UK wage and employment growth has been remarkably stable overall

Today brings new data on what is the most important economic number in the UK right now. This has been added to by the way that some Bank of England policymakers has plugged what some might call a bigly improvement in UK wage growth. Although of course you could say there is an element of deja vu all over again in that. But the issue did come up yesterday at the Treasury Select Committee interviews. This is the new policymaker Silvana Tenreyro quoted in the Guardian.

My position now is that if the data outturns are consistent with the picture i’ve just described, of an output gap going towards zero, then i would be minded to vote for a bank rate increase in the coming months.

The “output gap going towards zero” would be signalled by a sustained increase in wage growth. It used to be signalled also by the unemployment rate but the Bank of England has been in disarray on that subject since its Forward Guidance highlighted a 7% unemployment rate as significant. It is also very disappointing to see a policymaker continuing with the “output gap” theory which has failed so utterly in the credit crunch era but I guess that is simply a consequence of recruiting from an Ivory Tower. Also it seems that she knows better than the Bank of England’s own research on the subject of QE.

It’s far from evident that QE has contributed to higher inequality ( h/t Positive Money).

And whilst some loved it as it suited their particular views this was none too bright. Her words from the Financial Times about her suitability for the role.

I grew up in a developing country, subject to many crises

The pay squeeze

There is a nice chart showing the position from the Resolution Foundation albeit that it underplays the situation by being one of the few places that takes the CPIH ( H = Imputed Rents) inflation measure seriously.

There is the obvious issue that real wages have fallen according to the official data but there are two other consequences which pose problems for both the Bank of England and the Ivory Towers. Firstly as we have had nearly five years of economic growth the last shaded area should simply not exist as the claimed “output gap” seems to be operating both inversely and perversely. Also real wage growth did best in the period when inflation was low suggesting that it would be better to keep inflation low rather than aiming at a target of 2% annual growth in the Consumer Prices Index or CPI. Even worse of course the Bank of England helped to drive current inflation higher with its promises of “muscular” monetary easing post the EU leave vote which it acted upon in August 2016.

Self-employed

These do not matter for the official wages series as they are simply ignored as are smaller businesses. If I remember correctly the cut-off point is twenty employees. This has been an issue of increasing significance in the credit crunch era as the number of self-employed has risen especially as it approaches the same number as those who work in the public-sector.

self-employed people increased by 70,000 to 4.86 million (15.1% of all people in work)

There has been some potentially better news for self-employed earnings in the latest revisions to the UK economic data set. From Monday.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

As this follows other revisions in this area we see two things. Firstly that we have no reliable up to date data on the subject and secondly we have just been through a spell where dividend income was massively underestimated. So the news for the self-employed may well have been better than it may have appeared to be. Of course such large revisions whilst signs of a welcome look into the issue also pose questions about the credibility of the data.

Today’s data

Quantity

The numbers here continue to be very good.

There were 32.10 million people in work, 94,000 more than for March to May 2017 and 317,000 more than for a year earlier……..The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, up from 74.5% for a year earlier……..Between March to May 2017 and June to August 2017, total hours worked per week increased by 4.6 million to 1.03 billion.

This has had a consequence for those out of work too.

There were 1.44 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for March to May 2017 and 215,000 fewer than for a year earlier. The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 5.0% for a year earlier and the joint lowest since 1975.

So good news on this front with the only caveat being that we find out little about any issues with underemployment.

Average earnings or Quality

The Ivory Towers will be expecting a surge in wages as the “output gap” in the labour market continues its collapse. So let us take a look.

Between June to August 2016 and June to August 2017, in nominal terms, total pay increased by 2.2%, the same as the growth rate between May to July 2016 and May to July 2017.

So yet again they are disappointed. Actually as July was a weak month ( 1.4%) then August must have been better but I cannot say how much at this stage as the Office of National Statistics has forgotten to update the data set. Perhaps bonuses bounced back as we mull the (non)sense of monthly figures in this area.

If we move onto real wages we see this.

Comparing the three months to August 2017 with the same period in 2016, real AWE (total pay) fell by 0.3%, the same as the three months to July 2017. Nominal AWE (total pay) grew by 2.2% in the three months to August 2017, while the CPIH increased by 2.7% in the year to August 2017.

So we have seen yet another small decline in the official series for real wages with the caveat that the situation is worse if you use other inflation measures such as CPI and particularly the Retail Prices Index.

Comment

What we see yet again is quite remarkable stability in the UK labour market where employment rises but wage growth is weak considering that. For wages the summary of the Bank of England Agents continues to be accurate.

Growth in labour costs per employee had been subdued, with settlements clustered around 2% to 3%. Recruitment difficulties remained elevated, with conditions becoming very tight for some skills.

The Bank of England faces two problems here. Firstly its theoretical basis has all the stability of the Titanic and secondly there is the issue of its promised interest-rate rise. It is not the fact of one which is an issue it is the timing as why now and not before as not much has changed? On that road the monetary easing of August 2016 looks ever more a panic move.

Meanwhile the underlying picture for real wages continues on its not very merry way.

average total pay (including bonuses) for employees in Great Britain was £488 per week before tax and other deductions from pay, £34 lower than the pre-downturn peak of £522 per week recorded for February 2008

 

 

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The diversity of modern employment has left the official data behind

Today has opened with the subject of wages and pay in the news ahead of the official data on the subject. The particular issue is described by the Financial Times below.

 

It was Mr Hammond’s predecessor, George Osborne, who first imposed pay restraint on the public sector back in 2011-12, as part of the then coalition government’s efforts to balance the state’s books after the financial crisis. He initially announced a salary freeze, and later a 1 per cent cap on pay rises.

This slipped out of the news when inflation was low but has returned as it has risen and another factor is that a minority government is much less likely to enforce such a policy than a majority one. The actual changes announced so far are below.

 

The government announced on Tuesday that prison officers will be given a 1.7 per cent pay increase, while the police will receive a one-off 1 per cent bonus on top of their 1 per cent rise. The settlement for the prison service is in line with an independent pay review body’s recommendations. The deal for the police is somewhat less generous than the 2 per cent recommended by another pay review body.

So far the changes seem to be fiddling at the edges but those who have read or watched the Dambusters story will know that a small crack can turn into a flood of water. It seems unlikely that teachers and nurses for example will not get such deals although I also note that the new regime remains below inflation.

As to the debate over wages in the public and private sectors the Institute for Fiscal Studies offered some perspective in May.

 

Public sector pay rose compared to private sector pay during and after the 2008 recession, as private sector earnings fell sharply in real terms. Public pay restraint since 2011 has led to the difference between public and private sector pay returning to its pre-crisis level.

Of course not everyone has suffered as salaries for Members of Parliament have risen from £65,768 in April 2010 when an “independent” body was appointed to £76,011thia April.

House Prices

One of the features of using a national average is that some do better and some do worse. On that vein there is this from the Yorkshire Building Society.

However, homes in 54% of local authority areas – including Edinburgh, Birmingham, Peterborough, Leeds and Harrogate – are more affordable now than they were before the financial crash due to wages increasing at a higher rate than property values over this period.

This leads to this conclusion.

At a national level, since September 2007 affordability has improved by 0.6% in Britain overall, by 18.9% in Scotland, 17.2% in Wales but has worsened by 3.3% in England.

My challenge to their calculations come from the fact that they use earnings which have of course risen as opposed to real earnings which have fallen in the credit crunch era. But it is a reminder that in some places house prices have fallen. For example if the “Burnley Lara” Jimmy Anderson was to buy a place back home with the earnings created by over 500 test wickets he would see an average house price of £77,629 as opposed to £94,174 back in 2007.

Oh and as you click on their site they announce their lowest mortgage rate of all time which is 0.89% variable for two years. I also note that it is only variable down to 0% as perhaps they too fear what the Bank of England might do in the future.

Also this morning’s data release reminds us that official UK earnings data ignores the increasing numbers of self-employed.

self-employed people increased by 88,000 to 4.85 million (15.1% of all people in work)

The UK employment miracle

It is easy to forget that the numbers below would have been seen by economists as some sort of economic miracle pre credit crunch.

For May to July 2017, 75.3% of people aged from 16 to 64 were in work, the highest employment rate since comparable records began in 1971…..For May to July 2017, there were 32.14 million people in work, 181,000 more than for February to April 2017 and 379,000 more than for a year earlier.

Some of this is likely due to changes in the state pension age for women but there is also a rise apart from that.  The overall picture is completed by the unemployment numbers.

The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 4.9% for a year earlier and the lowest since 1975…….There were 1.46 million unemployed people (people not in work but seeking and available to work), 75,000 fewer than for February to April 2017 and 175,000 fewer than for a year earlier.

The good news does leave us with several conundrums however. For example if the situation is so good ( employment rising when it is already high) why is economic activity growth weak? Or to put it another way why do we have low and sometimes no productivity growth? Last time around when we had a dichotomy between the quantity labour data and GDP it was the labour market which was the leading indicator but of course we do not know that looking ahead from now.

Average Earnings

These continued recent trends.

Between May to July 2016 and May to July 2017, in nominal terms, both regular pay and total pay increased by 2.1%, the same as the growth rates between April to June 2016 and April to June 2017.

There was a cautionary note in that if we look at the data for July alone there was a fall in bonus payments particularly to the finance sector so there is a possible slow down in pay on the way. However those numbers are erratic as we saw the same in April and then a bounce back.

Moving onto real wages we get something of a confirmation of my critique of the Yorkshire Building Society analysis above.

average total pay (including bonuses) for employees in Great Britain was £487 per week before tax and other deductions from pay, £35 lower than the pre-downturn peak of £522 per week recorded for February 2008 (2015 prices).

If we look at the annual rate of fall it is around 0.4% if you use the official inflation data which has switched to CPIH but around 1% higher if you use the Retail Prices Index.

Comment

This month has brought us a reminder that the credit crunch has affected people in many different ways. There was something of an economic aphorism that recessions were 80/20 in that for 80% not much changed but for 20% it did but these days more are affected. For example there are increasing numbers of self-employed about whose wages we know little. No doubt some are doing well but I fear for others. If we move to house prices some are seeing what are increasingly unaffordable values whilst others have seen price falls.

National statistics have been caused difficulties by this as for example depending on the survey used the base level is 10 employees or 20 depending on the survey. This was less of a problem when the economy moved in a more aggregate fashion but now assuming that is a mistake in my view. It also misses out ever more people.

I know the tweet below is from the United States but it covers a few of my themes including if you look closely an improvement apparently related to a methodology change.

Oh and the increases in 2015/16 came mostly as a result of the lower inflation central bankers tell us are bad for us.

 

UK employment remains incredibly strong with even a flicker from real wages

Yesterday brought good news in that UK inflation is looking like it will be a little more subdued than our worst fears. However even so today we move onto comparing it with wage growth which is in a phase where it is below the inflation target measure of the Bank of England ( CPI 2.6% ) and even more so compared to the Retail Price Index at 3.6%. We started the week with some ominous news on the wages front as the Chartered Institute of Personnel and Development or CIPD released this survey on Monday.

basic pay award expectations for the next 12 months remain at just 1%

That was a downgrade from the circa 2% that we seem to be rumbling forwards at. According to the CIPD the reasons for this are as follows.

Against the backdrop of poor productivity growth, the report points to an increase in labour supply over the past year as a key factor behind the modest pay projection. This is driven by relatively sharp increases in the number of non-UK nationals from the EU, ex-welfare claimants and 50-64 year olds; although the report is keen to stress the future migration trends appear highly uncertain.

I do not know about you but I was not expecting to see a rise in employment based migration from the European Union being reported! This seems to be predominantly for lower-skilled jobs.

Employers report a median number of 24 applicants for the last low-skilled vacancy they tried to fill, compared with 19 candidates for the last medium-skilled vacancy and eight applicants for the last high-skilled vacancy they were seeking to fill.

This is fascinating in an economics concept and of course yet more dreadful news for the Ivory Tower theorists who face yet again the prospect of explaining why 2+2=5. Labour supply is supposed to have shrunk as EU citizens leave adding to the output gap which means wages will surge. We got something on those lines from Ben Broadbent of the Bank of England a week or two ago. The same Bank of England that makes this mistake every year.

The good news was that labour demand was reported as strong.

the long-term unemployed are finding work more quickly and the amount of workers aged 50-64 who are in employment has risen by around 200,000 during the past year……This is reflected in the quarter’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in Q3 2017 – which shows an increase from +20 to +27 during the past three months.

Bank of England Agents

They were more upbeat perhaps indicating that bonus pay is on the rise.

Recruitment difficulties had edged higher, and were gradually broadening across sectors and skill areas. Despite this, labour cost growth had been modest, with pay awards clustered around 2%–3%.

Today’s data

Employment

There is continuing evidence that labour demand continues its long climb in the UK.

There were 32.07 million people in work, 125,000 more than for January to March 2017 and 338,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, the highest since comparable records began in 1971.

This backs up the CIPD view that labour demand remains strong and poses yet again a conundrum that was in vogue around 4 years ago. This is that the employment figures look stronger than the economic output ( GDP ) ones. Last time around it was the employment figures which were the leading indicator so let us cross our fingers. Also there was another piece of news hinting at a stronger jobs market.

There were 883,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 20,000 fewer than for a year earlier.

Also the numbers employed had something that you might not have thought was true if you read the mainstream media. From Andy Verity of the BBC.

In year to end of June, the number of UK born people working in the UK increased by 88,000. Non-UK born people working increased by 262,000.

I thought everyone was leaving? If we look at the sector mostly likely to be affected EU nationals there has still been growth mostly driven by Bulgarians and Romanians but slower growth than before.

Unemployment

There was further good news here.

There were 1.48 million unemployed people (people not in work but seeking and available to work), 57,000 fewer than for January to March 2017 and 157,000 fewer than for a year earlier……The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.4%, down from 4.9% for a year earlier and the lowest since 1975.

For newer readers higher employment mostly means lower unemployment but does not have to as there are other factors such as size of the labour force. The good news extends to the news on underemployment. We only get quarterly hints on this but in the 3 months to June the rate was 0.5% lower than last year at 7.7%. So relatively good but if we look back for some perspective then we see that it was pre credit crunch mostly in the mid 6% range.

Wages

There was some better news here which is welcome to say the least.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.1%, both including and excluding bonuses, compared with a year earlier.

This means that real wages fell by a little less than the trend predicted.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.5%, both including and excluding bonuses, compared with a year earlier.

Actually if we drill down into the monthly detail we see that in terms of official calculations real wages nudged a little higher in June as annual wage growth was 2.8%. This was due to two factors one is that bonus payments were strong and that weekly wages fell by £1 last June so sadly it seems set to drift away. Also for those of us who still look at the RPI inflation figures even this better number still gives a negative answer for real wages.

Comment

There is some genuinely good news here as we see that the employment picture remains very strong a year after the EU leave vote ( as the numbers stretch to June). Unemployment is hitting lifetime lows for an ever higher percentage of the population and even wage growth has nudged higher. Yet as ever we need to ask if this is an example of “tractor production is higher?”

As we do so then we need to note that the underemployment numbers are higher giving a rate a bit more than 1% higher than in the pre credit crunch era. So more jobs but perhaps not quite as much more work as one might think. This is a partial explanation of what are wages growth numbers less than half of Ivory Tower output gap style explanations and expectations.

As to the wages numbers themselves we need to remind ourselves that they exclude the self-employed which means that we are likely to need to subtract something. But there is another factor heading the other way which is that we have created more lower paid jobs which seem to have weak wage growth and may be influencing the numbers or what is called compositional change. As ever the numbers let us down or as the TV series Soap reminded us.

Confused? You will be…..

 

 

 

The UK productivity crisis meets real wage growth

As we advance on the UK labour market data let us first note some good news. This is that the procedure for an “early wire” to be given to the UK establishment has been stopped. To be specific a list of people were in the past given the data some 24 hours before the rest of us, and as the ship of state is a somewhat leaky vessel there were obvious concerns that some traders would be more equal than others.

Moving back to today’s data the background to it was set by this official release from last week.

Productivity – as measured by our main measure, output per hour – fell by 0.5% in Quarter 1 (Jan to Mar) 2017.

As this is a factor in wage growth we have a potential driver of the dip in wage growth we have seen in 2017 but the problematic news did not stop there.

A fall of 0.5% takes productivity Quarter 1 2017 back below the peak achieved in Quarter 4 (Oct to Dec) 2007, which was broadly matched in Quarter 4 2016. Productivity is now 0.4% below the pre-downturn peak and 0.4% below the post-downturn peak.

The productivity problem

This is an example of what Winston Churchill meant when he said that Russia was a riddle wrapped in a mystery inside an enigma. The same type of thinking applies to productivity especially when it is described like this.

Productivity in Quarter 1 2017, as measured by output per hour, stood 16.8% below its pre-downturn trend – or, equivalently, productivity would have been 20.2% higher had it followed this pre-downturn trend

In my opinion looking at it like that merely tells us that the world has changed and that the productivity boat we were previously on sailed elsewhere. There is little point regarding it as a gap we can regain and I find it fascinating that those who seem to think we can get it back are supporters of policies like QE which have supported the zombie banks and companies which are a factor in this.

More significant to me is this from the June 2016 Economic Review.

Productivity is estimated to have grown at a compound average growth rate of 0.1% per quarter during the recovery between 2009 and 2014. This near-flat productivity growth is a phenomenon unprecedented in the UK since the Second World War.

We can update that because if we look at the expansion since the middle of 2013 we see that output per hour has risen from 98.1 then to 99.6 at the end of the first quarter. So a bit better than flat but not by much. This compares to past episodes.

This is in contrast with patterns following previous UK economic downturns where productivity initially fell, but subsequently bounced back to the previous trend rate of growth.

If we look back to the June 2016 Economic Review we can put a number on that.

However, at the same stages of both the 1990s and 1980s recoveries, productivity was more than 16% above the respective pre-downturn levels.

It is worse than that now as productivity three years or so later is where we thought it was then as whilst it has grown since the past was worse than we thought. What we can now clearly see is that yet another type of lost decade has been in play.

Moving to my explanation if we move on from the drop caused by the credit crunch and look at the more recent period I have written before that there are real problems in measuring productivity in the service industries. Not only are they pretty much 80% of our economy but they have been in essence our economic growth. Productivity in haircuts or operations for surgeons? Maybe in some cases but in others no.

The latest numbers seem to be picking this up.

Labour productivity fell in services but rose in the manufacturing industries; services productivity fell by 0.6% on the previous quarter, while manufacturing productivity grew by 0.2% on the previous quarter.

Employment

This is the good news side of the issue. What I mean by that is that the number of people who are employed continues to grow.

For March to May 2017, there were 32.01 million people in work, 175,000 more than for December 2016 to February 2017 and 324,000 more than for a year earlier.

Which brings more associated good news.

For the latest time period, March to May 2017, the employment rate for people was 74.9%, the highest since comparable records began in 1971.

My argument would be that the employment is mostly in the service sector where we struggle to measure productivity. If we note the rise and the recent struggles of UK output it may be that measured productivity fell again in the second quarter of this year. So there you have it would you prefer more people in employment or higher productivity? It is not of course completely that simple but it is a factor in play.

Oh and I noted another factor in rising employment.

The increase in the employment rate for women is partly due to ongoing changes to the State Pension age for women resulting in fewer women retiring between the ages of 60 and 65.

Unemployment

This does not necessarily get better as employment improves but generally does.

the unemployment rate for people was 4.5%; it has not been lower since April to June 1975………1.49 million unemployed people, 64,000 fewer than for December 2016 to February 2017 and 152,000 fewer than for a year earlier

Wages

Actually these were a little better although you might not think so from the official release.

Between March to May 2016 and March to May 2017, in nominal terms, total pay increased by 1.8%, lower than the growth rate between February to April 2016 and February to April 2017 (2.1%).

If you look into the detail you see that the annual rate of growth in May at 1.8% was better than the 1.3% in April ( where the annual bonus season was weak dragging it lower). This meant that if we switch to real wages the annual rate of fall rose to -0.9% from the -1.3% of April.

If we look deeper into the real wage situation we see that the index in May was at 100.8 which means that as it was set at 100 in 2015. So we have had economic growth with little if any real wage growth and that stretches back as the index was at that sort of level in the summer of 2011. There is a long way to go to the January 2008 peak of 105.8.

Actually as the “not a national statistic” CPIH is used as the inflation measure I am sorry to have to tell you that a more accurate inflation measure would show an even worse performance.

Comment

To my mind we should be more concerned about the slow rate of productivity growth than the drop in 2007/08. We are now in a world of QE and zombie banks which will take us some time to get out of especially as many places are still getting in it! I would be looking to take some of the service sector out of the numbers on two grounds. The first is that we simply cannot measure it and for others it is not appropriate. As to improving our performance there have been some interesting ideas from Diane Coyle but there are also dangers as I find myself thinking of all the money being spent on Smart Meters for a very small potential gain as I read this.

Ensuring adequate investment in infrastructure to meet our current and future needs and priorities

Also today is another grim day at the Bank of England especially for its Chief Economist Andy Haldane. Perhaps this is the true reason he is on something of a tour of the UK! Regular readers will be aware that I have listed the many failings of “Output Gap” theory in my time here. Andy has been a test case for these as he has got wage growth wrong again and again and again by using it. Well in February he thought he had struck a cunning plan by changing his framework so that the level at which wages would start to surge higher ( NAIRU) would be when unemployment fell to 4.5% or where we are now only a few months later as opposed to the couple of years he expected/hoped.

Dreamer, you know you are a dreamer
Well can you put your hands in your head, oh no!
I said dreamer, you’re nothing but a dreamer (Supertramp)

 

The economic problems of Italy continue

We have become familiar with the economic problems which have beset Italy this century. First membership of the Euro was not the economic nirvana promised by some as the economy ony grew by around 1% per annum in what were good years for others. Then not only did the credit crunch  hit but it was quickly followed by the Euro area crisis which hit Italy hard in spite of the fact that it did not have the housing boom and bust that affected some of its Euro area colleagues. It did however not miss out on a banking crisis which the Italian establishment ignored for as long as it could and is still doing its best to look away from even now. This all means that the economic output or GDP ( Gross Domestic Product) of Italy is now pretty much the same as it was when Italy joined the Euro. If we move to a measure which looks at the individual experience which is GDP per capita we see that it has fallen by around 5% over that time frame as the same output is divided by a population which has grown.

There is an irony in this as looking forwards Italy has a demographic problem via its ageing population but so far importing a solution to this has led to few if any economic benefits. That may well be why the issue has hit the headlines recently as Italy struggles to deal with the consequences of the humanitarian crisis unfolding in and around the Mediterranean Sea. But we have found oursleves so often looking at an Italian economy which in many ways has lived up or if you prefer down to the description of “Girlfriend in a Coma”.

Good Times

One thing which has changed in Italy’s favour is the economic outlook for the Euro area itself. It was only last week that the President of the ECB Mario Draghi reminded us of this.

If one looks at the percentage of all sectors in all euro area countries that currently have positive growth, the figure stood at 84% in the first quarter of 2017, well above its historical average of 74%. Around 6.4 million jobs have been created in the euro area since the recovery began…… since January 2015 – that is, following the announcement of the expanded asset purchase programme (APP) – GDP has grown by 3.6% in the euro area.

This was backed up yesterday by the private sector business surveys conducted by Markit.

The rate of expansion in the eurozone manufacturing
sector accelerated to its fastest in over six years in
June, reflecting improved performances across
Germany, France, Italy, the Netherlands, Ireland,
Greece and Austria.

Later they went even further.

At current levels, the PMI is indicative of factory output growing at an annual rate of some 5%, which in turn indicates the goods producing sector will have made a strong positive contribution to second quarter economic growth.

Good news indeed and if we look in more detail at the manufacturing detail for Italy it looks to be sharing some of this.

Italian manufacturers recorded a strong end to the
second quarter, with output growth picking up on
the back of robust export orders……Survey evidence indicated that higher demand from
abroad was a principal driving factor, with new
export orders rising at the fastest pace for over two
years in June.

Ah export-led growth? Economists have had that as a nirvana for years and indeed decades albeit that of course not everyone can have it. But the situation described set a hopeful theme for economic growth in the quarter just past.

The Italian manufacturing sector continued its
recent solid performance into June. At 55.2, the
PMI remained below April’s recent peak (56.2), but
its average over the second quarter as a whole was
the best seen in more than six years.

There were even signs of hope for what has become a perennial Italian problem.

New staff were taken on during the month to help
deal with the additional production requirements
that resulted from new orders. The rate of job
creation remained strong by historical standards
despite easing to the weakest seen since January.

The Unemployment Conundrum

Here we found disappointment as yesterday’s release struck a different beat to the good times message elsewhere.

Unemployed were 2.927 million, +1.5% over the previous month…….. unemployment rate was 11.3%, +0.2
percentage points over the previous month, and inactivity rate was 34.8%, unchanged over April 2017.
Youth unemployment rate (aged 15-24) was 37.0%, +1.8 percentage points over the previous month and
youth unemployment ratio in the same age group was 9.4%, +0.4 percentage points in a month.

The data for May saw a disappointing rise in unemployment and an especially disappointing one in youth unemployment. If these are better times then a grim message is being sent to the youth of Italy with more than one in three out of work and even worse the number rising. With inactivity unchanged this meant that employment also disappointed.

In May 2017, 22.923 million persons were employed, -0.2% over April 2017…….Employment rate was 57.7%, -0.1 percentage points over April 2017, unemployment rate was 11.3%.

The annual data does show a fall of 0.3% in the unemployment rate over the past year but that compares poorly with the 0.9% decline in the Euro area in total. Of the European Union states Italy now has the third worst unemployment rate as Croatia has seen quite an improvement and in fact has one even higher than that in Cyprus. If we move to youth unemployment then frankly it is hard to see how a country with 37% youth unemployment can share the same currency as one with 6.7%, Germany?

The banks

There are continuing issues here as I note that there are rumours of some of the problem loans of Monte Paschi being sold. The problem with that is we have been told this so many times before! Then last night we were told this.

italian regional lender banca carige approved a capital increase of 500 million euros and asset sales of 200 million euros ( h/t @lemasebachthani)

This added to this from the end of last month.

DBRS Ratings Limited (DBRS) has today placed the BBB ratings on the obbligazioni bancarie garantite (OBG; the Italian legislative covered bonds) issued under the EUR 5,000,000,000 Banca Carige S.p.A. Covered Bonds Programme (Carige OBG1 or the Programme), guaranteed by Carige Covered Bond S.r.l., Under Review with Negative Implications. There are currently 20 series of Carige OBG1 outstanding under the Programme with a nominal amount of EUR 3.08 billion.

Today has seen an example of never believe anything until it is officially denied in the Financial Times.

One of the eurozone’s senior banking supervisors has defended her institution’s role in handling the failure of two Italian lenders but said her watchdog needed new tools to protect taxpayers better from bank failures.

Comment

Let us hope that these are indeed better times for the Italian economy and its people. However whilst the background gives us hope that it will be running with the engine of a Ferrari fears remain if we look at the banks and the employment data that it may instead be using the engine of a Fiat. It is hard not be a little shocked by this from the Telegraph.

Italy’s chronic unemployment problem has been thrown into sharp relief after 85,000 people applied for 30 jobs at a bank – nearly 3,000 candidates for each post.

The 30 junior jobs come with an annual salary of euros 28,000 ($41,000). The work is not glamorous – one duty is feeding cash into machines that can distinguish bank notes that are counterfeit or so worn out they should no longer be in circulation.

The Bank of Italy whittled down the applicants to a short-list of 8,000, all of them first-class graduates with a solid academic record behind them.

 

Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.

Comment

There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?

 

 

 

 

Spain continues to see a strong economic recovery

At the moment we could do with some good news. Saturday night’s dreadful terror attack was at a place I know well beginning from childhood as one set of grandparents lived near to Borough Market. A place that has found some economic good news in the past couple of years or so has been Spain. This followed something of a double whammy as the initial impact of the credit crunch was then followed by the Euro area crisis. As I look back it feels a little strange to see its ten-year bond yield above 7% as it was in July of 2012 when the latter crisis was raging. Of course those with the courage and foresight to buy Spanish government bonds back then were well rewarded if they held onto the position.

Today’s business survey

From Markit:

The recent strong growth rates generated by the
Spanish service sector continued in May. Further
sharp increases were recorded in business activity
and new orders. With workloads rising, and the
prospect of new projects in future, companies took
on extra staff again. Meanwhile, inflationary
pressures moderated during the month.

As you can see there are several points to not here. For example the situation looking ahead is strong.

Moreover, sentiment picked up to the highest in 26
months. More than 55% of respondents predict
output to be higher in 12 months’ time than current
levels.

Also we see that employment is on the rise which is welcome considering the still troubled unemployment picture.

Spanish service providers increased their staffing
levels during May, with new hires needed to work
on current and future projects. The rate of job
creation was solid and only slightly weaker than
April’s nine-month high.

Added to this is a decline in inflationary pressure which starts to make this look rather like a situation where Goldilocks porridge is at exactly the right temperature.

Inflationary pressures showed signs of easing in the
sector during May, with both input costs and output
charges rising at weaker rates than recorded in April.

At the end Markit are very bullish on GDP growth this quarter.

with nearly 1% being signalled for Spain

Should that prove to be true then the forecasts of the Bank of Spain will start to look a little pessimistic.

Based on our estimates, GDP could rise by 2.8% this year, before slipping to more moderate growth rates of 2.3% and 2.1%, respectively, in 2018 and 2019.

Although to be fair it was expecting a growth spurt based on something you do not often hear or read associated with the Euro area.

the expansionary fiscal policy

Official GDP growth

The first quarter of this year was a good one for economic activity in Spain according to its statistics office.

The Spanish economy registers a quarterly growth of 0.8% in the first quarter of 2017. This rate was one tenth higher than that registered in the fourth quarter of 2016.  The growth compared to the same quarter last year stands at 3.0%, the same rate as that recorded the previous quarter.

A phrase so beloved of economists can be deployed which is, export-led growth.

The contribution of net foreign demand of the Spanish economy to annual growth of the quarterly GDP was 0.8 points………Goods and services exports accelerated its rate of growth, increasing from 4.4% to 8.4%

This morning has brought more good news on this front. From Spanish statistics via Google Translate.

The total expenditure of international tourists who visit Spain in April increases by 19.7% compared to the same month of 2016. Average daily spending stands at 137 euros, 5.5% more than in April 2016……..During the first four months of 2017 the total expenditure of international tourists increased by 15.3% compared to the same period of the previous year, reaching 20,394 millions of euros.

Actually Spain was also a good global citizen in that it shared some of the benefits around too.

Imports of goods and services experienced an increase of 4.1 points, from 2.3% to 6.4%

As well as export-led growth there was also investment led growth.

Gross fixed capital formation registered a growth rate of 3.8%, indicating an increase of 1.6 points as compared with the previous quarter.

Unemployment

This is the achilles heel of the Spanish economy as the latest official quarterly survey informs us. Via Google Translate.

The unemployment rate stands at 18.75%, which is 12 cents higher than in the Previous quarter. In the last year this rate has fallen by 2.25 points.

The problem is shown by the fact that even after 3 good years for economic growth unemployment is still at a rate of 18.75% meaning that 4,255,000 Spaniards are recorded as unemployed. The good news is that until this quarter the rate has been falling and with the rate of economic growth the increase seems strange. As does the quarterly fall in employment of 69.800 which tells a different story to the GDP report.

Employment of the economy in terms of jobs equivalent to full-time employment registered a quarterly variation of 0.7%, three tenths higher than that registered in the previous quarter.

Over the past year we see that the two roads give similar answers ( 408k versus 435k) so if pressed one would say that the fall in employment from the labour market survey seems most suspect here. Maybe the 65,000 households surveyed had seen a particularly poor phase.

Monetary policy

This is a little awkward for Spain as the very expansionary policy does not go well with the economic strength we have looked at above. If we look for any sign of the “punch bowl” being taken away as the party gets started we see only a reduction in monthly ECB bond purchases to 60 billion Euros a month from 80 billion. The deposit rate at the ECB remains at -0.4% and helped by some 182.5 billion Euros of buying by the ECB the Spanish government can borrow at negative interest-rates on short-dated bonds and only 0.06% for five year ones. A little bit of a brake will have been applied by the rise in the Euro to around 1.12 versus the US Dollar.

Accordingly policy could not be much looser and it is hard to think of an economy in the past that has tried this sort of experiment in terms of expansionary monetary policy in such a boom.

House prices

So far we are not getting much of a clue from the various indices which tell us that they may be going up or down! This was interesting via Spanish property insight.

The outlier is the 7.74% increase reported by the registrars, using their repeat sales methodology that only looks at the price of property that has sold twice in the period of study.

The catch is that it must be a rather small sample size. Spanish statistics has the annual increase at 4.5%. So is this a case of once bitten twice shy? The index provided by Spanish notaries was set at 100 in 2007 and  was 70.7 at the end of 2016. Mind you for PropertyEU up seems to be the new down or something like that.

Looking at property performance returns in Europe in the last 10 years, Spain is second on the list after Sweden with a 13% return, followed by Ireland and then Portugal with 12 per cent.

Some of the gap can perhaps be provided by rents where as I reported on the 27th of January there has been a boom. From RTN online.

THE AVERAGE price of rental housing in Spain rose 8.8 per cent in the first quarter of 2017 due to increasing demand, according to the rental price evolution report published on Wednesday by Idealista.

Comment

The good news theme coming out of Spain was reinforced by Real Madrid retaining the football Champions League trophy on Saturday evening. The dangers for now seem to be a combination of monetary policy which if we allow for the fact that policy changes take 18 months or so to operate seems way too lax and the way that if a housing boom is underway it is in the rental sector this time around.

Also there is still some ground to be gained as even the really good growth of the last few years has only just got Spain back to its previous peak. With 2010 set as 100 that was the 104.4 of the second quarter of 2008 which if the releases above are accurate should now have been regained. Whichever way you look at that it remains odd that Banco Popular has hit trouble now I think.

Economists letters

In spite of the track record of such events it would appear that some are not deterred.

https://www.theguardian.com/news/2017/jun/03/the-big-issue-labour-manifesto-what-economy-needs