A bond issue does little for the problem of plunging investment in Greece

Today brings a development which will no doubt be trumpeted across the media and it is explained by this from Reuters yesterday,

Greece will return to bond markets with a five-year issue “in the near future, subject to market conditions”, authorities said on Monday.

The sovereign has mandated BofA Merrill Lynch, Goldman Sachs International Bank, HSBC, J.P. Morgan, Morgan Stanley and SG CIB as joint lead managers for the transaction, according to a regulatory filing to the stock exchange.

The near future is today as we mull that in spite of its role in the Greek economic crisis Goldman Sachs is like the Barnacles in the writings of Charles Dickens as it is always on the scene where money is involved. As to why this is happening the Wall Street Journal explains.

Greece‘s borrowing costs have dropped to a four-month low, and Athens plans to raise up to $3.4 billion in a bond sale.

Although it is not turning out to be quite as cheap as the 3.5% hoped for.

Greece Opens Books For New 5 Year Bond, Initial Guidance For Yield 3.75-3.875% – RTRS Source ( @LiveSquawk)

Why are investors buying this?

The obvious objection is the default history of Greece but in these times of ultra low yields ~3.8% is not be sniffed at. This is added to by the Euro area slow down which could provoke more ECB QE and whilst Greece does not currently qualify it might as time passes. In the mean time you collect 3.8% per annum.

Why is Greece offering it?

This is much more awkward for the politicians and media who trumpet the deal because it is a bad deal in terms of financing for Greece. It has been able to borrow off the European Stability Mechanism at not much more than 1% yield for some time now. Actually its website suggests it has been even cheaper than that.

0.9992% Average interest rate charged by ESM on loans (Q1 2018)

Past borrowing was more expensive so the overall ESM average is according to it 1.62%. So Greece is paying a bit more than 2% on the average cost of borrowing from the ESM which is hardly a triumph. Even worse the money will have to be borrowed again in five years time whereas the average ESM maturity is 32 years ( and may yet be an example of To Infinity! And Beyond!).

So there is some grandstanding about this but the real reason is escaping from what used to be called the Troika and is now called the Institutions. The fact the name had to be changed is revealing in itself and I can understand why Greece would want to step away from that episode.
As we move on let me remind you that Greece has borrowed some 203.8 billion Euros from the ESM and its predecessor the EFSF.

The economy

We can see why the Greek government wants to establish its ability to issue debt and stay out of the grasp of the institutions as we note this from Kathimerini.

Greek Prime Minister Alexis Tsipras announced an 11 percent increase in the minimum wage during a cabinet meeting on Monday, the first such wage hike in the country in almost a decade.

Actually the sums are small.

The hike will raise the minimum wage from 586 to 650 euros and is expected to affect 600,000 employees. He also said the government will scrap the so-called subminimum wage of 518 euros paid to young employees.

There are two catches here I think. Firstly in some ways Greece is competing with the Balkan nations which have much lower average wages than we are used to. Also this reverses the so-called internal competitiveness model.

The standard mimimum monthly wage was slashed by 22 percent to 586 euros in 2012, when Greece was struggling to emerge from a recession.

A deeper cut was imposed on workers below 25 years, as part of measures prescribed by international lenders to make the labour market more flexible and the economy more competitive.

Productivity

Here we find something really rather awkward which in some ways justifies the description of economics as the dismal science. Let me start with a welcome development which is the one below.

The seasonally adjusted unemployment rate in October 2018 was 18.6% compared to 21.0% in October 2017 and 18.6% in September 2018 ( Greece Statistics Office)

But the improving labour market has not been matched by developments elsewhere as highlighted by this.

we documented that employment had started to lead output growth in the early days of the SYRIZA government. Since such a policy is unsustainable, we have to include in any consistent outlook that this process reverses and output starts leading employment again – hence restoring positive productivity growth. ( Kathimerini)

That led me to look at his numbers and productivity growth plunged to nearly -5% in 2015 and was still at an annual rate of -3% in early 2016. Whilst he says we “have to include” an improvement the reality is that it has not happened yet as this year has seen two better quarters and one weaker one. We have seen employment indicators be the first sign of a turn in an economy before but they normally take a year or so to be followed by the output indicator not three years plus. This reminds us that Greek economic growth is nothing to write home about.

The available seasonally adjusted data
indicate that in the 3rd quarter of 2018 the Gross Domestic
Product (GDP) in volume terms increased by 1.0% in comparison with the 2nd quarter of 2018, while
in comparison with the 3rd quarter of 2017, it increased by 2.2%.

If it could keep up a quarterly rate of 1% that would be something but the annual rate is in the circumstances disappointing. After all the decline was from a quarterly GDP of 62 billion Euros at the peak in 2009 whereas it is now 51.5 billion. So the depression has been followed by only a weak recovery.

More debt

I looked at the woes of the Greek banks yesterday but in terms of the nation here is the Governor of the central bank from a speech last week pointing to yet another cost on the way to repairing their balance sheets

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

Comment

Whilst I welcome the fact that Greece has finally seen some economic growth the problem now is the outlook. The general Euro area background is not good and Greece has been helped by strong export growth currently running at 7.6%. There have to be questions about this heading forwards then there is the simply woeful investment record as shown by the latest national accounts.

Gross fixed capital formation (GFCF) decreased by 23.2% in comparison with the 3rd quarter of 2017.

The scale of the issue was explained by the Governor of the central bank in the speech I referred to earlier.

However, in order to increase the capital stock and thus the potential output of the Greek economy, positive net capital investment is indispensable. For this to happen, private investment must grow by about 50% within the next few years. In other words, the Greek economy needs an investment shock, with a focus on the most productive and extrovert business investment, to avoid output hysteresis and foster a rebalancing of the growth model in favour of tradeable goods and services.

Yet as we stand with the banks still handicapped how can that happen? Also if we return to the productivity discussion at best it will have one hand tied behind its back by as the lack of investment leads to an ageing capital stock. So whilst the annual rate of economic growth may pick up at the end of 2018 as last year quarterly growth was only 0.2% I am worried about the prospects for 2019.

It should not be this way and those who created this deserve more than a few sleepless nights in my opinion.

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Can the good news from UK wage growth last?

Today is one of those days where we find ourselves awash in economic data from the UK. The labour market data usually comes out the day before the inflation numbers but it is a week late and has been produced at the same time as the public finances numbers. So whilst this is not what is called a theme day we have a lot to digest as we mull why the public finances were not released yesterday or tomorrow so they could get their own space and attention.

Let us start with some good news from an area that has been short of it in the credit crunch era.

Looking at annual growth rates for total pay (including bonuses), between September to November 2017 and September to November 2018:

 

total pay in nominal terms increased by 3.4%, the annual growth rate has not been higher since May to July 2008.

 

total pay in real terms increased by 1.2%, the annual growth rate has not been higher since September to November 2016.

I am pleased to see a concentration on total pay as whilst we learn something from regular pay the main number of interest is the total. It has risen to the highest it has been for over a decade and according to the official measure at least we have some sort of solid real wage growth. The actual picture in terms of real wages is not as good as that sadly because it relies on the CPIH measure that found itself under fire from the House Of Lords only last week.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs

But even if we switch to other inflation measures which are invariably higher we see that we have at least some real wage growth albeit not much if compared to RPI, but at least we have some. If we switch to the monthly numbers we see that they are erratic but the last 3 readers at 2.9% then 4% then 3.2% do show a drift higher and thus we may see another better three-monthly figure next time around. The catch will be when the October 4% drops out because we might then see something of a sharp fall.

Moving to actual amounts we see this.

For November 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was:

£527 per week in nominal terms, up from £510 per week for a year earlier.£495 per week in constant 2015 prices, up from £490 per week for a year earlier, but £30 lower than the pre-downturn peak of £525 per week for February 2008.

Put like that there is something of a quirk in the numbers as it was £528 in October so wages are up on a year before but down on a monthly basis so I think we need to welcome the news but cross our fingers looking ahead. The areas which have been pulling the numbers higher have been construction ( 4% in November) which in general has been doing well over the past year and finance ( 4.2% in November) which has picked up  in the last couple of months.

Employment

This continued the good news theme.

The employment rates for both men and women have been generally increasing since early 2012. For the latest time period, September to November 2018, the employment rate for all people aged from 16 to 64 years was 75.8%, the highest since comparable estimates began in 1971.

This area was the first to turn around back in the day and regular readers may recall it was a leading indicator when other signals both lacked and lagged. It took the economic output numbers ( GDP) another year or so to catch up.

Whilst the rate of growth has slowed it remains positive.

For September to November 2018, there were an estimated 32.53 million people aged 16 years and over in work, 141,000 more than for June to August 2018 and 328,000 more than for a year earlier.

Although some have been forced into this situation as for example by this.

The increase in the employment rate for women over the last few years has been partly due to ongoing changes to the State Pension age for women, resulting in fewer women retiring between the ages of 60 and 65 years.

Unemployment

Here the news was more nuanced as we see that relatively things improved.

the unemployment rate for all people was 4.0%, it has not lower been since December 1974 to February 1975

But in absolute terms the number rose in the quarterly period measured.

1.37 million unemployed people, little changed (up 8,000) compared with June to August 2018 but 68,000 fewer than for a year earlier.

Public Finances

Let us look at this from the labour market data which would suggest rising income tax revenues and higher VAT receipts from the combination of higher wages and more people being employed.

Central government receipts in December 2018 increased by 4.3% compared with December 2017, to £59.8 billion……

Much of this annual growth in central government receipts in December 2018 came from Value Added Tax (VAT), Income Tax, Rail Franchise Premia and National Insurance contributions compared with December 2017.

So that does seem to have some backing and if we switch to the fiscal year so far we see that income tax receipts have risen by £8 billion to £128.2 billion compared to last year. These extra receipts combined with some more VAT and for once some extra from Corporation Tax ( up £2.3 billion to £45.8 billion) have played their part in this.

Borrowing in the current financial year-to-date (YTD) was £35.9 billion, £13.1 billion less than in the same period in 2017; the lowest year-to-date for 16 years (since 2002).

There was an issue with the December numbers and it was pretty much from something not far off most people’s lips these days.

Borrowing (public sector net borrowing excluding public sector banks) in December 2018 was £3.0 billion, £0.3 billion more than in December 2017;

Here it is.

In December 2018, the UK’s net contribution to the European Union (EU) was £1.5 billion higher than in December 2017……In December 2018, there have been some amendments to member states’ contributions to 2018 EU budget, however the amount returned to the UK is much smaller than in December 2017.

As to the national debt it continues to rise but it has been outperformed by the economy so in relative terms it has fallen.

Debt (public sector net debt excluding public sector banks) at the end of December 2018 was £1,808.9 billion (or 84.0% of gross domestic product (GDP)); an increase of £48.6 billion (or a decrease of 0.5 percentage points of GDP) on December 2017.

 

Comment

We see that the main trends looked at today provide some welcome mid-winter cheer for the UK. The key signal these days is real wages and the difference to 2016 is that this time around we have some wage growth rather than the leader being lower inflation. This will boost other areas of the economy and it has done its bit for the public finances.

However there are dark clouds out there and it is hard not to think of what is happening in China and in the car sector as we note that manufacturing wage growth has been declining over the past 12 months.. The 3.1% of November 2017 was replaced by a mere 1.2% this November reminding us that some areas are singing along with Taylor Swift.

Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

 

Has the Bank of England forgotten about its currency reserves?

We are in the season for a raft of UK economic data although at the moment markets are being driven by Brexit developments, or rather the apparent lack of them. One consequence of this was a nearly 2 cent fall versus the US Dollar to below US $1.26 and around a 1 cent fall versus the Euro to below 1.11. I await the exact numbers on the change in the trade weighted or effective exchange rate index but the move was such that we saw something that under the old rule of thumb was equivalent to a 0.25% Bank Rate cut. That reminded me of this from early April ( no not the 1st…) 2016 in City AM.

Britain’s foreign currency reserves reached a new record high last month, passing $100bn (£70.5bn) for the first time, as the UK looks to be building a buffer to defend the pound against the prospect of a currency crisis ahead of the EU referendum.

 

Another $4.5bn in reserves was acquired in March, taking the total amount held to $104.2bn and fuelling speculation that the Treasury and Threadneedle Street are getting their ducks in a row to deal with wild swings in the value of sterling around the time of the referendum.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

But my fundamental point is to enquire as to under what circumstances would the Bank of England intervene to support the currency? This is what it is officially for.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

This, in my opinion could not contrast much more with the UK Gilt market which has surged due to expectations, or fears if you prefer of more QE bond buying from the Bank of England. It does not get reported much but the UK ten-year Gilt now yields a mere 1.24%.

Labour Market

Productivity

Yesterday our official statistician’s produced some research which backed up a long-running theme of my work.

Productivity gap narrows

As a reminder I wrote this back on January 18th on the subject.

I have regularly argued that it is very likely we have miss measured productivity and therefore the crisis will to some extent fade away……..If we go back to the peak headlines where for example the Bank of England argued we were some 19% below where we would have been projecting pre crisis trends we are left wondering how much is due to miss measurement?

Or in musical terms we need some Imagination

Could it be that it’s just an illusion
Putting me back in all this confusion
Could it be that it’s just an illusion now?

That was partly in response to some new work by Diane Coyle suggesting that the telecoms sector had in fact seen more growth than the official statistics recorded. Regular readers will not be surprised to learn that the official response was a somewhat woeful tweaking of the numbers to give basically the same answer as before,

But now there has been a new development.

Historically each country has used the best data available to it, but the OECD’s working paper shows that, when using a more consistent method to compare total hours worked, the UK’s labour productivity improves significantly relative to other countries. For example, the UK’s productivity gap with the US would reduce by about 8 percentage points from 24% to 16% when adopting the simple component method approach.

I do not know about you but when I compare numbers I always look to do them on as “like for like” basis as possible and find it not a little breathtaking that this has not been done before. But the good news is that it has now.

Not everyone’s numbers improve as for example Greece sadly gains little. Oh and if I was looking at these numbers I would be thinking of words like “offshoring” and phrases like “Gross National Product” about the stellar performances of Luxembourg and Ireland.

A clear signal was of course given earlier this year by the Office of Budget Responsibility going bearish on productivity trends.

Good news on wages

Here we go.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.3%, both excluding and including bonuses, compared with a year earlier.

As we welcome this let us take the rare opportunity to congratulate the Bank of England on beginning to look correct. After all this has come after many years of pain for it. The official view tells us this about real wages.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 1.0% excluding bonuses, and by 1.1% including bonuses, compared with a year earlier.

The catch is that the number above relies on an inflation number called CPIH which is dragged lower by the use of Imputed Rents. If we switch to the previous measure CPI real wage growth falls to 0.7% or so as the depressing influence of Imputed Rents falls out of the data. If we use RPI then rather than real wage growth we find that it is at least no longer falling. Can anybody think why the establishment does not like the RPI measure? Apart from when it is used in their own defined benefit pensions I mean.

The numbers for October on its own provided some further cheer as at 3.9% it even exceeded RPI by 0.6% as the numbers were pulled higher by the service sector (4.2%).

Employment continues to grow as well.

There were an estimated 32.48 million people in work, 79,000 more than for May to July 2018 and 396,000 more than for a year earlier.

Not so good was the rise in unemployment for men of 27,000 and I am putting it like that as female unemployment fell by 7,000. It was due to a shift out of the inactivity sector so we will have to wait to see what it really means.

Comment

There is a lot to consider right now but let us remind ourselves that producers of official statistics need to consume a slice of humble pie every now and then. Yesterday saw two clear examples of this with the large revision to UK trade especially ( surprise,suprise ) for the services sector and then a solid chunk of the productivity gap faded away. Or rather the perceived productivity gap. The latter had been on my mind Sunday evening because as I went for a run around Battersea Park after 8 pm and noted the shop selling Christmas trees was still open. Great for consumers but bad for one way at least of measuring productivity.

But left me leave you with the question of the day. When would Mark Carney and the Bank of England actually use our currency reserves?

 

 

 

Central banking forward guidance ignores the rules of probability

Today we can continue our journey into the world of central bankers which is a cosy international club. It was hard as the New York Federal Reserve Bank reported in glowing terms the visit of its President John Williams to the Bronx not to recall a previous effort from his predecessor William Dudley. From Reuters in 2011.

He then stretched for a real world example. The only problem was he chose the Apple’s latest tablet computer that hit stores on Friday, which may be more popular at the New York Fed’s headquarters near Wall Street than it is on the gritty streets of Queens.

“Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said.”You have to look at the prices of all things.”

This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment “tone deaf.”

“I can’t eat an iPad,” another said.

That of course echoed around the world. This event by the Tweet storm looks more controlled in terms of audience so he may have avoided questions like this.

“When was the last time, sir, that you went grocery shopping?” one audience member asked.

Equilibrium Unemployment

Last night Michael Saunders of the Bank of England gave a speech to the CBI and as early as the fourth sentence he was pontificating about the theory that just will not die and about a number he cannot possibly know.

In the last 10-15 years, these effects from population ageing have been fairly benign, reducing the equilibrium jobless rate and neutral interest rate.

Let me now take you back just over five years when David “I can see for” Miles was giving us forward guidance on the equilibrium unemployment rate.

we will not tighten monetary policy until a recovery is strong enough and sustained enough that it has made a meaningful dent in unemployment so that it at least falls to 7 per cent…….. that linking the horizon over which an exceptionally expansionary monetary policy continues to support demand to the rate of unemployment has merit.

It is easy to forget now that we were being steered away from using GDP for monetary policy and towards the unemployment rate along these lines. Poor old David must wish he had never uttered the words below.

I suspect this is largely because the weight of money is behind a view that the significant positive news on the economic outlook means that the 7% unemployment level might be reached within around eighteen months………

Actually the unemployment rate plunged such that by the New Year these words were even more embarrassing.

If that is so unemployment is likely to fall rather more
slowly than would be usual.

Putting it another way the equilibrium unemployment rate is now 4.25% according to the Bank of England via 4.5%,5%, 5.5% and 6,5%. They may have guided to 6% as well but I do not recall it and these things tend to get redacted. Imagine you went to an engineer who guided you towards 7000 revs in your car then a few years later decided it was 4250! This sort of thing can only happen because central banking is a closed shop where the establishment appoint the same old “independent” crew.

Returning to Michael Saunders and yesterday he loses the plot more here.

Over the last 25 years, the share of the 25-64 age population with tertiary level (ie university or
similar) education has risen from 19% to 43%, a bigger rise than in most advanced economies (see figure
4).ix The tertiary education share among people aged 25-40 years is now around 50%, and the rise in this
measure has slowed in recent years.

A triumph according to Michael except he ignores the fact that this accompanies a really poor period for real wages. Indeed if the workforce is indeed more qualified, then real wages are even lower on a like for like basis. Are qualifications now required for lower skilled jobs and frankly what value are they? These are the real questions central bankers ignore as they pose the question how did we get here? That of course has been driven by their policies.

The attempt to use demographics as a smokescreen clears quickly as we compare the number below with the 2.75% error.

 This shift in workforce composition away from age groups that tend to have high jobless rates has cut the equilibrium jobless rate by about 0.3 percentage point since 2007.

 

Neutral Interest-Rate

We now move on to one of the central banking obsessions of our times. The so-called neutral interest-rate is examined below.

However, the MPC judges that, in practice, population ageing currently is lifting the stock of household assets, both in the UK and globally – and hence is pushing the equilibrium level of global real interest rates lower, and will continue to do so for some time.

Interesting ( sorry). If we look at the UK real interest-rate are low because the Bank of England put them there! It then thought bond yields were too high so QE was used to help lower them. Even this was not enough so it used credit easing to reduce mortgage rates. On the other side of the coin it has had two main phases of what it calls “looking through” rises in inflation. The first in 2010/11 when both main consumer inflation measures peaked above 5% per annum and then more recently after the EU leave vote.

The fundamental issue here is something that I learnt during my days as an option trader. On the quiet days we spent many hours discussing how to measure low probability events or what we would call  far out of the money options. One company called CRT built quite a empire based on the view that low probability events were undervalued and therefore bought them and counted the profits. Those of you who have followed the collapse of the company called OptionsSellers last weekend might note that it appears ( it has been vague on the details) to have done the reverse and accordingly according to the CRT theory has lost money. In this instance all of it.

Bringing this back to central bankers lets us note that Bank Rate is presently 0.75% and the estimate of the neutral rate is say in the range 2.5% to 3%. Because that is far away and also because interest-rate changes have been so rare that is an extraordinarily low probability event. An intelligent man or woman would therefore conclude that they are likely to know little or nothing about it until there is more evidence ( like some actual interest-rate rises). By contrast central bankers regularly opine about it and attempt to present it as a fact when in fact the rest of us are singing along to Ivan Van Dahl.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high?

Comment

I would like to look at something I think we can all agree with.

For most of the last 10 years, the economy has generally had significant amounts of spare capacity.

But look where it then goes.

Now, with the economy having grown above its modest potential pace for six or seven years that spare
capacity has been used up, with supply and demand in the economy broadly in balance.

Really? A more intelligent statement would be to say that the quantity measure (employment) has been strong but wage growth has been disappointingly weak. The failures around the “output gap” have led to claims wage growth is on the turn for many years from this crew. The reality is that the two main real wage falls have come when they have “looked through” inflation.

Anyway he saved the best to nearly last. If so how come we are where we are then?

BoE research suggests that this is not the case for the UK so far, and that the total impact of interest rate changes on growth and inflation is similar to the pre-crisis period.xlv The easing in mid-2016 seemed to provide the expected boost to the economy.

There are a couple of escape clauses in the second sentence such as “seemed to” and “expected” ( by who?) but we seem to be in “the operation was a success but the patient died” territory to me.

 

 

 

 

 

UK wage growth rises but awkwardly productivity falls

It is hard not to have a wry smile as we note that Tuesday is now the day that the official UK labour market data is released. This is because Members of Parliament apparently need 24 hours to digest it before Prime Ministers Questions on Wednesday lunchtime. Hopefully it is leading to an improvement in the standard of debate. Meanwhile the Bank of England was on the case yesterday and it started well for the absent-minded professor Ben Broadbent as he remembered to turn up at CNBC. So what did he tell us? From Reuters.

Broadbent also said the BoE had seen signs of pay pressure strengthening.

“We’ve certainly seen stronger figures, not just in the official data but in many of the pay surveys, than we’ve seen for many years,” he said.

“I, certainly the (Monetary Policy Committee)… always believed that the same old rules applied — that as the labor market tightened you would begin to see faster wage growth, and that’s indeed what we’ve seen.”

Whether that will continue depends on whether the economy continues to grow enough so that the labor market keeps tightening, Broadbent said.

Deputy-Governor Broadbent is for once telling us the truth or at least some of it. We have seen some signs of pay growth in nominal terms and he has clung to the “same old rules” like a drowning man clings to a piece of wood. But what he does not tell CNBC viewers if that it is certainly not the “same old scene” that Roxy Music sang about. The new scene has seen Bank of England guidance on an unemployment rate that should see wages rising drop from 7% to 4.25%. They have been like a centre forward who strides into the penalty area and shoots only for the ball to go out for a throw-in. Or to put it another way wages growth should now be above 5% as opposed to there being hopes of a rise above 3%. There is a world of difference here if we consider what the impact of some genuine real wage growth would have on people’s circumstances and the economy generally.

As to actual evidence the view of the Bank of England Agents for the third quarter was this.

Employment intentions remained positive in most sectors except for consumer services, which weakened slightly. Recruitment difficulties remained elevated. Average pay settlements were a little higher than a year ago, in a range of 2½%–3½%. Growth in total labour costs picked
up due to the increase in employers’ pension auto-enrolment contributions, the Apprenticeship Levy, and ad hoc payments to retain staff with key skills.

Firstly let me note that several of you pointed out ahead of time the likely implications of pension auto-enrolment on wage growth.

Immigration

The impact of this on wage growth has been contentious in that the establishment view in both economics and officially is that immigration has not reduced wage growth. Yet the Financial Times last week more than hinted that the reverse may not be true.

Some companies are expecting it will become even more difficult to recruit once the UK leaves the EU because the government is proposing a new immigration regime that lets some high skilled workers into the UK but places curbs on untrained labour. After years of sluggish wage growth, low unemployment is now starting to hit companies’ profits: JD Wetherspoon, Royal Mail and Ryanair have recently complained about rising labour costs.

As many of the replies point out perhaps they need to increase wages which is awkward for those who argued that immigration has not depressed pay growth.

Today’s Data

There was some better news.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.2% excluding bonuses, and by 3.0% including bonuses, compared with a year earlier.

As you can see total pay growth reached 3% which will help real wages although not as much as we are told.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.9% excluding bonuses, and by 0.8% including bonuses, compared with a year earlier.

That is because the official measure of inflation or CPIH uses Imputed Rents and is therefore inappropriate to use as a wage deflator. Why not use CPI well real wage growth then falls to more like 0.7% for regular pay and 0.5% for total pay. If we use the Retail Price Index or RPI then real wage growth pretty much disappears. So in fact whilst any real wage growth is welcome the reality is that it is depending on the redefinitions of or as it is officially put “improvements” in the measurement of inflation.

Was it productivity?

Perhaps not because we know GDP growth picked up to 0.6% on a quarterly basis but look at hours worked.

Between April to June 2018 and July to September 2018, total hours worked increased (by 10.7 million) to 1.04 billion. This reflected an increase of 23,000 in the number of people in employment and an increase in average weekly hours worked, particularly by those working full-time,

So an increase of a bit more than 1%. So in terms of a direct link no although it may have been driven previous changes. Thus the answer to those hoping to find an oasis of productivity gains is definitely maybe.

Output per hour – Office for National Statistics’ (ONS’) main measure of labour productivity – decreased by 0.4% in Quarter 3 (July to Sept) 2018. This follows a 0.5% increase in the previous quarter (Apr to June) 2018. In contrast, output per worker increased by 0.5%.

Underemployment

We got a little bit of a clue yesterday from the UK Deputy Statistician Jonathan Athow who blogged on employment.

The share of people working very short hours – fewer than six hours a week – is very low, around 1.5 per cent, or a little over 400,000 people out of the 32.4 million people in work. This is down from around 2 per cent in the early to mid-1990s. The next category – from 6 to 15 hours a week – has also shrunk as a share of employment over the same period of time.

So measuring that might give us a clue to wage pressure as it is a signal of reducing underemployment. However it cannot be the full picture as otherwise wage growth would be more like the 1990s and I wonder how much of a role the rise in self-employment has had in this?

Comment

The good news is that the UK has some wage growth but the not so good news is that it remains relatively weak. Also the last three months have gone 3.3%,3.1% and now 2.8% which is a trend in the opposite direction! The last number was influenced by the annual rate of pay growth in the financial sector falling to 1.2% in September. So fingers crossed as we note that there is still a long road ahead.

£493 per week in constant 2015 prices, up from £490 per week for a year earlier, but £29 lower than the pre-downturn peak of £522 per week for February 2008.

At the current rate of progress we will get back to the previous peak by inflation measurement “improvements” rather than wage growth.

Also let me remind you that the self-employed and those in smaller businesses are not counted in the wages data. So let us mull some of the other issues.

employed (has worked at least one hour in the last two weeks);

It is hard not to think of  the Yes Prime Minster critique of labour market data as you read that. Also think of the issues involved in extrapolating this into the whole labour force.

As noted above, all of this information comes from our Labour Force Survey. Every three months, we ask approximately 90,000 randomly selected people for a few minutes of their time to respond to our Labour Force Survey interviewers face-to-face or over the phone.

I wonder how many do respond?

 

 

Of hot air, wind power and UK real wages

Today brings us to the latest UK labour market data but before we get there we see two clear features of these troubled times. One is in fact a hardy perennial referred to in Yes Prime Minister by Jim Hacker over thirty years ago although he was unable to arrange one. From Kensington Palace..

Their Royal Highnesses The Duke and Duchess of Sussex are very pleased to announce that The Duchess of Sussex is expecting a baby in the Spring of 2019.

Who says the UK has no plans for Brexit when a Royal Baby is in the process of being deployed?

Next comes some intriguing news from Scottish Power reported by the BBC like this.

Scottish Power to use 100% wind power after Drax sale

My first thought was to wonder what happens when the wind does not blow? Or only weakly as for example if we look at UK electricity production this morning where according to Gridwatch it is 5 GW out of a maximum of around 12.5 GW? There is little extra on this to be found in the detail.

Scottish Power plans to invest £5.2bn over four years to more than double its renewables capacity.

Chief executive Keith Anderson said it was a “pivotal shift” for the firm.

“We are leaving carbon generation behind for a renewable future powered by cheaper green energy. We have closed coal, sold gas and built enough wind to power 1.2 million homes,” he said.

As you can see the issue of when the wind does not blow gets entirely ignored in the hype. Indeed one part of its past production which could help to some extent by being used when the wind does nor blow which is hydro power has just been sold! As to the claims I see that this provides cheaper electricity that is rather Orwellian as we know that the green agenda is driving prices higher but tries to hide it. Still the good news for Scottish Power customers is that if all the statements are true then there will be no more price rises because energy costs are now pretty much fixed.

As you might expect raising such thoughts on social media leads to some flack. According to @Scottishfutball I am a stupid man although that tweet has now disappeared. Here is a longer answer to show the other side of the coin from Is anybody there on Twitter.

When the wind doesn’t blow they have hydroelectric power, wave power, solar, biomass, pumped hydro storage. Add in micro grids, battery storage and deferred demand and it’s very achievable.

The hydro power they just sold? And what’s “deferred demand”?

Wages

Here the news was a little better.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.1% excluding bonuses, and by 2.7% including bonuses, compared with a year earlier.

So we see that on this three-monthly measure total pay has risen at a 0.1% faster rate and basic pay by 0.2%. The balancing item here is bonuses which fell by 1.3% in August on a year before.

Let us take a look at this as the Bank of England wants us to. Here is its Chief Economist Andy Haldane from last week.

A year on, I think there is more compelling evidence of a new dawn breaking for pay growth, albeit with the
light filtering through only slowly……….Looking beneath the headline figures, evidence of an up-tick in pay is clearer still. Private sector pay growth (again excluding bonuses) has been grinding through the gears; it recently hit the psychologically-important 3% barrier. Private sector wage settlements so far this year are running at 2.8% and in some sectors, such as construction and IT, are running well in excess of 3%.

Someone needs to tell Andy that if an average is 3% some will be above and some will be below. Also is the growth 3% or 2.8%? But let us ignore those and Andy’s lack of enthusiasm for bonuses, no doubt influenced by his own personal experience. On this measure we see that private-sector pay growth is now 3.1% so another nudge higher and with July and August both registering 3.3% we could see another rise next time. The trouble is that whilst this is welcome we are back at the old central banking game of cherry picking to data to produce an answer you arrived at before you looked at it. Also one cannot avoid noting that the theory Andy so loves – and has led him regularly up the garden path over the past 5 years or so – would predict this wage growth to be more like 5%. Or to put it another way the view shown below seems not a little desperate and the emphasis is mine.

This evidence suggests the pulse of the Phillips curve has quickened as the labour market has tightened.
Unlike over much of the past decade, estimated wage equations are now broadly tracking pay.

So the new “improved” models are just the old ones in a new suit?

Some reality

If we switch to total pay we see that over the course of 2018 it is much harder to pick a clear pattern.  Whilst we are a little higher than a year ago as 2.7% replaces 2.4% it is also true that we opened the year at 2.8%. Next month should be better as the May 2% reading drops out but it is a crawl at best. If we switch to real wages we are told this.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.7% excluding bonuses, and by 0.4% including bonuses, compared with a year earlier.

Here comes my regular reminder that even such small gains rely on using an inflation measure that is not fit for purpose. This is because the CPIH measure relies on imputed rents which are a figment of statistical imagination and which, just by chance of course, invariably lower the reading. We will be updated on the inflation numbers tomorrow but it was 2.4% compared to the 2.7% of its predecessor ( CPI ) and the 3.5% of the one before that ( RPI)  as we try to detect a trend. Even using it shows that the last decade has been a lost one in real wage terms.

For August 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was: £523 per week in nominal terms, up from £508 per week for a year earlier……..£492 per week in constant 2015 prices, up from £489 per week for a year earlier, but £30 lower than the pre-downturn peak of £522 per week for February 2008.

As you can see even using the new somewhat deflated inflation number there will be another lost decade for real wages at the current rate of progress.

Comment

Today has mostly been a journey of comparing wish-fulfillment with reality, or the use of liberal quantities of hopium. Still perhaps it will be found at a fulfillment center, whatever that is. From CNBC.

Tech giant Amazon is set to install solar panels at its fulfillment centers across the U.K.  ( H/T @PaulKingsley16 )

If we switch back to the Bank of England which of course is also full of rhetoric on the climate change front, as after all someone has to offset all the globetrotting of Governor Carney, we return to wages again. Actually it has reined in its views quite a bit.

The rise in wages projected by the Bank is, to coin a phrase, limited and gradual. Private sector pay is
assumed to rise from 3% currently to around 3 ¾% three years hence, or around 25 basis points per year.

The catch is the implied assumption that we will always grow because any slow down would then knock real wages further. But even on that view once we allow for likely inflation it looks as if there will be only a little progress at best.

 

 

 

 

 

Has UK employment peaked and if so why aren’t wages rising faster?

After yesterday’s generally good economic news from the UK we turn to the labour market today. This has been if we switch to a football analogy a story of two halves. The first half continues an optimistic theme as we note how the quantity numbers such as employment and unemployment have developed. Indeed it was the rally in employment that signaled the  turn in the UK economy at the opening of 2012 and set the trend some time before the output numbers caught up. If we take a broad sweep the number of people employed in the UK has risen from 29.4 million to 32.4 million. That is not a perfect guide due to problems with how the numbers are measured and the concept of underemployment, but if we switch to hours worked we see they have risen from 935 million per week to 1032 million per week over the same time period.

But the ying to that yang has come from the price of labour or wage growth which has consistently struggled. This has been associated with what has come to be called the “productivity puzzle”. These are issues which are spread far wider than the UK as for example whilst the rise in US wage growth seen on Friday was welcome the reality was that it was to 2.9%. Or to put it another way the same as the July CPI inflation number. That sets a first world context where growth is not what it used to be as I looked at only on Friday. The truth is that it was fading even before the credit crunch and it gave it a further push downwards.

Unfortunately whilst we face the reality of something of a lost decade for wage growth the establishment has not caught up. It continues to believe that a change is just around the corner. For example the Ivory Tower at the Bank of England has forecast year after year that wage growth will pick up in a rinse, fail and repeat style. This is based on the “output gap” theory that has been so regularly debunked by reality over the past decade.

The MPC continues to judge that the UK economy currently has a very limited degree of slack. ( August Minutes)

This has been its position for some years now with the original starting position being that the “slack” was of the order of 1% to 1.5%. In that world wages would be on their way to the 5 1/2% growth rate predicted by the Office for Budget Responsibility back in the summer of 2010.

Does this really matter? I think it does. This is because when an official body becomes something of a haven for fantasies it allows it to avoid facing up to reality especially if that reality is an uncomfortable one. A particular uncomfortable reality for the establishment is the fact that the decline in wage growth has accompanied the era of low and negative interest-rates and the QE era. If you try to take credit for employment growth ( I recall Governor Carney claiming that he had “saved” 250.000 jobs with his post EU leave vote actions) then you also have to face the possibility that you have helped to reduce wage growth. Propping up larger businesses and especially banks means that the “creative destruction” of capitalism barely gets a look in these days.

Today’s data

Wages

Looked at in isolation we got some better news this morning.

Between May to July 2017 and May to July 2018, in nominal terms: regular pay increased by 2.9%, higher than the growth rate between April to June 2017 and April to June 2018 (2.7%)……..total pay increased by 2.6%, higher than the growth rate between April to June 2017 and April to June 2018 (2.4%).

Should you wish to cherry pick in the manner of the Bank of England then your focus would turn to the 3% growth of private-sector regular pay and perhaps to its 3.2% growth in July alone. Indeed you could go further and emphasise the 3.5% growth in regular pay in the wholesale retail and hotel/restaurant category which was driven by 4.4% growth in July.

But the problem for the many cherry pickers comes from the widest number which cover everyone surveyed and also includes bonuses. You see it started 2018 at 2.8% as opposed to the 2.6% in the three months to July. Also if we look back we see that weekly total wages fell in July of 2017 from £509 to £504 so the 3.1% increase in July is compared to a low base. Thus even after what is six years now of employment gains we find ourselves facing this situation.

Please take their numbers as a broad brush. It is welcome that they provide historical context,  but also disappointing that they use the CPIH inflation measure which via its use of imputed or fantasy rents is an inappropriate measure for this purpose. Pretty much any other inflation measure would overall show a worse situation.

Employment

The long sequence of gains may now be fading.

Estimates from the Labour Force Survey show that, between February to April 2018 and May to July 2018, the number of people in work was little changed………..There were 32.40 million people in work, little changed compared with February to April 2018 but 261,000 more than for a year earlier.

On the surface it looks like the composition of employment at least was favourable.

Figure 4 shows that the annual increase in the number of people in employment (261,000) was entirely due to more people in full-time employment (263,000).

Due to the way full-time employment is officially counted (for newer readers rather than being defined it is a matter of choice/opinion) we need confirmation from the hours worked numbers.

Between February to April 2018 and May to July 2018, total hours worked increased (by 4.0 million) to 1.03 billion. This increase in total hours worked reflected an increase in average weekly hours worked by full-time workers, particularly women.

Work until you drop?

There has been a quite noticeable change in one section of the workforce.

The number of people aged 65 years and older who were in employment more than doubled between January 2006 and July 2018, from 607,000 to 1.26 million. The same age group had an employment rate of 6.6% in 2006 and this increased to 10.7% in the three months to July 2018.

We get some suggested reasons for why this might be so.

the improved health of the older population, which increases older workers’ desire to continue working for reasons of status, identity and economic well-being.

 

changes to the state pensionable age for both men and women.

 

changes to employment laws that prohibit discrimination based on age.

 

older people’s desire for financial independence and social interaction.

To my mind that list misses out those who continue to work because they feel they have to. Either to make ends meet or to help younger members of their family.

Comment

There is a fair bit to consider today and this time around it concerns employment itself. At some point the growth had to tail off and that has perhaps arrived and it has come with something else.

The level of inactivity in the UK went up by 108,000 to 8.76 million in the three months to July 2018, resulting in an inactivity rate of 21.2%. Inactivity increased by 16,000 on the year.

That is an odd change when the employment situation looks so strong and I will be watching it as the rest of 2018 unfolds.

Moving to wages we find ourselves yet again at the mercy of the poor quality of the data. The exclusion of the self-employed, smaller businesses and the armed forces means that they tell us a lot less than they should. Also the use of a broad average means that the numbers are affected by changes in the composition of the workforce. For example if many of the new jobs created are at lower wages which seems likely that pulls the rate of growth lower when they go into the overall number. So it would be good to know what those who have remained in work have got. Otherwise we are in danger of a two or more classes of growth and also wondering why so many in work need some form of income support.