Cut some slack - Economics weekly

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Cut some slack - Economics weekly

Viewed through the occasionally narrow lens of economics, unemployment is a measure of slack in the labour force. It’s a gauge of the relative demand for and supply of workers and the resultant pressure on wages and inflation.

With growth cruising along at close to 3%, interest rates will surely rise at some point

These help inform the Bank of England’s decision on interest rates. The Bank thinks there’s still enough slack in the labour market to postpone raising rates. They’re probably right. But the slack is slowly tightening.

Holding a steady course

The UK economy is sailing well, with unemployment and inflation both falling. So the Bank of England is sensibly reluctant to change tack. Its latest inflation report showed an increasingly optimistic view of the UK recovery. Back in August it thought that the economy could recover, without stoking inflation, until unemployment fell to about 6.5%. This figure is now closer to 6%. This should contain wage pressures and inflation, extending the period of record low interest rates. Yet with growth cruising along at close to 3%, interest rates will surely rise at some point.

Different strokes

People work part time for all sorts of reasons. What matters for them and economically is whether they choose to do so. The last few years has seen a high proportion of part-time workers who would prefer to work full-time. Although this has fallen since last summer, it remains high at 18% of all those working part time. The Bank of England views this as further evidence of 'slack' in the labour market. But before crying “something must be done”, it’s worth noting that the number of people working part-time because they don’t want a full-time job now is at a record high level of 5.4 million.

The noose tightens

Further improvements in the jobs market brings closer the time the Bank will opt to raise rates. The unemployment rate fell again in the three months to March, to 6.8%. A bigger story is perhaps the record high 1.3 percentage point jump in the employment rate. At 72.7%, it is just a shade below the pre-crisis 73% peak. The bulk of the rise was due to full-time employment and self-employment. And workers will welcome the news that pay growth managed to keep pace with inflation. The labour market is healing. And that means it’s tightening. But it still has some way to go.

Inflating hopes

Central bankers tend not to encourage higher inflation. Not so in the Eurozone, at least at the moment. Inflation has trended down since late 2011. And with the prospect of deflation looming larger, April's rise in inflation across the euro area to 0.7%y/y, up from 0.5%y/y in March, will be warmly welcomed by the European Central Bank (ECB). Yet inflation remains far below the target of close to, but below 2%, pushing markets to expect the ECB to act next month.

Family fortunes

Despite business surveys’ indicating growing activity across the Eurozone throughout the first three months of the year, the final result underwhelmed. At 0.2%q/q, the region’s economy only managed to match the expansion achieved in the final quarter of 2013. Moreover, divergent fortunes again affected the different members of the single currency family. The German economy stays a pillar of strength. Yet the Eurozone's second and third largest economies, France and Italy, remain a cause for concern – France’s economy stagnated, while Italy’s shrank.

Purses in pocketbooks puzzle

The recent pattern of puzzling US data continues. Retail sales values increased by only 0.1% m/m in April. With inflation, that means volumes fell. Yet over the last three months value growth has averaged 0.8%m/m. And American household borrowing is on the rise, up 3.7% in the year to Q1. Although it’s the first time since the financial crisis that we’ve seen a sustained increase in debt, there’s little cause for concern. US household borrowing never reached British proportions and they displayed more ruthlessness in eliminating debt during the crisis.

A piece of cake

British household wealth amounted to £9.5 trillion in 2010-12. Housing wealth is one of the most equitably shared forms of wealth. And, for most homeowners, their piece of Britain is also the bulk of their wealth. Half have property wealth of £150,000 or more. So the extraordinary period of rising homeownership and house price growth helped broaden wealth. Financial wealth (cash, savings, stocks and shares) is more unequal. The top 10% of households hold almost twothirds all financial wealth. Yet while wealth is far from equally shared in Britain, the recession has not caused it to become more unequal. A measure of inequality, called the Gini coefficient, remains the same in 20010/12 as it was in 2006/08.



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 Group plc. All rights reserved.


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