The UK labour market ended 2015 on a high note. Over half a million more people were in work than 12 months ago, pushing the employment rate to yet another high. Strong job growth seems to have become the norm, but it’s worth reflecting that this is the third highest number of jobs created in the last quarter of a century (only 2012 and 2014 was stronger). But it’s not an even recovery. At 5.1%, UK unemployment is the same as it was ten years ago. But in the North East it’s 1.6% higher than it was before the recession, whilst London is 1% lower.
The UK economy might be awash with jobs, but it isn’t translating into rapid pay growth. Average earnings growth was just 1.9% last year, slightly less than the 2.2% recorded in 2014. The big difference between these two years is the real value of the increase. Inflation eroded just 0.1% of workers’ purchasing power last year, whereas in 2014 it chewed off 0.9%. That means 2015 was the best year for real wage rises (1.8%) since 2007, but given real pay was actually falling in six of those years it’s hardly a triumph. Low inflation might not continue to help workers for long though. The Bank of England reports that firms are using the lack of inflation to justify low wage rises.
Withan extra half a million people working over the last year you’d expect the tax revenues to be rolling into The Exchequer. They’re not. Public sector borrowing is about £10bn lower than it was at this point last year. That’s good progress, but as recently as November the OBR forecast a fall of £17bn by the end of March. The Treasury will be hoping that the growth in income tax receipts continues to climb from its current 4.7% to help plug the gap.
Life, Jim, but not as we knew it.
Inflation ticked up to 0.3%y/y in January, the highest rate for a year. Falling energy and food prices continue to depress the headline figure. But even without them, underlying inflation was just 1.2%, a considerable distance from the Bank of England’s 2.0% target. Recent further declines in the oil price mean weak inflation is with us for some time yet. And that’s another reason to expect interest rate setters to sit on their hands throughout 2016.
Seems everyone forgot to tell the UK housing market that inflation was meant to be low. House prices rose by 6.7% in 2015. Even removing London from the measure prices still rose by 5.8% nationally. That's odd, as there's a clear north/south divide. Average prices rose between 9-10% in London and the greater south east. In cash terms, the price of an average London property rose by £34k in 2015 and is now well north of half a million pounds. North of the Watford Gap however, rises were more modest and actually fell by 0.2% in Scotland. But for now at least, house price growth particularly in the south of England, shows little sign of stalling.
With fears over excess credit growth in recent years you would think China would be looking to rein in bank lending. Not a bit of it. 2.54 trillion RMB (about £272bn) of new loans left Chinese banks in January. That's about £8.8bn a day. It’s likely that a share is going to pay existing debts, perhaps even loans that Chinese corporates have taken in foreign currency. But it points to the authorities combating the growth slowdown by yet again pumping credit into the economy. And crucially, delays China’s much-needed deleveraging and making the eventual reckoning with its debt all the more painful.
What a difference a month makes. Back in December the Fed raised interest rates and pencilled in four more hikes for 2016. But stock market declines, global growth concerns, heightened fears over China and the impact all of the above has on the US economy made for a different tone to January’s meeting of Fed officials. Caution is increasing. Some members of the committee want to see “direct evidence” that inflation was rising toward 2% before backing further rate rises. There may even be some that feel a little regretful over December's move.
Not minding the gap.
The UK’s labour market recovery has been impressive but the same cannot be said for productivity. Output per hour in the UK was 18 percentage points below the average for the rest of the major G7 advanced economies in 2014. This is the widest gap since the series began in 1991. Since 2007, only Italy has had weaker average productivity growth rates than the UK within the G7. The mantra should be: “Productivity, Productivity, Productivity”.