%,0.9%,0.8% and 1%. Maybe a minor fading but I think that would be harsh on a country which has put in a strong performance.

If we look back for some perspective then let us compare with what sadly is often the laggard which is Italy. From Spain’s Royal Institute.

the contrast between cumulative growths is significant: 50% since 1997 in Spain versus 10% in Italy. Moreover, according to EU forecasts, in 2018 Spain will surpass Italy in per capita GDP (in PPP terms) for the first time ever.


The Euro area crisis has been characterised by high levels of unemployment so it was nice to see this in the GDP report of Spain.

In annual terms, employment increases at a rate of 2.9%, one tenth more than in The second quarter, which represents an increase of 499 thousand jobs
Equivalent to full-time in one year.

Yesterday we got a further update on this front from Spain’s statistics agency.

Employment has grown in 413,900 people in the last 12 months. The annual rate is 2.29%……….In the last year employment has risen in all sectors: in the Services there are 240,400 more occupied, in Industry 115,700, in Agriculture 37,000 and in Construction 20,800.

Not everything was perfect as the numbers dipped by 19,400 on a quarterly basis but overall the performance has been such that we can report this.

The number of unemployed falls this quarter in 83,000 people (-1.92%) and is in 4,237,800. In seasonally adjusted terms, the quarterly variation is -3.78%. In The last 12 months unemployment has decreased by 541,700 people (-11.33%).

Or if you prefer.

The unemployment rate stands at 18.63%, which is 28 cents lower than in The previous quarter. In the last year this rate has fallen by 2.26 points.

So we have a ying of lower unemployment combined with a yang of the fact that it is still high. If we return to the comparison with Italy then according to the Royal Institute the situation is better than it first appears to be.

From 1990 to 2014 female participation has risen from 34% to 53% in Spain and from 35% to only 40% in Italy (seeWorld Bank data). Hence, although there is a much lower unemployment rate in Italy, the latter’s inactivity rate is much higher than Spain’s.

The other point I would make is that whilst it is pleasing that Spain is creating more jobs the fact that the growth rate in them is similar to the economic growth means that it too will have its productivity worries.

Looking ahead

The Bank of Spain is reasonably optimistic in its latest Bulletin.

Hence, after standing in 2016 at 3.2% (the same rate as that observed a year earlier), average GDP growth is expected to ease to 2.5% in 2017 (see Table 1). In 2018 and 2019, the estimated increase in output would stand at 2.1% and 2%, respectively.

As to the private-sector business surveys Markit tells us this about services.

Rate of expansion in activity remains marked in December

And this about manufacturing.

The Spanish manufacturing PMI signalled that the sector ended 2016 on a high, with growth back at the levels seen at the start of the year.

Fiscal Position

The situation here has been summed up by El Pais this morning like this.

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.”

If you look at its economic performance you might be wondering if Spain got it right although of course that is far from the only issue at hand. The current state of play is shown below.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If we move to the national debt it is in the awkward situation it has breached the 100% of GDP barrier. The reason this is awkward is that as described Spain has seen good levels of economic growth and the ECB has bought a lot of Spanish government debt keeping debt costs relatively low. It has bought some 150.3 billion Euros worth so far as of the end of last week and the ten-year yield is at 1.6% meaning that in spite of recent rises debt costs are very low. Thus the ratio has risen at a time when two favourable winds have been blowing in Spain.

House Prices

As this was a signal last time I can report that as of the end of the third quarter they were rising at an annual rate of 4% so relatively moderate by past standards. However as the last quarter of 2015 saw a quarterly 0% this seems set to rise. Price rises may also be capped by the fact that the bad bank Sareb is selling off some of the stock that it inherited ( believed to be around 105,000 homes). Mind you there does appear to be considerable rental inflation if this from The Spanish Brick is any guide.

The price of rental dwellings has increased in Spain by 5.8% during the second quarter of 2016, being the price of the square meter 7.8 euros per month. On an inter-annual rate, it is an 8.5% increase, according to the main property portal in Spain. ( BankInter)


There has been plenty of good economic news for Spain in recent times and we should welcome that. After all it makes a nice change from the many down beat stories that are around. But if we use the phrase “escape velocity” so beloved of Bank of England Governor Mark Carney we see that work remains to be done. If we look back and set 2010 at 100 then GDP peaked at 104.4 in the second quarter of 2008 but only reached 102.4 in the third quarter of 2016 so another just under 2% is required to scale the previous peak. Spain will need to do that relatively quickly to prevent a type of “lost decade” but even as it does so, which I expect it to do it then looks back on a decade which overall has been a road to nowhere overall.

Should Spain continue to follow the British economic pattern then worries for the UK of rising inflation affecting the economy may have a knock-on effect. As to literal links the UK Office for National Statistics has helped out a little today.

Spain is host to the largest number of British citizens living in the EU (308,805); just over a third (101,045) of British citizens living in Spain are aged 65 years and over.

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Today’s Data

The crucial number showed a welcome sign of improvement.

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

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

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

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

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

Employment and Unemployment

The quantity numbers continue their strong trend.

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

The next number might be good or bad.

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

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

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


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

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

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

Portugal is struggling to escape from its economic woes

Late on Friday (at least for those of us mere mortals who do not get the 24 hour warning) came the news that the ratings agency DBRS had reduced Italy to a BBB rating. These things do not cause the panic they once did for two reasons the first is that the ECB is providing a back stop for Euro area bonds with its QE purchases and the second is that the agencies themselves have been discredited. However there is an immediate impact on the banks of Italy as the Bank of Italy has already pointed out.

Italy’s DBRS downgrade: a manageable increase in funding costs…..Haircuts on collateral posted by Italian banks: the value of the government bonds collateral pool alone would increase by ~8bn. ( h/t @fwred )

However this also makes me think of another country which is terms of economics is something of a twin of Italy and that is Portugal.

When we do so we see that Portugal has also struggled to sustain economic growth and even in the good years it has rarely pushed above 1% per annum. There have also been problems with the banking system which has been exposed as not only wobbly but prone to corruption. Also there is a high level of the national debt which is being subsidised by the QE purchases of the ECB as otherwise there is a danger that it would quickly begin to look rather insolvent. In spite of the ECB purchases the Portuguese ten-year yield is at 3.93% or some 2% higher than that of Italy which suggests it is perceived to be a larger risk. Also more cynically perhaps investors think that little Portugal can be treated more harshly than its much larger Euro colleague.

The state of play

This has been highlighted by the December Economic Bulletin of the Bank of Portugal.

Over the projection horizon, the Portuguese economy is expected to maintain the moderate recovery trajectory that has characterised recent years . Thus, following 1.2 per cent growth in 2016, gross domestic product (GDP) is projected to accelerate to 1.4 per cent in 2017, stabilising its growth rate at 1.5 per cent for the following years.

So it is expecting growth but when you consider the -0.4% deposit rate of the ECB, its ongoing QE programme and the lower value of the Euro you might have hoped for better than this. Or to put it another way not far off normal service for Portugal. Also even such better news means that Portugal will have suffered from its own lost decade.

This implies that at the end of the projection horizon, GDP will reach a level identical to that recorded in 2008.

This is taken further as we are told this.

In the period 2017-19, GDP growth is expected to be close to, albeit lower than, that projected for the euro area, not reverting the negative differential accumulated between 2010 and 2013

You see after the recession and indeed depression that has hit Portugal you might reasonably have expected a strong growth spurt afterwards like its neighbour Spain. Instead of that sort of “V” shaped recovery we are seeing what is called an “L” shaped one and the official reasons for this are given below.

This lack of real convergence with the euro area reflects persisting structural constraints to the growth of the Portuguese economy, in which high levels of public and private sector indebtedness, unfavourable demographic developments and persisting inefficiencies in the employment and product markets play an important role, requiring the deepening of the structural reform process.

After an economic growth rate of 0.8% in the third quarter of 2016 you might have expected a little more official optimism as they in fact knew them but say their cut-off date was beforehand, but I guess they are also looking at numbers like this.

According to EUROSTAT, the Portuguese volume index of GDP per-capita (GDP-Pc), expressed in purchasing power parities represented 76.8% the EU average (EU28=100) in 2015, a value similar to the observed in 2014.

It is at the level of the Baltic Republics, oh and someone needs to take a look at the extraordinary numbers and variation in the measures of Luxembourg!

House Prices

Here we see some numbers to cheer any central banker’s heart.

In the third quarter of 2016, the House Price Index (HPI) increased by 7.6% when compared to the same period of 2015 (6.3% in the previous quarter). This was the highest price increase ever observed and the third consecutive quarter in which the HPI recorded an annual rate of change above the 6%. When compared to the second quarter, the HPI rose by 1.3% from July to September 2016, 1.8 percentage points (p.p.) lower than in the previous period.

What is interesting is the similarity to the position in the UK in some respects as we see that house price growth went positive in 2013 although until now it has been a fair bit lower than in the UK. Of course whilst central bankers may be happy the ordinary Portuguese buyer will not be so pleased as we see yet another country where house price rises are way above economic performance. Indeed a problem with “pump it up” economic theory in Portugal is the existing level of indebtedness.

the high level of indebtedness of the different economic sectors – households, non-financial corporations and public sector – ( Bank of Portugal )

The debt situation

In terms of numbers Portuguese households have been deleveraging but by the end of the third quarter of last year the total was 78.6% of GDP, whilst the corporate non banking sector owed some 110.8% of GDP. At the same time the situation for the public-sector using the Eurostat method was 133.2 % of GDP.

Going forwards Portugal needs new funding for businesses but seems more set to see property lending recover if what has happened elsewhere after house price rises is any guide. Also the state is supposed to be reducing its debt position but we keep being told that.

The banks

It always comes down to this sector doesn’t it? Portugal has had lots of banking woe summarised by The Portugal News here just before Christmas.

The Portuguese state provided €14.348 billion in support to the banking sector between 2008 and 2015, according to a written opinion submitted by the country’s audit commission, the Tribunal de Contas, last year and made public on Tuesday.

That’s a tidy sum in a relatively small country and we see that the banking sector shrunk in size by some 3.4% in asset terms in the year to the end of the third quarter of 2016. In terms of bad debts then we are told that “credit impairments” are some 8.2% of the total although the recent Italian experience has reminded us again that such numbers should be treated as a minimum.

Last week the Financial Times reminded us that the price of past troubles was still being paid.

Shares in Millennium BCP fell by more than 13 per cent in early trading on Tuesday after Portugal’s largest listed lender approved a capital increase of up to €1.33bn in which China’s Fosun will seek to lift its stake from 16.7 per cent to 30 per cent.

Oh and this bit is very revealing I think.

The rights issue, which is bigger than BCP’s market value,


Let us start with some better news which is from the labour market in Portugal.

The provisional unemployment rate estimate for November 2016 was 10.5%

This represents a solid improvement on the 12.3% of 2015 although as so often these days unemployment decreases comes with this.

These developments in productivity against a background of economic recovery fall well short of those seen in previous cycles……. Following a slight reduction in 2016, annual labour productivity growth is projected to be approximately 0.5 per cent over the projection horizon.

Also there is the issue of demographics and an ageing population which the Bank of Portugal puts like this.

the evolution of the resident population,
which has presented a downward trend,

I like Portugal and its people so let us hope that The Portugal News is right about this.

Portugal has been named as the cheapest holiday destination in the world for Britons this year. The country’s Algarve region came top in the Post Office’s annual Holiday Costs Barometer, which takes into account the average price of eight essential purchases, including an evening meal for two, a beer, a coffee and a bottle of suncream, in 44 popular holiday spot around the world.

That’s an interesting list of essential purchases isn’t it? But more tourism would help Portugal although the woes of the UK Pound seem set to limit it from the UK.





Is Germany an economic miracle or a deflationary force?

There has been a raft of economic data out of the Federal Republic of Germany this morning but before we get to that there are two major themes I wish to point out. These come from its membership of the Euro which has given its exporting industry in particular an enormous competitive boost. To get an idea of the scale of these we merely need to consider where the Deutschmark would be trading now if it existed. The musical theme is “higher and higher it’s a living thing” by ELO. If we look at the most similar currency which is the Swiss Franc we see that a new Deutschmark would have soared like a bird and created all sorts of problems for the German Bundesbank in trying to cope with it and German industry. If the Swiss pattern was repeated then the Bundesbank would also be an enormous hedge fund with a central bank on the side. As for the exchange rate well it would be more like 1.50 to the US Dollar ( and perhaps higher) rather than the 1.05 that Euro membership has brought,

In addition Germany has seen low and more recently negative interest-rates with the deposit rate of the European Central Bank currently -0.4%. If there is anywhere that sees this translated into lower borrowing rates for businesses and consumers in the Euro area then Germany will be at the top of the list. Whilst I doubt that negative interest-rates themselves help much Germany has seen low interest-rates for quite some time now. In an example of the sort of “Not Fair” sung about by Lilly Allen we also see that the German government has benefited from some 304 billion Euros ( and rising) of its debt being bought by the ECB. It is seldom asked how wise or indeed necessary this is/was but for now let me simply point out that the ability to issue debt at low and negative yields has added further to Germany’s ability to run a budget surplus.

The trade problem

This is usually presented as an economic triumph for Germany and in many ways it is but with it problems have been created and we see these in this mornings data release.

Germany exported goods to the value of 108.5 billion euros and imported goods to the value of 85.8 billion euros in November 2016. These are the highest monthly figures ever calculated both for exports and for imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 5.6% and imports by 4.5% in November 2016 year on year.

So not only a large trade surplus in goods but one which is growing so much it is a record. If we widen our outlook to services then the position changes but by a relatively small amount.

services (-1.8 billion euros)

If we look at the Euro area we see that Germany continues to be a deflationary influence on the other nations.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

This is not explicitly due to the exchange rate of course but makes us wonder what other gain have been provided by a lower exchange-rate such as possible economies of scale for its vehicle producers. If we move to outside the Euro area than the numbers speak for themselves.

Exports of goods to countries outside the European Union (third countries) amounted to 45.2 billion euros in November 2016, while imports from those countries totalled 28.9 billion euros. Compared with November 2015, exports to third countries increased by 7.6% and imports from those countries by 3.9%.

So we see not only a large and growing surplus but one that seems to be accelerating and here of course the value of Euro membership can be explicitly seen.

When the credit crunch hit there was a lot of talk about the German trade surplus being a factor ( along with the Chinese and Japanese ones) yet we see that as we sadly see so often if anything it has grown. The initial impact is to raise German GDP via net exports but the way that it happens year after year means that demand is sucked out of other countries. If you throw in the budget surplus I mentioned earlier then you have plenty of fuel for my argument that the theme that Germany keeps losing with regards to matters such as ECB policy needs the counterweight that in areas which it considers most important Germany continues to get what it wants.


This morning has seen another consequence of this.

In November 2016, production in industry was up by 0.4% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

This follows a 0.5% monthly increase in October but to see the overall picture we need to look deeper. If we look at the manufacturing output index then it was 100.2 in November 2008 and was 110.5 in November of last year. So we see growth over what has been a very difficult period for western manufacturing. Now those two months make it look better than I think it is but in general 2016 is better than 2008 whereas if we look at my country the UK we see a different situation.

In Quarter 3 2016, production and manufacturing output remained below their Quarter 1 2008 levels by 8.0% and 5.7%, respectively.

There has been good news this morning from both Rolls Royce and Jaguar Land Rover with their 2016 figures but it is plain that the UK has quite a bit of ground to catch up.

The outlook

The future is bright if the Markit business surveys are any guide. According to them Germany had a solid last quarter in 2016 and 2017 looks okay as well.

With services expectations also improving in December, the outlook for 2017 is bright – IHS Markit is forecasting solid GDP growth of 1.9% for the year as a whole.


If you are looking for support for the theme of Germany being something of an economic miracle then one would look at the trade position combined with this which was reported by Eurostat earlier.

the lowest unemployment rates in November 2016 were recorded in the Czech Republic (3.7%) and Germany (4.1%).

As we move to youth unemployment we see a further example but also a hint that perhaps a deflationary consequence has been seen elsewhere.

In November 2016, the lowest rate was observed in Germany (6.7%), while the highest were recorded in Greece (46.1% in September 2016), Spain (44.4%) and Italy (39.4%).

If we look back at the history of the Euro we see that it has benefited Germany hugely and that monetary policy has in general been set for it. There are doubts rising from the latest phase of negative interest-rates and 1.5 trillion Euros of QE ( Quantitative Easing) which have seen consumer inflation rise to 1.7% in some German regions with the likelihood it will push higher as 2017 progresses. Or as Die Welt puts it.


Actually in a link to my next part they are discussing Mesut Ozil who of course is trying to get a large pay rise from Arsenal football club which has to be inflationary. But many think that an increase in wages in Germany would improve things as highlighted by this below.

2017 price-wage loop check: wage bargaining rounds kick off in Germany with unions asking for 6% pay rise for 800k regional public servants. ( h/t @MxSba )

Of course in both cases asking is one thing and getting is another. But it has long been argued that higher wages in Germany would set off a beneficial cycle as follows. Workers would be able to consume more ( the original Ford motor car strategy as discussed in the comments a few days ago) thereby boosting imports and shrinking the trade gap as well thereby benefiting both the German and overseas economies. As Germany is estimated to be 5.5% of world economic output this could have a solid effect in world terms.

As ever life is unlikely to be that simple as for example what if the higher wages set of an inflationary push? Or make companies uncompetitive? But in general I think it is hard to argue that a nudge higher would be what economists call a Pareto gain.