Chief Economist’s Weekly Brief – No time to rest

Unemployment may be low and job growth robust, but it’s not time to rest. The UK’s productivity performance is screaming for more investment. So it’s encouraging that more spending on infrastructure and R&D look to be key planks of the government’s ‘industrial strategy’. We await Wednesday’s Autumn Statement for more detail.

Down another notch. UK unemployment edged down to 4.8% (NI = 5.6%) in the three months to September. That’s the lowest rate for over 10 years. Jobs aren’t being created at quite the break-neck speed that they once were, but 49,000 extra people in work is nothing to complain about. The jobs growth was more broadly spread as well. Regions such as the North East and the West Midlands are seeing employment rise particularly quickly. Yet another piece of strong post-referendum data then.

Two Directions. Northern Ireland’s labour market headlines make for pleasant reading.  Unemployment continues to fall and the employment rate has never been higher. But before we get carried away check out the widening gender differential. Male unemployment has risen significantly from 6.2% in Q4 2015 to 7.3% for Q3 2016. It is now the highest of all UK regions by quite a margin. Conversely, female unemployment has plunged by two percentage points to 3.7% in just two quarters. No other UK region has a lower rate than that, nor has the degree of divergence between genders as Northern Ireland. Perhaps we need to rebalance the unemployment rate?

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Unmoved. Falling unemployment and endless job creation used to mean higher wage growth. Not at the moment. UK pay was 2.3% higher than last year, exactly the same rate as last month. Contrast this with the last time unemployment was this low, 2005. Back then pay was rising at a much more appealing 4.5%. With a rise in inflation imminent many people will be hoping for a more generous pay deal in the New Year. They’ll do very well to even get close to that 2005 average though.

Must do better. The amount we produce and earn in each hour we work – our productivity – grew by 0.2% in Q3, says the ONS, down from 0.6% in Q2. Productivity growth matters hugely to our economic wellbeing; in fact, little matters more. The faster productivity grows, the faster our pay can rise. The slower it grows … In recent years, UK productivity growth has struggled to get out of first gear. The solution? More investment, from businesses and governments. Will Wednesday’s Autumn Statement lead the way.

Pause. Inflation unexpectedly slowed in October, to 0.9%y/y, from 1% in September. A sharper fall in food prices, down 0.5% on the month, was the main cause. Conversely, transport costs, mainly fuel prices, and restaurants and hotels pushed prices up. Different people spend money differently, of course. Poorer and older folk tend to spend more of their income on food and less on transport, so inflation remains low for them. Younger, richer household spend more on eating out and driving, so their inflation will be higher. What unites us is that this is a moment of stillness before prices start rising for us all.

Ouch. Pity the importer. UK input prices rose by 12.2% in the year to October (and up a record 4.6% in a month).Output prices meanwhile rose by a more modest 2.1%y/y. The gap of 10 percentage points is some margin squeeze and looks unsustainable. In fact it is. Profit margins for manufactures average at around 20% (albeit with a hefty variability). So, even those who want to hold prices to take market share will struggle to do so. That includes exporters. Two things are pretty clear. First, as they work out how to share the pain businesses are in for a period of negotiations with their suppliers and customers. Second, the end consumer is not immune from the result.

Click & collect. UK consumers’ enthusiasm to part with their cash shows no sign of abating. The quantity of retail sales (excluding motor fuel) in October rocketed by 7.6% y/y, the largest rise since April 2002. Meanwhile the average weekly spend online was £1bn, up 27% y/y. For every £100 of retail spending £15 is now spent online. Visitors to the UK have taken advantage of the weak pound by snapping up luxury items, with watch & jewellery sales up one-fifth on last year. But with prices headed north next year, the rush to shop could well be the storm before the calm.

Less negative equity. There is concern that inflation will catch-up with and overtake earnings growth next year. In turn, this will squeeze household incomes in real terms. While consumer price inflation is set to accelerate, local house price inflation is beginning to slow, albeit it continues to advance at a faster clip than both earnings and consumer prices. NI’s residential property price index saw the annual rate of growth ease from 7.6% in Q2 2016 to 5.4% in Q3. Since the property market bottomed in Q1 2013, residential prices have rebounded by more than a quarter (+27%) and are now approaching a 6-year high. Good news for those who found themselves in negative equity but not so good for those who are struggling to get a foot on the property ladder.

Shake-up. Markets have had plenty to say since Donald Trump’s victory. As they see it, a programme of infrastructure investment means more growth. In an economy closing in on full employment that means higher inflation and interest rates. Odds on the Fed raising rates next month have risen to almost 100% (it was 65% a month ago). There has been a knock-on to the UK, too. Markets now expect Bank Rate to reach at 1% in four years, up from 0.5% two months ago. But a sense of perspective is important: UK ten-year yields have only returned to the level seen in May. And Bank Rate of 1% four years hence, if it happens, represents a very modest tightening.

Enough on our plate. China’s growth stabilisation extended into October with industrial production rising 6.1%y/y and fixed investment rising 8.3%y/y (both almost identical to September’s figures). Retail sales growth slowed but remained firm at 10%y/y. There are two clouds on the horizon. First, slower property market activity as local governments tackle frothy price rises. The second one is less certain but even more concerning – the possibility of higher tariffs on Chinese goods by the new US administration. China has perhaps been the primary driver and beneficiary of globalisation in recent decades. Any moves to reverse it will hurt. And China has enough of its own problems to deal with.

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