Chief Economist’s Weekly Briefing – Peaking?

Last week’s data suggests inflation’s recent run-up could very well be peaking. That would be welcome. The less good news was a rare decline in the number of people in work. Here’s hoping that’s just a blip.

Never. The UK job market remains in good shape with employment and unemployment close to record highs and lows, respectively. However, the number of people in work fell by 14,000 in the three months to September, a very small drop but only the fourth q/q decline since 2013. Among people aged under-25, employment was down by nearly 100,000 while the number of people neither in work nor looking for a job rose by 150,000. Never put too much weight on one month’s data, they say, but are these signs that the job market might be turning?

Inactive. N.Ireland’s unemployment rate is close to a 9-½ year low. The 4.0% Q3 figure fell below the UK rate for the first time since 2013. Unfortunately there is a catch. Economic inactivity has performed a handbrake turn since last year’s record low, rising by its fastest rate of growth since the global recession struck in Q2 2009. Unemployment is therefore falling for the wrong reason. Employment is falling rather than rising too. Following a quarterly rise in Q2, the number of people working fell in Q3 with the year-on-year decline accelerating to 2.1%. Policy makers would happily see the unemployment rate take a turn for the worse if the economic inactivity and employment rates took a turn for the better.

Under pressure. On the face of it there was good news for UK workers as total pay grew by 2.6%y/y in September. Dig deeper, however, and their spending power is still being squeezed. Regular pay, which excludes bonuses, was up 2.2%. The boost to total pay was down to an apparently sharp rise in bonuses in finance and business services. Price inflation continues to run ahead of pay growth and ONS reckons that real wages fell by 0.1%y/y in September.

Pens down. Inflation saved the Bank of England’s blushes in October by staying at 3%. Any higher and the Governor Mark Carney would have been obliged to write to the Chancellor explaining why inflation was more than 1% away from the 2% target and what the MPC was going to do about it. But even as food prices climbed there was some relief from lower fuel prices, leaving the headline rate unchanged on September. Good news therefore for households, it looks like we might be passed the worst of the painful gap between inflation and wage growth.

Recovery builds.  Residential property price inflation in Northern Ireland continues to outpace CPI. House prices rose by 3% in Q3 with the annual rate of increase running at twice that level. NI residential prices have now chalked up four successive years of growth. Good news for those in negative equity. But the headline price rises conceal more dramatic gains for new builds. The latter recorded an 18.5% y/y rise in Q3 which was over four times the gain for existing dwellings. The cumulative rise in new dwelling prices now stands at 55% in just 4-years. More than double the gain for the second-hand market. Despite these rises new dwelling and existing prices remain 25% and 44% respectively below their 2007 highs.

Sensible shoppers. October’s retail sales were down on last year in real terms as the quantity UK shoppers bought slipped by 0.3%. That fall is the most prominent evidence of the squeeze that higher inflation and weak wage growth is exerting on households, and their response to it. But it also highlights just how big a spending spree consumers went on late last year. By contrast recent growth has been much more modest, with volumes rising by 0.9% over the last 3 months. Not a crisis before Christmas then, but nothing like the pace of growth we saw last year.

Welcome. The average UK worker is producing just 1% more today in each hour worked than she or he did nearly 10 years ago. It’s this failure to boost productivity that lies behind weak wage growth. But the three months to September saw a welcome pick-up in productivity according to the initial estimate. The amount produced per hour rose by 0.9%, as fast as at any time since the recession. The reasons? It wasn’t so much that total output grew strongly – it was up by 0.4%. Rather, we worked 0.6% fewer hours.

See the sights. Overseas residents made 3.9 million visits to the UK in August 2017, up 5% on 2016. For the summer months as a whole (June – August) there was a 6% rise in the number of visits to 11.5 million. Spending is also up with overseas residents spending £2.8bn during August, 3% more than the previous year. The fall in sterling in recent years is likely a key driver. But strong growth and falling unemployment in our near-abroad will certainly be helping, too. 

You know things are good when… Italy’s economy is growing at almost 2%y/y. The latest estimate of Q3 GDP growth across the Eurozone revealed plenty of robust economic performances. Spain’s economy is growing at over 3%y/y, Germany almost 3% and France over 2%. And it looks like there’s room for plenty more. With inflation low and the European Central Bank indicating that it will keep monetary conditions looser for longer this upturn has some legs. One ECB policy-maker even remarked that the economy is in its best shape since the euro’s inception in 1999. High praise.

Ebbing? China’s October data pointed to a little loss of momentum with growth in retail sales, industrial output, investment and property construction all slowing. Infrastructure investment is still very strong, rising 19.6%y/y, underlining how stimulus is still supporting growth. Credit growth also retreated a little, possibly on the back of the central bank having pushed market interest rates higher to try and cool credit demand.

Intervention. Last month’s twice-a-decade government Party Congress in China signalled a shift to emphasising the quality of economic growth rather than growth at all costs. To that end the government has ordered the closure of underused and outdated steel mills to cut capacity and clean up the environment. But how much of an economic slowdown is the government willing to accept in the pursuit of reform? The past decade has shown that its tolerance is low.

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