Chief Economist’s Weekly Briefing – We’ve rarely had it so good

English housing

It’s perhaps tempting fate to say that we’ve never had it so good when it comes to the performance of the job market but things certainly haven’t been so strong for decades.

Strong. Britain’s job market continued to go from strength to strength in the three months to February. The number of people in work was up more than 300,000 on a year earlier. At 74.6%, the employment rate equalled the highest seen since records began in 1971. Unemployment fell to 4.7%, its lowest level since 1975. The number of job vacancies reached 767,000 in February, another record in a series that dates back to 2001.

Not so hot. Wages are another story, however. Average UK weekly earnings, excluding bonuses, increased by 1.9%y/y in February. The rate for the three months to February was 2.2%. With inflation running at 2.3% in February that means the spending power of wages is now falling. The dominant economic issue in the UK over the next few months will be how people cope with this squeeze. Do they reach for their credit cards or run down their savings to maintain spending? Or will they tighten their belts a little? The option we choose will have important consequences this year and beyond.

Silver lining has a cloud. At first glance NI’s labour market appears to be strengthening too. Unemployment fell to 5.2% in the three months to February – its lowest level in over 8-years. Youth unemployment (18-24yrs) also dipped below 13% for the first time in 7 years and is almost half the rate that prevailed at Q3 2013’s peak. Cause for a celebration? Not quite. Employment growth is now falling with relatively steep year-on-year declines for employees and full-timers. These falls are more than offsetting gains for the self-employed and part-timers. Meanwhile the number of economically inactive is accelerating at its fastest rate since late-2009. So, beneath the positive unemployment headlines, local labour market conditions are softening rather than strengthening.

Bang! The local economy ended 2016 with a bang. At least that’s according to the official Northern Ireland Economic Composite Index (NICEI). Growth rebounded from Q3’s post-EU referendum dip to record growth of 2.1% q/q in the final quarter. Not bad. In fact this represented the fastest rate of growth in 12 years. Both the public and private sectors recorded growth with construction posting the fastest rate of expansion of all sectors. Belfast’s crane cluttered skyline is clearly evident in the spreadsheets too. The private sector expanded by 2.6% q/q with output up 4.1% y/y ( a decade high).  Private sector output is now at an 8-year high.

Perspective. Despite this rapid rate of growth, private sector output in Q4 2016 was still some 4.5% below the level Q2 2007’s peak. The local private sector has now recouped two-thirds of the decline in output that occurred in the six-year slump to Q2 2013. Overall, even with the robust rates of expansion in the final quarter, 2016’s growth rate was pedestrian at 1.6% y/y – a slight improvement on the previous year. This conceals contrasting fortunes for both the public (-2.2% y/y) and private sectors (+2.8%). If the private sector maintained its growth rate a return to the Q2 2007 peak would occur by Q3 2018. At 11 years that is even longer than a lost decade.

Sluggish. House price growth is usually a good barometer of the state of the UK property market and at the moment the signs are reasonably clear. Both Halifax and Nationwide reported a weakening pace of growth in March, down to around 3.5%. The official ONS data show that it is weakness in the London market which is driving the fall. Prices in the capital haven’t budged since the summer. But surveyors have an even more negative impression: most think London property values are falling and complain about a severe lack of new properties to sell across the UK. Low volumes make for a jittery market, so a springtime surge in activity would be welcomed by both buyers and sellers.

Low base. NI bucked the UK trend in March when it came to housing market activity, according to the RICS and Ulster Bank survey. New buyer enquiries increased at the strongest rate in six months, whilst they were flat in the UK as a whole. Prices and sales are also rising relatively robustly, at odds with the UK picture. But we need to remember that NI housing market activity has been coming off a low base. Challenges also remain on the supply side, with instructions to sell failing to keep pace with enquiries to buy. This will be a drag on activity in the months ahead.

Lucrative. Cost pressures on many firms are particularly acute at the moment. Weaker sterling has pushed up the price of imports and energy. Global food prices are on the rise. And closer to home the living wage is rising by an inflation beating 4.2% this month. How will business cope? Pretty well according to the profitability numbers from the Office for National Statistics. They showed that UK firms made an average rate of return of 12.3% in 2016. The last time profitability was materially higher than that was back in 1998 when GDP growth was a staggering 3.5%. Slow economic growth needn’t be unprofitable, it seems.

Pausing? The rate of UK inflation was unchanged during March, registering a figure of 2.3%. Why did the recent trend of rising inflation come to a halt? The shift in the timing of Easter compared to last year meant movements in air fares weighed down on the headline rate. Pushing in the other direction were food prices, which rose 1.2%y/y. A 17%y/y rise in fuel prices will also be exerting a little squeeze on household budgets. The goods category as a whole rose 2.5%y/y. It’s been four years since it’s been so high. Even televisions are up in price compared to last year. And that never happens!

Not likely. The prices charged by UK producers rose by 3.6%y/y. Prices were up 0.4% on the month, in line with the average over the past half year.And although the rate of inflation producers face (their input costs) fell for the second month in a row, at 17.9% it’s a steep rise compared to last year. Sterling’s modest rise in recent months, which is tempering input price inflation a little, is no match for the sharp fall in sterling during 2016. All in all it’s safe to say the pause in consumer price inflation doesn’t represent a topping out. There are more pressures in the price pipeline.

On target. At 2.4%y/y US inflation was a little higher than the Fed’s preferred 2% in March. However, the rate was boosted by past rises in energy prices. Core inflation, which strips out the effects of volatile items like energy, was right on target at 2.0%. The Fed has been raising rates in recent months and looks set to continue doing so. But there’s nothing in the inflation numbers that would give even the toughest inflation hawk any reason to move more quickly than planned, meaning two or three more rises this year seem likely.

Over here. The ONS has shone a light on the role of non-nationals in the UK job market. One person in nine in work is a non-national. Their shares of employment are greatest in transport and communication; wholesale, retail and hospitality; and manufacturing. They get paid less, on average, largely because they are more likely than UK nationals to be in low skilled jobs. Non-nationals are more likely, too, to be over-qualified for what they do. Perhaps the most important insight is that non-nationals are a varied bunch. People from the longer-standing EU members states are likelier than nationals to be in high skilled jobs and their average pay is higher than for nationals.

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