Economics Weekly - Not budging

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Economics Weekly - Not budging

The demand for more labour and a surge in self-employment continues to drive the UK unemployment rate down. House price gains remain strong and inflation is still low. It’s been the story of the UK economy in 2014. But the missing piece of the puzzle remains wages. Until productivity improves, earnings are unlikely to budge.

Economic Analysis

21 July 2014

The Fed's decision to end QE is a step back towards normality.

Jobs machine

This time last year 7.8% of the UK labour force was out of work. But an astonishing surge in job creation has driven that figure down to 6.5%. There are 929,000 more people in work than a year ago, the largest increase since records began in the early ‘70s. Earlier concerns over an outsized rise in part-time job creation have given way to evidence of a substantial increase in full-time positions. There are now just as many full-time jobs in the UK as there were before the recession. But a big part of the jobs boom has also come from self employment. Four and half million people are now their own boss, representing 15% of the workforce.

Too tight to mention

There might be record numbers of people finding work, but wages are breaking the wrong sort of records. Average pay over the last year rose by just 0.7%, excluding bonuses, lower than at any time during the recession. 0.7% is a very small rise, particularly when set against the recent pick up in inflation, but even this flatters the situation in some sectors. Regular wages actually fell across one quarter of the economy with industries from construction to financial services cutting salaries. The weakness in wages looks increasingly closely linked to the UK's weak productivity growth.

Neither one, or t’other

Annual inflation in the UK rose from 1.5% in May to 1.9% June, due in part to an increase in the cost of clothes. Ordinarily, this would barely make the business pages. But the significance of inflation grows alongside increased debate about when and if the Bank of England should raise interest rates. The trouble is, the figures do not come down on one side of the fence. Those calling for rates to rise sooner rather than later can legitimately point to the fact that the rate of inflation is rising. Yet others could reasonably argue that with wage growth so weak, higher inflation curbs household spending power, which could dampen prices rises in the future.


House prices passed a number of mini-milestones in May, according to official figures. First, annual UK house price growth broke into double digits, rising to 10.5%, up from 9.9% in April. Second, average annual house price rises in London edged over 20%, up from 18.7% the month before: that's an estimated £84,000 rise in cash terms. And lastly, the cost of a typical first time buyer house rose above £200,000. It was £180,000 in May last year. And there's little sign yet of a slowdown in price rises. The monthly rise was 0.8%, the average monthly rise over the past 12 months.

On track

US consumers were fairly cautious in June. Spending on retail and food services rose by just 0.2% m/m. As ever, there was plenty of variation among the sub-sectors, with non-store and clothing posting strong growth, while building materials and garden supplies saw a sharp decline. Still, the overall trend is fairly benign, with y/y growth in line with the 20-year average (4.3%). The US recovery remains on track but, outside the labour market, the economy is hardly shooting the lights out - a point that was made by Fed Chair Yellen in her semi-annual monetary policy report to Congress.

Into reverse?

China's economy continued to truck along in Q2, growing by 7.5%y/y compared to the same quarter in 2013, as infrastructure spending offset the slowdown in the property sector. More important was China's new credit data. For the past year, the Chinese authorities have begun a much-needed control of credit growth. Yet June's data showed a 90% yearly rise. The key question is whether this is a one-month blip or if the authorities are again resorting to their quick fix for pumping-up growth. If it's the latter it will add further risks to China’s financial system.

Filling their boots

China is not just racking up its own debt, it’s helping out others with their debt, too. In the first five months of the year the country bought over $100 billion worth of US government bonds, a record amount. It brings back memories of the pre-crisis years. Back then, China’s purchases of US government debt was a major contributing factor to the downward pressure on long-term interest rates, encouraging the build-up of debt in various parts of the global financial system, including US households. If history repeats, rather than rhymes, there could very well be risks building again. But identifying them is unlikely to be straightforward.

Baby bust?

The UK birth rate fell in 2013 by the most since 1975. But even at the current level it’s higher than any year in the 1980s and 1990s. So it’s still a relatively healthy rate. The consequences of this are wide-ranging. For example, a continued high birth rate will eventually feed into stronger demand for housing, meaning supply will need to increase.  

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.

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