How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.


There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)


As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV





The economy of Italy has yet to awaken from its “Girlfriend in a coma” past

The subject of Italy and its economy has been a regular feature on here as we have observed not only its troubled path in the credit crunch era but also they way that has struggled during its membership of the Euro. This will no doubt be an issue in next month’s election but the present period is one which should be a better phase for Italy. Firstly the Euro area economy is doing well overall and that should help the economy via improved exports.

Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and in the EU28 during the fourth quarter of
2017, compared with the previous quarter……..Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.7% in the euro area and
by 2.6% in the EU28 in the fourth quarter of 2017…….Over the whole year 2017, GDP grew by 2.5% in both zones.

The impact on the economy of Italy

If we switch now to the Italian economy we find that there has been a boost to the economy from the better economic environment. From the monthly economic report.

Italian exports keep increasing with a positive trend following world trade expansion…….Over the period September-November, foreign trade kept a positive trend
driven by the exports (+2.9%), while the imports increased at a lower pace (+0.6%).

However the breakdown was not as might be expected.

Sales to the non-EU area (+4.6%) contributed positively to the favorable trend in exports and more than the sales to the EU area (+1.5%). In 2017, trade with non-EU countries increased both exports (+8.2%) and imports (+10.8%).

So the export-led growth is stronger outside the Euro area than in it which is not what we might expect as we observe the way that the Euro has been strong as a currency. Effects in this area can be lagged so it is possible via factors such as the J-Curve that the new higher phase for the Euro has yet to kick in in terms of its impact on trade, so we will have to watch this space.


There was some good news on this front in December as the previous analysis had been this.

Taking the average values of September-November, shows that production decreased compared to the previous quarter (-0.2%, ). In the same period all the main industrial groupings recorded a decrease except durable consumer goods (+2.7% compared to the previous quarter).

As you can see that is not what might have been expected but last weeks’ data for December was more upbeat.

In December 2017 the seasonally adjusted industrial production index increased by 1.6% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.8.

This meant that the position for the year overall looked much better than the downbeat assessment above.

in the period January-December 2017 the percentage change was +3.0 compared with the same period of

If we move to the outlook for 2018 then the Markit business survey or PMI could not be much more upbeat.

Italy’s manufacturing sector enjoyed a strong start
to 2018, registering the highest growth in output
since early 2011 and one of the greatest rises in
new orders of the past 18 years.

In addition domestic demand was seen adding to the party.

but January data pointed to a growing contribution from within Italy itself.

This leads to hopes for improvement in one of the Achilles heels of the Italian economy.

The response from many manufacturers was to
bolster employment numbers, and January’s survey
indicated the second-strongest rise of employment
in the survey history.

Unemployment and the labour market

At first glance the latest data does not look entirely impressive.

In December 2017, 23.067 million persons were employed, -0.3% over November 2017. Unemployed were
2.791 million, -1.7% over the previous month.

There is a welcome fall in unemployment but employment which these days is often a leading indicator for the economy has dipped too.

Employment rate was 58.0%, -0.2 percentage points over the previous month, unemployment rate was
10.8% -0.1 percentage points over November 2017 and inactivity rate was 34.8%, +0.3 percentage points in
a month.

However if we look back we see that over the past year 173,000 more Italians have been employed and the level of unemployment has fallen by 273,000.  What we are still waiting for however is a clear drop in the unemployment rate which has been stuck around 11% for a while. We are told it has dropped to 10.8% but there has been a recent habit of revising the rate back up to 11% at a later date meaning we have been told more than a few times that it has fallen below it. Sadly much of the unemployment is concentrated at the younger end of the age spectrum.

Youth unemployment rate (aged 15-24) was 32.2%, -0.2 percentage points over the previous month.

So better than Greece but isn’t pretty much everywhere as we again wonder how many of these have never had a job and even more concerning, how many never will?

Sometimes we are told that higher unemployment rates are a consequence of better wages. But is we look at wages growth there does not seem to be much going on here.

The labor market outlook is characterized by the wage
moderation: in 2017 both the index of contractual wages per employee and that of hourly wages increased by +0.6% y-o-y.

On a nominal level that is a fair bit below even the UK but of course the main issue is in real or inflation adjusted terms.

In January 2018, according to preliminary estimates, the Italian consumer price index for the whole nation (NIC) increased by 0.2% on monthly basis and by 0.8% compared with January 2017 (it was +0.9% in December 2017).

So there was in fact a small fall in real wages in 2017 which we need to file away on two fronts. Firstly there is the apparent fact that better economic conditions in Italy are not being accompanied by real wage growth and in fact a small fall. Secondly we need to add that rather familiar message to our global database.

The banks

This is a long running story of how the banking sector carried on pretty much regardless after the credit crunch and built up a large store of non-performing assets or if you prefer bad loans. This has meant that many Italian banks are handicapped in terms of lending to help the economy and some have become zombified. From Bloomberg earlier.

Even after making reductions last year, Italian banks are still weighed down by more than 270 billion euros ($330 billion) of non-performing loans. Struggling households account for almost a fifth of that total, according to the Bank of Italy.

It is hard not to have a wry smile at a proposed solution.

The Bank of Italy says an improvement in the country’s real estate market is helping to reduce the risks for banks.

Whether that will do much good for what has become the symbol of the problem I doubt but here is the new cleaner bailed out Monte Paschi. From Bloomberg on Monday.

The bank, which is cutting about a fifth of its workforce, eliminating branches and plans to sell 28.6 billion euros of bad loans by 2021, posted 501.6 million-euro net loss in the last three months of the year.

How is the bailout going?

The shares were down 2.8 percent at 3.72 euros as of 9:55 a.m. The stock, which returned to trading Oct. 25 after an 10-month suspension, is now valued more than 43 percent below the 6.49 euros apiece paid by Italy for the rescue.

This morning it is 3.44 Euros so the beat goes on especially as we note that pre credit crunch and the various bailouts the equivalent price peak was over 8800.


This issue continues to be ongoing.

The population at 1st January 2018 is estimated to be 60,494,000; the decrease on the previous year was
around 100,000 units (-1.6 per thousand).

Driven by this.

The number of live births dropped to 464 thousand, 2% less than in 2016 and new minimun level ever.

We have seen on the news so often that there is considerable migration to Italy and if we look into the detail we see that not only is it so there is something tucked away in it.

The net international migration in 2017 amounted to +184 thousand, recording a consistent increase on the
previous year (+40 thousand).

Yet Italians themselves continued to leave in net terms as 45,000 returned but 112,000 left which is a little surprising in the circumstances. As to the demographics well here they are.

At 1 January 2018, 22.6% of the population was aged 65 or over, 64.1% was aged between 15 and 64, while
only 13.4% was under 15 years of age. The mean age of the population exceeded 45 years.

The theme is that the natural change has got worse over the past decade rising from pretty much zero to the 183,000 of 2017 but contrary to the news bulletins net immigration is lower as it approached half a million in 2007.


This morning has brought news which will be very familiar to readers of my work which is an Italian economy which seems to struggle to grow at more than around 1% per annum for any sustained period.

In the fourth quarter of 2017 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.3 per cent with respect to the third quarter of 2017 and by 1.6 per
cent in comparison with the fourth quarter of 2016.

As we note a negative official interest-rate ( -0.4%) and a large amount of balance sheet expansion from the European Central Bank the monetary taps could not be much more open. Italy’s government in particular benefits directly by being able to borrow very cheaply ( ten-year yield 2.05%) when you consider it has a national debt to annual GDP ratio of 134.1%. Thanks Mario!

Thus we return on Valentines Day to the “Girlfriend in a Coma” theme of Bill Emmott which is a shame as Italy is a lovely country. Can it change? Let us hope so and maybe the undeclared economy can be brought to task. Meanwhile if you want to take the Matrix style blue pill here is Bloomberg.

ITALY: GDP expanded by 0.3% in 4Q, a bit less than expected. Still, 2017 was the best growth year (+1.5%) since 2010. Shows how broad-based the euro-area recovery has become. A rising tide lifts all boats





What next for the UK economy and Bank of England policy?

Later this week the bank of England meets and votes on monetary policy. It will do this on Wednesday and announce the result on Thursday which is a newish innovation which frankly can only go wrong by being leaked. Also we will receive the quarterly Inflation Report so it is what you might call a “live” meeting as a policy move is more likely than at other meetings because of this. Last Tuesday Governor Carney made an effort to raise the rhetoric on the subject of inflation  From the House of Lords transcript.

We have further to go. The experience, particularly
over the course of the past decade, with large and persistent exchange rate moves is that there has been quite material pass-through to consumer prices and that that pass-through has come through over time.

In fact he expects the lower value of the UK Pound £ to continue to have an upwards effect on inflation for another couple of years or so.

Using a broad brush to describe how it flows through to CPI and people’s shopping baskets, we had about 40% of the effect in the first year, then 30%, 20% and 10%, so that it is tiny by year four……….We are about 18 months into this. Again, the rule of thumb is that in a big exchange rate move, about 60% goes to a first stage passthrough—in
other words, import prices—and the weight in the
consumption basket is just under 30%; or 30%, which I will use for the sake of argument. Given a 15% fall in the trade-weighted exchange rate, we should think about a 2.75% rise in the price level over time. Around 1.1% to 1.3% of the pass-through has shown up.

This is interesting as it would in itself justify an increase in Bank Rate to respond to this as there would be time for it to have some effect. Personally I doubt that as it looks yet again like something which might look neat in an economic model but has little contact with reality. I can see years one and two with the latter being where exchange-rate hedges and the like run off and lead to price rises but much much less if any for years 3 and 4. After companies like Apple and Unilever could hardly wait to raise prices as the Pound £ fell could they?Also I think it is important to remember that the main issue for price rises is the US Dollar because of the way that so many commodities are priced in it which leads me to this sentence.

. Of course, the farther out you go, the more other things are affected in terms of inflation and offsetting.

This at a later date can be used to cover the fact that there has been no mention that the UK Pound £ is now much higher against the US Dollar and at US $1.41 and a bit as I type this. This matters as the UK Pound £ has improved by a bit more than double ( ~17%) on my measure than on the effective one (~8%).


Bank of England optimism in this area is like a hardy perennial where even the bitterly cold winds provided by reality seem not to affect it.

We see it in the gradual firming of wages, particularly private sector wages, and particularly of people who are
shifting work.

The 3 monthly average has risen from 1.9% to 2.5% but that means that it was still lower than the 2.7% of the same month ( November) a year before. Also the single month data going 2.8%, 2.4% and then 2.3% hardly suggests a firming of any sort. Actually if you look at the issues with the data then the dip was the bonus season (April) and ordinary wage growth may well be pretty much where it was all along. A troubling answer but one which has fitted reality vastly better than the Bank of England’s modelling.

The economy

This has been doing well again to the dismay of economic modellers but this week has brought a couple of factors which are downbeat. One will be very familiar to regular readers. From the UK SMMT.

The UK new car market declined in the first month of the year, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,615 cars were driven off forecourts in January, a -6.3% fall compared with the same month in 2017.

This makes us think of the car finance boom and second-hand car prices as well as ironically a fall in car imports which seemed on previous data to be disproportionately affecting French manufacturers. Another factor is the shambles around diesels which I doubt will improve as we learn that Volkswagen has been using monkeys in its tests.

However, this growth failed to offset a significant decline in demand for new diesel cars, which fell -25.6% as confusion over government policy continued to cause buyers to hesitate.

Also the latest business survey from Markit or PMI suggests that the UK economy slowed in January.

While the fourth quarter PMI readings were
historically consistent with the economy growing at
a resilient quarterly rate of 0.4-0.5%, in line with the
recent GDP estimate, the January number signals a
growth rate of just under 0.3%.

A little care is needed as the growth rate in the services sector has been erratic so we do not know if this will be a continuing dip or is an outlier.


Governor Carney was under pressure from the off as he faced the Lords Select Committee on Economic Affairs.

perhaps I may start by asking about the Bank’s projections for the economy in August 2016, particularly for business and housing investment and for imports and exports. Why did they turn out to be so wrong, relative to what has
actually happened?

This is much more than an idle question because these predicated the Bank Rate cut of August 2016 and the “Sledgehammer” bond purchases (QE). The Governor suggested that context was needed but was unable to shake off the issue completely in his reply.

On an annual average basis, not a calendar-year basis, there was 1.8% growth versus the 0.8% forecast.

If this was a boxing match then the Governor was trapped on the rails for a while.

I was struck by the fact that business investment, for example, which you suggested would fall by 2% in 2017, actually went up by 2.25% for the 11 months. You predicted that housing investment would fall by 4.7%, but it actually
went up by 4%.

It would appear that the Bank of England seems to be trying to set up something of an inflation scare after most if not all of it has passed. Maybe if we add in its optimism on wages it is tilling the ground for an interest-rate increase or two but this has problems one of which was highlighted by Markit earlier.

The January slowdown pushes the all-sector PMI
into dovish territory as far as Bank of England
monetary policy is concerned, historically consistent
with a loosening bias. With the survey also
indicating weaker upward price pressures, the data
therefore cast doubts on any imminent rise in
interest rates.

I think that the latter sentence reflects my view on inflation prospects more accurately than the Bank of England one but only time will tell. What we do know is that if we remain around US $1.41 then it will be an increasing brake on inflation trends. That should be good news as 2018 develops as it will help real wages and there should be an economic boost as real wages stop falling and hopefully rise from this source. It remains unclear whether wage growth will pick up.

Meanwhile the film industry seems to be continuing its recent boost to UK economic output if last night in Battersea Park was any guide.




How does UK employment rise but hours worked fall?

This week has brought with it news of a surge in UK wages but sadly for the rest of us it is only for one person. From the Guardian.

Sánchez’s four-and-a-half-year contract ties him to United until the summer of 2022. It is understood his salary is closer to a basic £300,000 a week than the reported £500,000. This means he is, with Zlatan Ibrahimovic, the club’s highest remunerated player.

We are of course looking at the wages of Alexis Sanchez which are supposed to be too high even for Manchester City but not for their neighbours. Actually if we add in the agent of Alexis Sanchez and any other hangers-on we do at least have more than one person benefiting from this. Whatever you might think of the economics of premiership football and it is easy to make a case for it being more inflated than even the modern era football itself it is providing a boost for the UK economy as this from the BBC this week highlights.

Manchester United have topped the table of the world’s 20 richest football clubs for the second year in a row, and 10th time overall, says Deloitte…….Manchester United’s €676m revenues were boosted by €44.5m from Uefa after winning the Europa League against Ajax…..There were a record 10 English Premier League clubs in the top 20. The number in the top 30 was up from 12 to 14.

Maybe it is the performance so far this season influencing me but I was surprised by this part.

Southampton are the only debutant in the top 20 after broadcast revenues soared.

That makes you wonder why they are always selling players doesn’t it?

Changes over time

According to the Resolution Foundation there has been something going on and it started well before the credit crunch hit.

A change in working hours is driving this change, but there are two factors at play. The first is the large increase in the number of male employees working part-time, which has risen from 8.1 per cent in 1997 to 11.7 per cent in 2017. The second driver of the ‘hollowing out’ of male pay over the last two decades is the reduction in average hours worked by the lower-paid (in terms of hourly pay) – over and above the shifting balance between full-time and part-time working. The average number of hours worked by full-time men earning around two-thirds of male median hourly earnings fell from 44.3 hours in 1997 to 42.2 hours in 2016. At the same time hours worked increased for higher paid men. As a result of this change lower-paid men no longer work more hours than their higher-paid counterparts.

As we mull the illogic in those who are at the bottom end of the pay spectrum working fewer hours we are left wondering one more time how much underemployment there is.

 Among part-time employees in the bottom fifth of the male weekly earnings distribution, 27 per cent would like full-time work compared to 8 per cent of those in the top fifth. Under-employment (people wanting more hours) is also concentrated amongst lower earners.

Sadly the official UK data releases tell us much less about underemployment than we would like to know.

Pressure pressure

We get regular reports of pay pressure but this so far has not filtered into the headline official data. An example of this was provided by The Independent yesterday.

The FMB, in its quarterly report on the state of the industry, found that companies are particularly struggling to recruit bricklayers and carpenters. Demand for skilled plumbers, electricians and plasterers is also outstripping supply……As a result of the skills gap, the FMB said that wages are rising sharply for skilled tradespeople.

So there is evidence for some wage pressure in that sector which must be awkward for a news source which regularly assures us immigration does not affect wages. “Without skilled labour from the EU, the skills shortages we face would be considerably worse” seems to tell a different story.

What was especially interesting about the CBI ( Confederation of British Industry) manufacturing survey yesterday was the absence of a mention of wage pressure.

Employment grew at the fastest pace since July 2014 over the last three months, with further growth expected next quarter. However, skill shortages are high on firms’ agendas, with the number of firms citing skilled labour as a factor likely to limit output over the next three months the highest for more than four decades.

Today’s data

What we saw was a continuation of what over the past few years has been a strength of the UK economy.

For September to November 2017, there were 32.21 million people in work, 102,000 more than for June to August 2017 and 415,000 more than for a year earlier.

The previous concerns over new employment/ work being part-time ( and hence likely to be lower paid) has reduced considerably as you can see.

The annual increase in the number of people in employment (415,000) was mainly due to more people in full-time employment (401,000).

Yet if we switch to wages we see little sign of change in yet another disappointment for the Bank of England with its “output gap” style thinking.

Between September to November 2016 and September to November 2017, in nominal terms, regular pay increased by 2.4%, little changed compared with the growth rate between August to October 2016 and August to October 2017 (2.3%)……….Between September to November 2016 and September to November 2017, in nominal terms, total pay increased by 2.5%, unchanged.

This means that the picture for real wages was pretty much unchanged as well with a small fall if you use the official CPIH series but something which is over 1% per annum higher if you use the Retail Price Index or RPI.

We get a different perspective if we look at hours worked as you can see below.

Between June to August 2017 and September to November 2017, total hours worked per week decreased by 4.9 million to 1.03 billion..

Only a small fall but much more significant if we remind ourselves that an extra 102,000 people were contributing to the hours worked. We will have to see how this plays out because one version could argue that underemployment is rising the other is that as the economy is growing we are improving productivity and thus should (hopefully) see higher wages going forwards. I suppose as this is the credit crunch era we should not be too amazed if we end up seeing elements of both! At least we will not be like Reuters who always present good UK economic news like this.

 The number of people in work in Britain surged unexpectedly in the three months to November


If we look at the recent UK economic experience we see that there have been gains since around 2012 particularly in employment. Yet to the chagrin of economics 101 the wage growth so confidently predicted by it 101 is still missing and we have moderate wage growth and falling real wages with employment at record highs. Maybe a partial reason is that many individual experiences are different to the collective as seen by averages as this from Sarah Connor in the Financial Times hints at.

When I hear about “continuous change”, I think of the husband of a woman I interviewed last year: a British man who lost his job more than a decade ago after the car factory where he worked closed down. Since then, he has been hired and made redundant 10 times. Is he resilient and willing to learn? Yes. Has it been enough? No.

Perhaps the official surveys miss his like in the same way that the official wages data still shamefully excludes the self-employed and small-size employers. That omission has got worse as the number of self-employed has grown in recent years and now totals 4.77 million. Somehow on that road we find ourselves noting that real wages are still some 6% below the previous peak.

average total pay (including bonuses) for employees in Great Britain was £489 per week before tax and other deductions from pay, £33 lower than the pre-downturn peak of £522 per week recorded for February 2008

Maybe another factor is another even longer-term trend seen by the UK economy.

Looking at a longer-term comparison, between June 1978 (when comparable records began) and September 2017: the proportion of jobs accounted for by the manufacturing and mining and quarrying sectors fell from 26.4% to 7.8%…….the proportion of jobs accounted for by the services sector increased from 63.2% to 83.4%.





The UK manufacturing boom is boosting both GDP and productivity

Today will bring us up to speed or at least up to the end of November on a range of areas of the UK economy. Some of it may well be contrasting as we mull the hoped for manufacturing boom but also not that the construction sector has fallen into a recession. As we do so there are plenty of more up to date influences at play as we note that the UK Pound £ has improved to around US $1.35 versus the US Dollar which means that on annual inflation comparisons it no longer boosts inflation as it is up around 13 cents over that period. So instead it will come to be a brake on our above target inflationary episode although as ever life is not simple as we note that the rise in the oil price I looked at on the has continued with the price of a barrel of Brent Crude Oil pushing above US $69 this morning making a three-year high.


We so rarely see good news in this area so let me bring you this from today’s Sainsburys results.

The 4% pay rise for staff was paid for out of cost savings says Mike Coupe, CEO ….so no impact on pricing or margins…. ( h/t Karen Tso of CNBC)

We see so little sign of wage growth above 2% these days so anything like this is welcome and indeed if we look a little further it is not the only such sign in the retail sector.

 Aldi is increasing pay for store staff after it enjoyed a bumper Christmas with sales up 15% in December…..

Aldi said it was increasing the minimum hourly rate of pay for store assistants to £8.85 nationally, a 3.75% rise, and to £10.20 in London, a 4.6% boost, from 1 February.

The company, which also pays employees for breaks unlike some chains, claimed it was reaffirming its position as the UK’s highest-paying supermarket.

The rates match the independently verified living wage recommended by the Living Wage Foundation, although Aldi is not formally accredited to the scheme as not all its workers are guaranteed the rate as a minimum.

As you were probably already aware the retail sector is not a high payer so the increases are good news in an era of concern over poverty whilst being at work and higher food bank usage.  Or to put it another way an era where we have a need for a Living Wage Foundation.

Mind you not all wage boosts are well received. From yesterday’s Guardian.

The chief executive of housebuilder Persimmon has insisted he deserves his £110m bonus because he has “worked very hard” to reinvigorate the housing market.

Jeff Fairburn collected the first £50m worth of shares on New Year’s Eve from the record-breaking bonus scheme that has been described as “obscene” and “corporate looting”. He will qualify for another £60m of profits from the scheme this year.

That will no doubt be much more than the total effect of the Sainsburys wages rise and in fact we can go further.

The scheme – believed to be Britain’s most generous-ever bonus payout – will hand more than £500m to those 140 senior staff.

The real problem is that this has mostly been fed to them by the UK taxpayer via this.

More than half the homes sold by York-based Persimmon last year went to help-to-buy recipients, meaning government money helped finance the sales.

Noble Francis has kindly helped us out on the subject.

Apropos of nothing, Persimmon‘s share price from the day before Help to Buy (19 March 2013) was announced till 8 January 2018. A 183% rise.

Whilst equity markets have been having a good run the general move is of course nothing like that.

What about consumer credit?

According to the Bank of England worries from people like me are overblown, From the Bank Underground blog.

Credit growth not being disproportionately driven by subprime borrowers is reassuring. As is the lack of evidence that mortgage lending restrictions are pushing mortgagors towards taking on consumer credit.

So that’s alright then. But now that a reassuring line has been taking ( both for unsecured credit and the author’s careers) there is of course the fear that my analysis may be right so we get.

But vulnerabilities remain. Consumers remain indebted for longer than previously thought. And renters with squeezed finances may be an increasingly important (and vulnerable) driver of growth in consumer credit.

In the end it is a bit like the Japanese word Hai which we translate as yes but in my time there I learnt that it also covers maybe and can slide therefore into no!

Today’s Data


There is a continuation of what is rapidly becoming a good news area for the UK economy.

Manufacturing output increased ( 0.4%) for the seventh consecutive month, for the first time on record;

If we look for more detail we see this.

Manufacturing has shown similar signs of strength with output rising by 1.4% in the three months to November 2017…….Manufacturing output was 3.9% higher in the three months to November 2017 compared with the same three months in 2016, which is the strongest rate of growth since March 2011; on this basis, growth has now been above 3% for four consecutive three-months-on-a-year periods, which is the first time since June 2011.

We know from the various business surveys ( CBI and Markit PMI) that this is expected to continue. The growth is broad-based although regular readers will not be surprised that one area failed to take part.

 The downward contribution came from a decrease of 7.1% in motor vehicles, trailers and semi-trailers; the largest fall since August 2014 when it fell by 7.7%.

This of course provides food for thought for the unsecured credit analysis above via car loans.


This too was upbeat mostly as a function of manufacturing which provided 2.77% of the growth recorded below.

Total production increased by 3.3% in the three months to November 2017, compared with the same three months to November 2016.

There was good news from the past tucked away in this as October’s numbers were revised higher.


For once we had some better news here.

The total UK trade (goods and services) deficit narrowed by £2.1 billion to £6.2 billion in the three months to November 2017; excluding erratic commodities, the total deficit narrowed by £1.2 billion to £6.1 billion.

As ever we have a deficit but maybe we are beginning to see the impact of better manufacturing data and more of this would help/

a £0.9 billion widening of the trade in services surplus due to increases in exports.

Actually the general export position is looking the best it has been for some time.

The UK total trade deficit (goods and services) narrowed by £4.3 billion between the three months to November 2016 and the three months to November 2017; this was due primarily to a 10.6% (£8.4 billion) increase in goods exports, which was higher than the increase in goods imports.

Is that the lower overall level of the UK Pound £ in play? Or to be more specific the reverse J curve ending and the more formal J Curve beginning.


There was a glimmer of good news here.

Construction output rose by 0.4% in November 2017 as growth in private new housing increased by 4.1%,

However that is not yet enough to end the recessionary winds blowing across this sector.

Construction output fell by 2.0% in the three months to November 2017, which is the largest three-month fall since August 2012


The news is good for manufacturing and must be received rather wryly by the former Governor of the Bank of England Baron King of Lothbury. He of course talked often about a rebalancing towards manufacturing but the fall in the Pound £ on his watch (2007/08) did not help much, whereas the post June 2016 fall is doing better. The difference in my opinion is that the world economic situation is much better. Also we may see more of this which hopefully will help wage growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.9% from Quarter 2 (Apr to June) 2017 to Quarter 3 (July to Sept) 2017; this is the largest increase in productivity since Quarter 2 2011.

The manufacturing boom has lifted production and finally seems to be impacting on trade which might have Baron King putting a splash of cognac in his morning coffee! Mind you the current incumbent of that role may have some food for thought also from the trade improvement as Rebecca Harding points out.

Has anyone told the how closely correlated with financial fraud trade in works of art is?

Isn’t Mark Carney a keen art buyer? Anyway I am sure there is nothing to see there and we should move on.

The cloud in the silver lining is construction which is beginning to benefit from some extra house building but has yet to break the recessionary winds blowing. On a personal level it is hard to believe with all the building at Nine Elms so near which must be that elsewhere there must be quite a desert.



What are the economic prospects for Germany?

After looking at the strength of the Euro yesterday it is an interesting counterpoint to look at an economy which would otherwise have a much stronger exchange rate. Whilst the Euro may be in a stronger phase and overall pretty much back to where it began in trade-weighted terms ( 99.26%) it is way lower than where a Deutsche Mark would be. For Germany the Euro has ended up providing quite a competitive advantage as who knows to what level it would have soared as we suspect it would have been as attractive as the Swiss Franc. Rather than an exchange rate of around 1.20 to the US Dollar the equivalent rate would no doubt have been somewhere north of 1.50.

That means that the German economic experience of the credit crunch has seen quite a monetary stimulus if we combine a lower than otherwise exchange rate with the negative interest rate of the ECB ( European Central Bank) and of course the Quantitative Easing purchases of German sovereign bonds. If we look at the latter directly then the purchase of 449 billion Euros of German government bonds must have contributed to the German government being able to borrow more cheaply as we note that the ten-year yield is only 0.46% and that Germany is actually paid to borrow out to the 6 year maturity. This is a factor in Germany running a small but consistent budget surplus in recent times and a national debt which is declining both in absolute terms and in relative terms as at the half-way point of 2017 it had fallen to 66% of annual economic output or GDP. So it may not be too long before it passes the Growth and Stability Pact rules albeit over 20 years late! But let us move on noting a combination of monetary expansionism and fiscal conservatism.

The Euro area

Unlike some of the countries we look at and Greece and Italy come to mind particularly the Euro era has been good for the German economy. It opened in 1999 with GDP of 87.7 ( 2010 = 100)  which rose to a peak of 102.6 at the opening of 2008. Like so many countries there was a sharp fall ( 4.5% in the opening quarter of 2009) but the difference is that the economy then recovered strongly to 113.8 in the third quarter of last year. You can add on a bit for the last quarter of 2017 if you like. But the message here is that Germany has recovered pretty strongly from the effect of the credit crunch. Indeed once you start to allow for the fact that some of the economic output in 2008 was false in the sense that otherwise how did we have a bust? You could argue that it has done as well as it did before and maybe better in absolute terms although of course that depends on where you count from. In relative terms the doubt disappears.

Looking Ahead

Yesterday’s Markit PMI business survey could hardly have been much more bullish.

“2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs. Moving back to the report we see that the German trade surplus seems set to increase further if this is any guide.

Notably, the level of new business received from abroad
rose at the joint-fastest rate in the survey history,
with anecdotal evidence highlighting Asia, the US
and fellow European countries as strong sources of
new orders for German manufacturers.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth. It has also led to a further fall in unemployment which is also welcome.

 Adjusted for seasonal and irregular effects, the number of unemployed stood at 1.57 million. It was down by roughly 14,000 people on the previous month. The adjusted unemployment rate was 3.6% in November 2017.

Much better than the Euro area average and better than the UK and US but not Japan which is the leader of this particular pack.


The next issue is to look at wage growth which as we see so often these days seems to be stuck somewhere around 2% per annum even in countries recording a good economic performance. We have seen plenty of reports of wage growth picking up and maybe you could make a case for it rising from 2% to 2.9% over the past year or so but the catch comes if we look back a quarter as it was 2.9% then!

So real wage growth has been solid for these times in Germany since the opening of 2014 but the truth is that it has been driven by lower inflation rather than any trend to higher wages. In what we consider to be the first world wage growth these days seems to be singing along with Bob Seeger and his Silver Bullet Band.

You’re still the same
Moving game to game
Some things never change
You’re still the same

We therefore find ourselves in another quandary for economics 101 which is that economic improvement no longer seems to be accompanied by any meaningful increase in wage growth. A paradigm shift so far anyway. The official data is only up to the half-way point of last year but according to the Bundesbank “Wage growth remained moderate in the third quarter of 2017” so a good 2017 was accompanied by lower real wage growth as far as we know and this from last week will hardly help.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2017. Compared with November 2017, consumer prices are expected to increase by 0.6%. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that, on an annual average, the inflation rate is expected to stand at 1.8% in 2017.

On this road expansionary monetary policy has a contractionary consequence via its impact on real wages and inflation targets should be lowered. Meanwhile it will be party time at the Bundesbank towers as this is quite close to the perfect level of inflation or just below 2%.


Let us welcome the economic good news from 2017 and the apparent immediate prospects for 2018. We can throw in that the Euro era has turned out to be good for Germany overall as the lower exchange rate cushioned the effect of the credit crunch and helped it continue this.

The foreign trade balance showed a surplus of 18.9 billion euros in October 2017. In October 2016, the surplus amounted to 18.8 billion euros.

For everyone else there are two problems here. Whilst there are gains from Germany being efficient and producing products which are in worldwide demand a persistent surplus of this kind does drain demand from other countries especially if helped by an exchange rate depreciation of the sort provided by Euro area membership. It was one of the imbalances which fed into the credit crunch and which the establishment told us needed dealing with urgently. So urgent in fact that nothing has happened.

So it looks like Germany will have a good opening to 2017 and first half to the year. But that is as far as we can reasonably see these days and is an answer to those on social media who asked why I did not join the annual forecasts published ( for the UK as it happens) yesterday. If there is to be a cloud in the silver lining then it seems set to come from this.

In the third quarter of 2017, the perceptible expansion
in the broad monetary aggregate M3
continued; the annual growth rate at the end
of the quarter came to 5.1%, remaining at the
level observed over the last two and a half
years ( Bundesbank )

The old rules of thumb may not apply but where is the inflation suggested? Also there is this.

Consumer credit likewise continued to expand
substantially during the period under review,
with its annual growth rate climbing to 6.7%
by the end of September

Those are Euro area figures and the consumer credit growth seems light weight compared to the UK but that is perhaps only because we are an extreme. Moving onto German data there is some specific which seems rather Anglicised.

Once again, loans for house purchase were a
decisive driver of growth in lending to households.
However, their quarterly net increase has
already been relatively constant for several
quarters, meaning that at 3.9%, their annual
growth rate remained unchanged on the year.

The old theories of overheating risks cannot be fully applied because so far at least the wages element has disappeared but that does not mean that some of the other parts have done so. After all procyclical monetary policy usually ends in tears for someone.

The future

With the caveats expressed above this does make one stop and think.


UK productivity rises as real wages and employment fall

After yesterday’s inflation paradox where we in the UK were told it was rising ( CPI), falling ( RPI) and also staying the same ( CPIH) there has been a couple of bits of good news. First not only for inflation prospects but the prospect of having reliable heating this winter and for the latter Italy will be even more grateful after having to declare a state of emergency. From Reuters.

All main arteries that supply neighbouring countries from Austria’s main gas pipeline hub were back online before midnight after a deadly explosion there shut it down on Tuesday, the co-head of Gas Connect Austria said on ORF Radio on Wednesday.

Also looking ahead UK consumers can expect lower water bills as the regulator has announced this already today.

Our initial view of the cost of capital – based on market evidence – is 3.4% (on a real CPIH basis). In RPI terms it is 2.4%, which is a reduction of 1.3% from the 2014 price review. The effect of this change alone should lower bills of an average water and wastewater customer by about £15 to £25.

It is hard not to have a wry smile in that they are in line with the UK establishment by using CPIH but also reference RPI! Oh and whilst the news is welcome we should not ignore the fact that Ofwat has looked the other way as UK water bills have risen year after year.

Real Wages

Whilst the news above is welcome sadly inflation has been higher than wage growth in the credit crunch era as shown by the chart below.

The one area where a little cheer is provided is clothing. They do not compare with house prices so let me help out. Yesterday’s data release is very unwieldy but if we pick the middle of 2007 as June the house price index was 97.7 and as of October this year it was 117.4. Plenty of food for thought there as against nominal wages may be not so bad but there is a catch which is that we are comparing to the previous peak. Of course the picture in terms of real wages is worse as they have fallen.

As to the more recent trend then housing costs are depressing real wages still. The establishment try to hide this as we see here.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.9% in Quarter 3 (July to Sept) 2017 compared with the corresponding quarter of the previous year.

In their fantasy world ( remember they use Imputed Rents which are never paid) you might think that housing costs are rising more slowly than other inflation. But if you switch to actual and real prices of which house prices are one then you get this.

OOH according to the net acquisitions approach have grown by 3.9% in Quarter 3 2017 compared with the corresponding quarter of the previous year.

As you can see the impact of housing costs on the ordinary person’s budget over the past year looks very different if you use real numbers as opposed to made up ones from the fake news registry. On this road the UK real wages situation looks different as a rough calculation shows that CPIH would have been 3.1% just like CPI in October.

The end of “overtime”?

Just for clarity this in the UK involves working beyond your contracted hours and the state of play according to the Resolution Foundation is this.

The typical premium has gone from over 25 per cent in the 1990s to under 15 per cent today. Only one in five workers now get traditional time and a half rates. Most women get absolutely no pay premium at all, possibly because they are more likely to work in sectors without unions.

We can see that as time has passed the reduction in the premium for overtime has put downwards pressure on pay measures. The scale of the issue is shown here.

This is a big deal because a lot of us do paid overtime – 2.6 million people do over 1 billion hours of it a year (and that’s before we even start on the 1.5bn hours of unpaid overtime). Men and those doing manufacturing or transport jobs are most likely to be doing some, but amongst those that do overtime it is a bigger deal financially for part timers and women.

So it has a solid impact which if we look at the trends has negative. The problem is what to do about it? Invariably the Resolution Foundation aligns itself with the central planners but sadly I doubt we can simply wish the problem away by legislation. After all we have an employment success story and some of that seems likely to be due to lower wages at the margin. You could argue employers are being more efficient in allocating hours and work which is a good thing. However it is an alloyed good thing as this time period is one where we have seen the growth of zero hours contracts which presumably have taken up some of the slack. Some types of work ( most of my career for example) are defined around performing tasks not how long it takes to do them so perhaps this definition of work has expanded. More research is welcome though especially into why women seem much less likely to benefit from overtime.

Today’s data

There was slightly better news on wages driven mostly by higher bonuses.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.3% excluding bonuses, compared with a year earlier.

Still a fair way below the hopes and expectations of the Bank of England and this is what it does to real wages.

In the three months to October 2017, real earnings decreased by 0.2% (including bonuses) and by 0.4% (excluding bonuses) compared with a year earlier.

That is using the CPIH measure so if you want it with house prices add around 0.3% to the decline.

Adding to the welcome news was another fall in unemployment.

There were 1.43 million unemployed people (people not in work but seeking and available to work), 26,000 fewer than for May to July 2017 and 182,000 fewer than for a year earlier.

However for perhaps the first time there is a hint of a change ( 2 months data now) in what up until now has been an employment success story.

The UK employment rate fell by 0.2 percentage points to 75.1% in the three months to October 2017 compared with the previous quarter.The level of employment fell by 50,000 for men and by 6,000 for women.


We see a complex picture in today’s data. Wage growth is up on a three monthly basis but this is not because October was an especially good month ( 2.3%) it was that July which dropped out of the data was a particularly weak one (1.7%). Ironically the weaker employment data may offer a little hope as rising output with lower employment will be good for the productivity data and this is confirmed by the hours worked numbers.

Between May to July 2017 and August to October 2017, total hours worked per week decreased by 5.9 million to 1.03 billion.

However on the other side of the coin the employment data is simultaneously troubling as the success saga has at best reached a soggy patch. Mostly it seems that it was the self-employed who saw a change.

 The employment level decreased by 50,000 for men and by 6,000 for women………..The total number of self-employed decreased by 41,000 in the three months to October 2017 compared with the three previous months.