Chief Economist’s Weekly Briefing – Calling into question

It’s a familiar narrative for the UK. Strong job growth but signs of a weakening consumer on the back of paltry income growth squeezed by higher inflation. Yet markets are convinced the Bank of England is raising rates on 2 November. The latest data suggests the decision will likely be more finely balanced for policy-makers.         

Unwelcome. The rate of UK inflation hit 3% in September, up from 2.9% in August and three times the rate in September 2016. It was also the highest reading in over five years. Transport costs made a big contribution with fuel prices 6% higher than this time last year. But food prices were up, too, rising 3% compared to last year. Falling food prices seem like a distant memory. At least inflation should be close to peaking, albeit the retreat is expected to be gradual and modest –  even by the end of next year it’s still expected to be above 2%. So not much consolation to squeezed purses and wallets.

Firm. You can’t argue with the facts. Between March to May and June to  August, UK employment rose by 94,000, unemployment fell by 52,000 and there were 17,000 fewer people not looking for work at all. It seems the UK’s labour market is an impregnable fortress, unassailable by external events. Or can you? Part-time self employment made a major contribution, rising by 70,000 over the period. And best not mention pay, up by 2.2% across the economy, well under inflation. The jobs-market’s walls remain firm, but not undented.

Defence. Second fiddle to the unemployment rate, despite being economically (if not politically) more important, is the employment rate. It’s currently 75.1%, meaning 3/4 of the population aged 16-64 is in work, near a record high. When productivity’s low, like now, it’s the last line of defence for maintaining income growth (see above).  But there’s wide regional variation. Lowest is Northern Ireland, at 68.4%, close to the EZ average of 66.3%. The South East comes top, at 79.2%. London wins the most improved region this year, up 1.7ppts to 74.9%.

Turning a corner.  Northern Ireland’s labour market appears to have turned a corner. The unemployment rate has hit its lowest level in almost nine years. Youth unemployment is down markedly too. All good stuff? Or is it? On closer inspection our employment and inactivity rates are diverging with the UK. The former has fallen in each of the last 4 quarters to 68.4% – down from its record high (70%) a year ago. Economic inactivity is rising with the latest three-month period witnessing the largest annual increase since the depths of the recession back in 2009. Last year’s record low in economic inactivity (25.8%) is now a fading memory. Twelve months on and the corresponding rate is 28.1% and rising.

Flattering to deceive? The enduring puzzle of falling unemployment but stubbornly low wage growth. What to make of it? Could there be hidden “slack” in the UK labour market? Some metrics suggest so. The proportion of employees working full-time remains below its pre-crisis level, but that’s less surprising given growth in older and female workers (groups more likely to work part-time). Self employment has also been on the rise, albeit the continuation of a trend that started before the recession and has been accelerated by technology. Still, a higher share of part-time workers want a full time job today than used to be the case – under-employment, in other words. But on its own isn’t enough to explain weak wage growth.

Break for the border. Northern Ireland’s tourism industry has been one of the main beneficiaries from sterling’s post-EU referendum depreciation. There has been a notable surge in visitors from the Republic of Ireland. The number of trips taken from RoI visitors has increased by 23% y/y for the first six months of 2017 and by one third over the last twelve months. Visitors from outside the UK and RoI have posted double-digit growth too. Alongside more visitors has been increased expenditure. Visitors from the RoI spent 75% more in H1 2017 than they did a year ago. Expenditure by those coming from outside the UK & RoI also recorded a healthy rise of 45% y/y in H1 2017. 2017 looks set to be a bumper year for the sector with NI Airbnb’s fastest growing UK visitor destination.

Softly, softly. UK shoppers are cutting back, but they’re taking it slowly. Prices have risen faster than wages over the last year, denting spending power. True, the phenomenal rate of job growth means there are more households with extra sources of income, but the squeeze is still hitting the high street. So much so that retail sales grew by just 1.5% in the year to Q3, in volume terms.  Add on price increases and households had to spend 4.7% extra to get those goods and services, which itself is probably unsustainably high. All this adds up to an inauspicious start to the festive shopping season.

Best in a decade. Halfway through the current financial year and the UK’s public sector borrowing ‘totaliser’ has hit £32.5bn. It’s the smallest deficit in a decade and £2.5bn below the corresponding figure a year ago. Stronger receipts from income tax, VAT and stamp duty property tax provided a boost. Indeed, September was the third successive month of borrowing being below analyst expectations. Encouraging news for the Chancellor ahead of next month’s Budget. The bad news is the the OBR is to slash its productivity forecasts (again), hampering the economy’s ability to generate revenues.

Hints? China’s economy grew 6.8%y/y in Q3. Putting aside the usual scepticism of China’s GDP figure it’s fair to say that growth looks robust, driven by infrastructure spend, exports and consumer spending. But debt growth continues apace. These days, with the corporate sector encumbered by a hulking debt load, consumers are doing a bit more of the leveraging up. Another concern is that the real estate sector, which accounts for as much 20% of the economy, may be softening. Housing floor space sold fell in September for the first time since early 2015. Hints of a China slowdown in 2018?

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