Chief Economist’s Weekly Brief – Over and out

The UK economy can chalk up 2017 as a decent, if unspectacular, 12 months. Growth will likely be slower this year compared to last, but not by much. The trouble is some signs of weakening are appearing, most importantly on the jobs front, after what has been a lengthy period of economic expansion. A bumpier 2018 ahead?

Plateau. Google ‘plateau’ and the returning definitions are ‘an area of fairly level high ground’ or ‘a state of little or no change following a period of activity or progress’. Both neatly describe the UK jobs market. The UK’s jobs market has enjoyed five years of almost continuous and fairly pacy growth. But the machine’s now stalled. Employment fell by 56,000 in the three months to Aug-Oct. While the unemployment rate also fell, to 4.3%, without the support of job growth the UK economy looks fragile, especially given our woeful productivity performance.

Still lagging. The very latest indicators afford a little hope. It’s not much, but at least UK vacancies rose by 5k in the three months to Sep-Nov. So jobs remain available and employers may still need to up pay offers. That’ll be music to the ears for many of the UK’s hard-pressed workers. Average regular pay rose by 2.3% in the three months to October, yet again outpaced by inflation. This is where economics matters. Slowing job growth due to fewer workers should boost wages. Alternatively, if it’s due to employers’ reduced need for workers, then, absent productivity growth, ouch!.

Highs & lows – 2017 has been a good year for Northern Ireland’s labour market, with a net gain of almost 12,000 jobs y/y in Q3. Private sector employment hit a fresh record high for the same period with almost 68,000 jobs created since the post-recession low 5½-years ago.  ICT has been the fastest growing sector over the last year, but the Accommodation & Food Services sector posted the largest gains, with 2,470 jobs added. In terms of unemployment, it has fallen to a 9½-year low of 3.9%. The bad news is unemployment is falling due to rising economic inactivity amongst the working-age. The latter has soared with a rise of 39,000 over the year to Q3. As result, the economic inactivity rate has hit a 7-year high of 29.0%. This follows a record low last summer! Economic inactivity is rising at over three times the rate of net job growth. Not so good.

Letter time. Mark Carney has looked out his quill pen and Basildon Bond. In November, consumer price inflation was 3.1%, breaching the 3% threshold above which the Bank of England writes to the Chancellor of the Exchequer to explain why price rises are “high”. Inflation is running above target mainly because of sterling’s fall since mid-2015. That effect will wane during 2018 but another boost to inflation has appeared. Oil prices have been rising. That’s one reason manufacturers’ input cost inflation accelerated to 7.3%y/y in November.

Saved. Black Friday: what started out as a single-day event has morphed into a month-long hook for retailers to start their seasonal sales early. And it works. Buoyed by sales of household electrical goods, UK retail sales rose 1.1% between October and November, the biggest rise in seven months. But looking at the data through a wider lens reveals a different picture. Sales grew 1.1% across September to November compared to the same period last year. That growth rate has been in retreat from 4% at the beginning of the year and is now at its lowest since early 2013. Thank you, higher inflation.

No surprises. The Bank of England left Bank Rate unchanged last week, as was widely forecast. MPC members reiterated that “further modest increases” would probably be needed over the next few years assuming the economy performs as expected. No change to the UK’s source of greatest uncertainty – the country’s changing economic relationship with the EU. Meanshile the Chancellor will be pleased that his Budget got an endorsement with members remarking, in typical central bank speak, that it “contained some upside news for aggregate demand”. Good for growth, in other words.

No gamechanger. The Fed increased its benchmark rate by 25bps to 1.25-1.5% – the fifth hike since tightening began two years ago. It raised its outlook too with growth of 2.5% forecast for 2018, up from 2.1% in September. And it also sees unemployment moving below 4% (currently 4.1%). That’ll warrant three more hikes next year and two more in 2019, according to the Fed. Trump’s tax cuts are a factor. But the central bank is not (yet, at least) convinced that it will materially alter the growth potential of the US economy with the longer-term GDP growth forecast unchanged at 1.8% per year.

Notable upgrade. The European Central Bank also stood pat, leaving rates and its QE programme unchanged. But President Draghi signed off 2017 with a more optimistic outlook for single-currency area. The ECB thinks growth will reach 2.3% next year – half a percentage point up from September – and just below 2% through 2019 and 2020. By contrast the Bank of England is forecasting 1.7% growth for the UK. The troubles of the euro area seem like a distant memory.

Bleak. The growth forecasts from the newly established Scotland Fiscal Commission (the equivalent of the Office for Budget Responsibility) made for grim reading. It estimates average growth of just 0.8% to 2022, far less than OBR’s forecast of 1.4% for the whole of the UK, less even than the IMF’s forecast for Italy and the about the same as its forecast for Japan. With more than 40% of Scotland’s tax revenue now devolved, these divergences will affect Scotland’s budget in future much more than they would have done before.

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