Chief Economist’s Weekly Briefing – All work and no pay

people-2568530_1920.jpgWith unemployment at a 40-year low, wages should be rising at roughly twice their current pace. That they are not reflects rising supply, a shift to self-employment, less job switching than usual and, above all, stagnant productivity. It can also stump central banks used to the conventional relationship between work and pay.

Jobs for all. The UK’s job creation machine continues to run at full tilt, with employment up nearly 380,000 in the year to July. At 75.3%, the proportion of people in work set another record. The unemployment rate fell to 4.3%, its lowest level since 1975. Important but often unremarked is the decline in the numbers neither working nor actively seeking work. At 21.2%, the inactivity rate has never been lower on records stretching back to 1971. People moving out of inactivity added nearly 100,000 to labour supply in the last year.

Mixed messages. With unemployment at 5.3% and private sector employment at a record high, Northern Ireland’s labour market is in rude health? Vicky Pollard might respond “”. Unlike in the UK, economic inactivity has been on the rise in NI in 2017. While NI and the UK share the same employment growth rates (+1.4% y/y in Q2) the composition is different. UK’s employment growth is dominated by full-time positions whereas part-timers are driving the job gains in NI. Full-time jobs growth in NI slowed to 0.5% y/y in Q2-17, one-quarter of the UK’s growth rate.  Meanwhile part-time employment expanded by 3% y/y. Consumer sensitive sectors have been generating a lot of jobs growth for NI in recent years. But the consumer spending squeeze could see this lead to a jobs squeeze.

Can we have more? Despite what by any standards is a tight job market wage pressures remain subdued. That’s good news for the inflation outlook – nothing to see here – but bad news for consumers, whose spending power is under pressure. UK weekly pay was up around 2% year-on-year. With consumer price inflation well north of that number our spending power and material living standards continued to erode: real pay was down 0.4% on a year earlier.

Sticky. UK consumer price inflation ticked up to 2.9% y/y in August, a whisker away from the rate at which the Governor of the Bank of England would have to explain why prices were rising well above the inflation target. But there are no real signs that the UK has a made-at-home inflation problem. The continued rise in producers’ costs is down mainly to sterling depreciation and rising energy costs. Growth in domestic costs, like wages, remains modest. In time, inflation should return towards the 2% target but will it get there fast enough for the Bank of England’s liking without some interest rate help.

Smoke Free Zone. Northern Ireland manufacturing output plunged by 4.7% q/q in Q2.  This represented the biggest quarterly fall in output since Q4 2008. Back then global trade fell at its fastest rate since WW II. So what’s happened? The Food, Drink & Tobacco (FDT) sector was largely responsible for this decline. Ballymena’s JTI tobacco plant is NI’s sole producer of cigarettes. Its wind down and imminent closure pushed output within the FDT sector down by 20% q/q and by almost 25% y/y. Encouragingly there are some manufacturing bright spots. Engineering firms posted their third successive quarterly rise in output. Meanwhile output within the Chemicals and Pharmaceutical Products category hit a record high.

In need of a service. Service sector activity outside of retail was relatively buoyant in Q2 according to Ulster Bank’s PMI.  But the official index of services paints a less positive picture. Services output fell by 1% q/q in Q2 – its steepest quarterly fall in five years. Though output is still up marginally (+0.5% y/y).  All broad sectors posted declines with Business, Services and Finance the steepest at 3.1% q/q. This hefty fall follows an unusually large gain the previous quarter. Elsewhere, the Wholesale, Retail, Repair, Accommodation and Food Service category (retail, tourism and hospitality) reported its first quarterly decline (-0.7% q/q) in 11 quarters. Perhaps a sign that the domestic cost of living squeeze is starting to bite?

The boyfriend’s back. Mark Carney brought forward guidance to the Bank of England in 2013. Since then it has had a chequered history. At first, a 7% unemployment threshold was used as a milestone on the path to rate hikes. When unemployment plummeted below 7% in early 2014, rates stood still. That summer Carney cautioned that rates may rise sooner than expected. Still they stood. The Bank was likened to an “unreliable boyfriend” at a Treasury Select Committee. Nonetheless, the MPC seems undeterred. It judges that rates will rise if underlying inflationary pressures continue to build “in the coming months”. All eyes on wage growth then.

An ill wind. Between the tail ends of 2015 and 2016, a period, lest we forget, containing the EU referendum, the price of sterling fell by 18%. The resulting rise in import costs hurt import-heavy producers. Yet it offered a boon for firms that export much and import little. They typically have three choices: raise prices, increase sales or a bit of both. Most chose the latter. Between June 2016 and June 2017, export turnover rose by 9.7% on average and export prices rose by 8.6%. Life’s often unfair mind, as this group tends to be the higher value manufacturers, who were already growing quickly.

The great rotation. House price growth stayed stable at 5% for the UK as a whole in July but the tectonic plates of the housing market are shifting underneath the surface. London started the year with prices rising around 7% but six months later growth has cooled to less than 3%. It’s taken the heat out of the South East, too, where price rises are now also slower than the national average. Moving in the other direction are prices in the Midlands and there are signs of some faster price growth in northern regions too.

League of Regions. Two Midlands clubs are top of the PMI league. The West Midlands leads the regional growth table for business activity (58.6) and job creation (56.9), according to August’s IHS Markit PMIs. Yorkshire & Humber sneaks into second place but the East Midlands flies in third. Conversely, London and the South East have been without PMI silverware for some time and the home nations of Wales and Scotland reported slower rates of growth in August. They also remain the least optimistic about the year ahead. Meanwhile the North East remains in the relegation zone with a reading less than 50.

Uh-oh… Confidence in US Q3 GDP growth stumbled this week. First off, inflation’s rise to 1.9% was only due to higher gas prices, a consequence of hurricane Harvey disrupting Texan supply, rather than the strength of economic growth. Second, retail sales fell in August. The contraction was slight, just 0.2% down on July. But it’s a world away from the rise enjoyed last year. Third, consumers feel a bit less confident about the future than usual. Individually each of these moves mean little. Collectively they’re large enough to create doubt that the Fed will automatically raise rates this week.

Leave a Reply