The 5 year squeeze - Economics weekly

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The 5 year squeeze - Economics weekly

Real wages in the UK have been falling for 5 years now.

Economic Analysis

22 April 2013

Such an extended slump was unimaginable before the crisis and forecasters have been wrong-footed by the weakness of incomes following the recession. With inflation falling I had hoped that the squeeze would come to an end this year. Instead poor productivity is pushing wages down and inflation is eroding spending power. 2013 is already shaping up for another big squeeze on wages.

Unemployment up but falling wages point to even more pain

Unemployment rose by 0.2ppts to stand at 7.9% for the three months to February, meaning that 2.56 million people are out of work. Of these, over a third have been jobless for more than 12 months, showing how hard it is to escape long term unemployment. But it was weak wage growth that should really grab your attention.

Not only is average wage growth of 0.8% far below annual inflation of 2.8% y/y, but in the last six months wages have been falling in nominal terms as well. £9 a week lower than August might not sound like much, but when you multiply it by the 30 million people in work you get an annual hit to incomes of £14bn and that’s almost 1% of GDP.

Female participation in the workforce

The Labour Force Survey also confirmed the changing composition of Britain’s workforce. The number of women out of work due to looking after the family or home is now 2 million, down from 3 million in the early 90’s. Those extra one million workers have given the UK economy a big boost, but it’s a boost that can’t continue indefinitely. Even with continued pressure on household incomes we’re unlikely to see another million women move into employment in this way.

Inflation steady with MPC still split over more stimulus

Inflation remained stubbornly high in March with the CPI rate unchanged from February at 2.8%. However, many commentators, including the Bank of England, expect rising food, gas and electricity prices to push inflation over 3% this year.

Yet for the third month in a row the monetary policy committee (MPC) was split on whether to add another £25bn to the current £375bn of quantitative easing. Whilst it voted 6-3 against more asset purchases, the committee was interested in exploring extensions to the Funding for Lending scheme.

If Washington's fiscal mess was supposed to derail the US recovery the American people didn't get the memo

Expectations were low after earlier surveys pointed to a slowdown, but Q1 industrial production was 3.5% higher than a year ago. Even that performance was put firmly in the shade by the continuing recovery of the housing market.

New house starts were up 7.0% m/m and by a staggering 46.7% y/y. Other data showed that 'distressed sales' - where the owner has defaulted on the mortgage and the lender markets the house - continued to fall. As the stock of distressed properties runs down, more of the demand for housing will be met from newly constructed units, so the recovery has some way to run.

IMF review asks more questions of austerity as Fitch downgrades UK

The latest economic health-check from the IMF highlights a three speed recovery in the global economy. While emerging and developing markets are returning to robust growth, there is clear blue (or Atlantic grey) water between the US and the eurozone. But it was the Fund’s views on austerity which led to most discussion.

The IMF is concerned that some governments might be pushing austerity too hard, given the weak growth environment. It thinks the UK falls into that category and will be asking the Chancellor to consider slowing austerity in response to poor growth. It was this poor growth, and its impact on the public finances, that led Fitch to join Moody’s in downgrading the UK from AAA to AA+. It concluded that UK did not merit the top rating given a higher debt profile and an austerity programme likely to last at least two parliaments.

A Reinhart and Rogoff bust up

Academia is full of debates about data quality, but the charge of “selective omissions” in the data of Reinhart and Rogoff’s influential paper was unusually fierce. Their research “Growth in a time of debt” found that average growth in countries with debt ratios above 90% fell from 2.8% to -0.1%. But now other academics have spotted errors.

The critics claim that the actual results should have been 3.2% and 2.2%, with debt’s detrimental impact on growth being just 1% rather than nearly 3%. The original authors accept some of the corrections but dispute others. People make mistakes even at the highest levels, but it was only because Reinhart and Rogoff were so open with their data that the mistakes were spotted.

I wish that could be said for all economic research, but according to a recent survey only 2% of papers share their data fully. Is higher government debt more risky? (PDF 42KB) is our take on the relationship between debt and growth.



This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.

The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.


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