Chief Economist’s Weekly Brief – Let down


The big let down of the post-crisis recovery has been the failure of wage growth to ignite in the face of an ever-tightening labour market. Will 2018 finally be the year it changes?  Prolonging the recovery might depend on it.

Service charge included.  The UK economy’s largest sector is losing momentum as it approaches year-end. The service sector PMI slipped from 55.6 to 53.8, which is below the average for 2017 and the long-term average (55.1) as activity levels and new orders softened. Job creation continues but recruitment difficulties are adding to cost pressures with a sharp rise in input cost inflation last month. Firms are passing through these additional costs (food, fuel and wages) to customers. It’s not the first time this survey has pointed to impending wage pressures. Yet the hard data have not backed it up. Could this finally be the moment when the UK workforce gets a big pay rise? That would be worth a toast at Christmas.

Count on it. After a slightly softer summer (although not as soft as originally thought), the good run for UK exports continued. Inspired by decent global growth and sterling’s fall export volumes rose 2.3% in the three months to October 2017 from the prior three months and are up 10% compared with last year. The slow-burning story in the trade statistics is the UK’s growing surplus in services. This reached almost £28bn in the three months to October, up 15% on the year. “The UK doesn’t make anything anymore” goes a common refrain. Quite the contrary, it’s just a bit less tangible.

Broad-based. But even the tangible stuff is on the rise, too. UK manufacturing output rose 1.2% in the three months to October from the previous three and up almost 4% compared with the same period last year. It’s been a slow grind but the sector is now less than 1% below its pre-crisis peak. The gains in recent months have been broad-based with transport equipment (motor vehicles), machinery, chemicals and metal products all on the up.

Still strong. Business confidence in the US service sector slipped a couple of points last month but at 57.4 is still seriously strong. Businesses weren’t quieter (output growth is still exceptionally high), but because new orders for work haven’t quite kept up with that blistering pace it means pipelines aren’t as full. That won’t trouble new Fed chair Jay Powell as he takes over the hot seat from Janet Yellen. He is expected to continue her strategy of gradual rate rises. He inherits an economy with a lot more momentum behind it than when Yellen took over in 2014 and this particular measure was pointing to growth at roughly half its current pace.

Soft. A debate this year (well, amongst economists anyway) has been whether the tight US labour market would ignite wage growth. Judging by the latest data it looks set to rumble on into 2018. The US economy added a healthy 228k jobs during November with unemployment holding at 4.1% – its lowest rate since the early 2000s. Although wage growth accelerated from 2.3% to 2.5% it’s nothing to write home about and lower than this time last year. It’s unlikely to deter the Fed with a rate rise this week pretty much a foregone conclusion. But if modest wage growth continues it’s bound to act as a brake on monetary tightening.

Onwards and upwards. The Eurozone’s economy has really found its stride this year and seems determined not to fade during Q4. The combined services and manufacturing PMI hit a very healthy 57.5 in November, up from 56 in October. And the good news is widespread. Yes Germany is doing well, as you’d expect, but Spain and Italy are also churning out good numbers (55.2 and 56.0, respectively). The stand out result definitely belongs to France though. Its 60.3 is a six year high and if sustained should be enough finally to make inroads to its stubbornly high unemployment rate of 9.4%.

Be aware in 2018. It’s been years since anyone described it as a Goldilocks environment but that is the Bank for International Settlements’ characterisation of the world economy: not too hot, not too cold, just right. The main growth engines are firing but not racing. Inflation is subdued. Market volatility is low. Asset prices are rising. Central banks have started withdrawing stimulus. No worries, then? Not quite. BIS is concerned that years of ultra-loose monetary policy have inflated asset prices beyond reasonable values and that as interest rates rise a correction could be on the cards.

It’s an ill wind. How long we live has been rising for over a century. Recently, however, the pace of improvement in life expectancy has slowed. Just why isn’t entirely clear. Perhaps we’ve reaped the easy gains from campaigns against cancer and heart disease. Maybe it’s a blip and the old trend will return. Whether the slowdown persists has economic consequences. If we don’t live quite as long previously anticipated demand for health and social care will be lower than expected. And pension liabilities will fall, too.

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