Chief Economist’s Weekly Brief – New rules

The new UK points-based migration system was revealed last week. It sets the same rules for immigrants from all countries and will take effect on January 1st 2021. These rules will make it harder for sectors relying on low paid workers to fill the jobs. Northern Ireland has the highest concentration of these jobs within the UK (>1 in 5). The hope is that this will lead to higher productivity due to investment in education and automation. With a record low unemployment rate, the adjustment period is likely to cause some disruption.

Mixed messages. Economic growth was flat in Q4, but the UK labour market’s record breaking run continued.  Unemployment remained at 3.8% – a 45-year low! – but there were improvements elsewhere. Employment rose by 180K q/q to almost 33 million. Hiring picked up with vacancies rising in the three months to January, after a year of decline. On earnings two data sources sent mixed messages. According to the labour force survey, annual pay growth slowed to 2.9% in Q4 – a 16-month low. But more reliable HMRC’s PAYE figures have wage growth running at a healthy 3.8% y/y.

Repeat. Strong job growth amid weak productivity is a familiar tale of UK economic performance. So it was last week. Output per hour was estimated to be a mere 0.3% higher in Q4 2019 compared to the same quarter in 2018. More broadly, productivity is stagnating again, after staging a modest recovery through 2017 and 2018. And again it prompts the question – what ails our productivity? Cast around for answers and low levels of investment, skills gaps, zombie companies and a failure of new technology to ‘diffuse’ down through the business base will be cited. Each on their own a tanker to be turned.

A bit of regional rebalancing. Strong UK labour market performance is hiding significant regional variation. The familiar story of London and the South East’s dominance still held true, but the capital missed out on the top spot. East and West Midlands produced 4.3% and 2.9% growth in employment respectively, taking the top two spots. The lowest unemployment rate is still to be found in the Northern Ireland at just 2.4%, compared to the UK’s 3.8%. Whilst the challenges for the North East are clear, jobs failed to grow and the unemployment rate edged up to 6.1%, a rate last seen almost 3 years ago.

High fives & P45s. Northern Ireland’s labour market ended the decade on a high. 2019 saw record lows in both the unemployment and economic inactivity rates and an all-time high with the employment rate (the % of 16-64 year olds working). Looking at the Q4 data, all three rates were just off their recent highs/lows. PAYE earnings growth may have slowed but remains perky at 3.3% y/y. While 2019 saw plenty of labour market high fives, there were also a pick-up in P45s. Confirmed redundancies breached 3,000, that’s up almost one-fifth year relative to 2018, with manufacturing accounting for almost 60% of those job losses.

Up, flat & down. Northern Ireland’s residential property prices have been rising continuously for the last seven years. But annual price inflation eased to 2.5% in Q4 2019, the weakest pace since Q3 2013. Private sector rents are rising at a slightly slower pace of 2% per annum. These compare with price and rent rises of 1.6% y/y for the UK. Remember activity speaks louder than prices. On that front there are clear signs of a slowdown.  Last year residential property transactions levelled off following eight years of growth. Meanwhile the direction for housebuilding activity is unmistakably down. Starts fell at their fastest pace in seven years (-16% y/y). 

Continuing. Meanwhile the post-election bounce in surveys continued in the UK. Not even shortages of some manufacturing components could bring it down with the manufacturing index hitting a ten-month high. The services PMI edged down a little to 53.3 from 53.9, with some firms stating coronavirus had weighed on overseas bookings, particularly those based in mainland China. But domestically firms are still reporting a solid improvement relative to a few months ago.

Janus. As sung by Icelandic “wunderstar” Björk, it wasn’t supposed to happen. As least not this much. UK consumer inflation leapt 1.8% annually in January, up from 1.4% in December. But before the MPC starts a self-congratulatory bout of high-fiving (recall their 2% target), this bounce is actually more about Christmas’ past than future. Heating and energy contributed around 0.55%, but due to past price reductions unwinding. Similarly, petrol prices had of late been easing inflationary pressures, but snapped back in January. The outlook’s more balanced and it’s not unlikely that inflation will again ease in the months ahead.

Bounce. Who’d a thought it – economics works? Really. As petrol prices rose by 2.3p per litre between December and January, UK sales fell 5.7%. Actually this rather bucked the overall trend, as there was a noticeable uplift at the tills in January, where the volume of UK sales rose by 0.9% on the month. This followed two poor months for many retailers, and also means sales fell by 0.8% on a quarterly basis. The key question is whether this is a blip or a bounce. Truth is it’s too early to say, but the evidence is slowly mounting for the latter.

Concern. The US composite PMI, covering both manufacturing and services, fell to its lowest level since 2013 in February. No need to search far for the culprit. The outbreak of coronavirus is to blame, right?  Only partly it seems. Businesses also expressed worries about a wider economic slowdown and uncertainty ahead of this year’s presidential election. The Eurozone’s more export-reliant economy (so in theory more exposed to the outbreak) actually registered a six-month high in its composite PMI. The US economy might just warrant a little closer scrutiny than usual in coming months.

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