Chief Economist’s Weekly Brief – Stuck in orbit


The labour market continues to strengthen but wage growth refuses to escape its sluggish trajectory

Strong and stable: UK labour market conditions continue to improve. Witness the 137k rise in employment in the three months to May, a 4.2% unemployment rate and a record high for the employment rate (75.7%). Yet wage growth remains sluggish. Average weekly earnings (excl. bonuses) edged down to 2.7%yoy in the three months to May, from 2.8%yoy in April. Not the climb higher the the Monetary Policy Committee (MPC) would have been hoping for.

More fresh highs but no new lows. Northern Ireland’s record breaking run in the labour market continues. In Q1 the Quarterly Employment Survey revealed a record high in jobs. Meanwhile the Labour Force Survey revealed a record low in the unemployment rate (3.1%) for the same period. Since then it has edged a bit higher but remains at a very respectable 3.5% for the three-month period to May 2018. Encouragingly the local job creation machine has continued to produce the goods in the second quarter. The latest LFS data for March – May 2018 revealed another raft of record highs. The number of people in work has never been higher at 852k. Other all-time highs included: females in work, employees, full-time and temporary workers. The over 50s and females are driving the employment boom.

Record vacancies. With record tourism numbers vacancies are few and far between amongst hoteliers. But the same cannot be said for the labour market. Northern Ireland’s jobs machine is firing on all cylinders with a record number of vacancies / jobs advertised in Q2. That’s according to the latest NIJobs report with Ulster Bank. Job listings jumped by five per cent during the quarter and are 11 percent higher over the year. Eight employment categories posted their highest number of quarterly vacancies to date. Those with the biggest demand include IT, engineering, manufacturing, the not-for-profit sector, and hospitality. Notably, IT has seen vacancies increase 44 percent year-on-year, accounting for one-in-nine of all current listings. Perhaps not surprising given the range of big announcements of late from both indigenous companies and inward investors.

Flagging.  After marvelling at NI’s job creation figures a quick look at output will bring you back down to earth. Commentators bemoaned the UK’s paltry growth rate of 0.2% q/q in Q1 2018. NI’s Composite Economic Index, the nearest thing we have to GDP, fell by 0.3% q/q. NI output is down 1% y/y which compares with a 1.2% gain in the UK. The local economy is employing more people to produce less output! That says a lot about productivity. The JTI tobacco plant closure provided a big hit on manufacturing output despite growth elsewhere in the sector. Construction output slumped by 7% q/q in Q1 influenced by the Beast from the East in March. Ulster Bank’s PMI suggests a rebound in Q2. Nevertheless, output growth, unlike job creation, looks set to remain stuck in the slow lane – meaning improvements in our economic prosperity will be stuck there too.

Unchanged. Contrary to expectations, annual UK consumer price inflation was unchanged at 2.4% in June. Higher energy prices exerted upward pressure last month, but this was offset by the sharpest fall in clothing and footwear prices in June since 2012. The summer sales are yielding lots of bargains this year. The cost of leisure activities is falling too, prices in recreation and culture fell last month. Prior to latest inflation data a rate hike in August was viewed as a foregone conclusion but June’s downward surprise in CPI  may have sown a few seeds of doubt amongst the MPC.

Relief rally. Wage growth might not be outpacing inflation but there’s still been a turnaround in sentiment amongst the UK’s shoppers. Retail sales were up 5.1% on a year ago, or 2.8% after taking inflation into account. There are two problems though. First, spending growth is higher than income growth, so households’ saving ratio has been pushed even lower. Second, nearly all this growth is online, with sales rising at a stunning 14.3% pace. Online sales are now close to a fifth of all spending, so bricks and mortar establishments are barely seeing any volume growth at all.

Sluggish. According to latest official data UK house price growth continues to slow: the annual rate declined to 3% in May, from 3.5% in April. This is the slowest rate of growth since August 2013. The biggest contributors to this trend are London and the South-East. The former saw house prices fall 0.4%yoy in May, the fourth consecutive monthly decline, whilst the latter slowed though it remains in positive territory. In contrast, Scotland registered the largest rise in house prices in the UK, up 4.9% in the year to May.

Narrowing. The UK fiscal position is steadily improving. Net borrowing for the first three months of FY18/19 was £16.8bn compared to £22.2bn in the same period a year earlier. This equates to a significant decline of almost 25%. Recent trends in tax receipts, a proxy for UK growth, have been mixed. Corporation tax receipts edged higher 0.8% in the period Apr-June 2018 versus the period Apr-June 2017, hinting at a corporate sector that is struggling to boost profits. By contrast, VAT receipts are up a healthy 5.6%, consistent with the pick-up in retail sales in Q2. The power of record high employment can also be seen in the tax take. The revenue raised by income tax and national insurance is up 4% on last year, comfortably above the UK’s meagre wage growth and supported by the sheer number of extra people working, and therefore paying tax.

Support. Net migration numbered 280k in the year to end 2017, a pace broadly unchanged over the prior 18 months. Yes it’s down on the record pace of 330k through 2015 and early 2016, but it remains historically high and about 10% above the average over the past ten years. There are still plenty of migrants coming with a definite job, as high as any point in the past decade. But a few more are emigrating and the more speculative ‘looking for work’ category has fallen. Measured by job growth the UK’s labour market has been a success story in recent years. Migration has been, and remains, a key plank of it.

Gradual.  Fed Chair Jerome Powell’s latest semi-annual testimony before Congress sounded upbeat about the US economy. US growth is solid with investment rising at a healthy pace, the jobs market has continued to strengthen, inflation is close to the FOMC’s 2% target and the risks to the outlook are viewed as roughly balanced. He warned that rising US trade tensions pose a downside risk to the economy but this was offset by the positive effect of a sizeable fiscal stimulus. Hence the Fed, for now, maintains its gradual tightening bias.

Will you blink?  China’s economy churned out growth of 6.7%y/y in Q2. Even if it’s the slowest pace since 2016 it’s still healthy by anyone’s standards. But that’s not the biggest concern. Efforts to rein in credit are starting to bite with signs of waning domestic growth momentum. The last time that happened in 2015 things got a little ugly. Wary of growth slowing too much the central bank has loosened policy a little in recent weeks. The bigger test will be the government. Is it willing to stay the course and shake the economy from its credit addiction? At least the global trade landscape is looking solid….wait.

Leave a Reply