Calling into question - Economics Weekly

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Calling into question - Economics Weekly

It's a familiar narrative for the UK. Strong job growth but signs of a weakening consumer on the back of paltry income growth squeezed by higher inflation. Yet markets are convinced the Bank of England is raising rates on 2 November. The latest data suggests the decision will likely be more finely balanced for policy-makers.

Economic Analysis

24 October 2017

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Unwelcome. The rate of inflation hit 3% in September, up from 2.9% in August and three times the rate in September 2016. It was also the highest reading in over five years. Transport costs made a big contribution with fuel prices 6% higher than this time last year. But food prices were up, too, rising 3% compared to last year. Falling food prices seem like a distant memory. At least inflation should be close to peaking, albeit the retreat is expected to be gradual and modest - even by the end of next year it’s still expected to be above 2%. So not much consolation to squeezed purses and wallets.

Firm. You can’t argue with the facts. Between March to May and June to August, employment rose by 94,000, unemployment fell by 52,000 and there were 17,000 fewer people not looking for work at all. It seems Britain’s labour market is an impregnable fortress, unassailable by external events. Or can you? Part-time self employment made a major contribution, rising by 70,000 over the period. And best not mention pay, up by 2.2% across the economy, well under inflation. The jobs-market’s walls remain firm, but not undented.

Defence. Second fiddle to the unemployment rate, despite being economically (if not politically) more important, is the employment rate. It’s currently 75.1%, meaning 3/4 of the population aged 16-64 is in work, near a record high. When productivity’s low, like now, it’s the last line of defence for maintaining income growth (see above). But there’s wide regional variation. Lowest is Northern Ireland, at 68.4%, close to the EZ average of 66.3%. The South East comes top, at 79.2%. London wins the most improved region this year, up 1.7ppts to 74.9%.

Flattering to deceive? The enduring puzzle of falling unemployment but stubbornly low wage growth. What to make of it? Could there be hidden “slack” in the labour market? Some metrics suggest so. The proportion of employees working full-time remains below its pre-crisis level, but that’s less surprising given growth in older and female workers (groups more likely to work part-time). Self employment has also been on the rise, albeit the continuation of a trend that started before the recession and has been accelerated by technology. Still, a higher share of part-time workers want a full time job today than used to be the case - under-employment, in other words. But on its own isn’t enough to explain weak wage growth.

Softly, softly. Britain’s shoppers are cutting back, but they’re taking it slowly. Prices have risen faster than wages over the last year, denting spending power. True, the phenomenal rate of job growth means there are more households with extra sources of income, but the squeeze is still hitting the high street. So much so that retail sales grew by just 1.5% in the year to Q3, in volume terms. Add on price increases and households had to spend 4.7% extra to get those goods and services, which itself is probably unsustainably high. All this adds up to an inauspicious start to the festive shopping season.

Receding. There’s some relief for those renting at least. Inflation in private rents have been moderating in recent months, rising 1.6%y/y in September. This time last year the pace was 2.3%. It’s in keeping with the softening in house prices generally over the past year or so. And just like house price growth London has seen the biggest slowdown. There rents rose a mere 0.9%y/y – a welcome development, giving incomes the opportunity to catch up. The pace of growth is still weakest in Scotland with rents a mere 0.3% higher than last year. In fact they are little changed compared to two years ago.

Best in a decade. Halfway through the current financial year and the UK’s public sector borrowing ‘totaliser’ has hit £32.5bn. It’s the smallest deficit in a decade and £2.5bn below the corresponding figure a year ago. Stronger receipts from income tax, VAT and stamp duty property tax provided a boost. Indeed, September was the third successive month of borrowing being below analyst expectations. Encouraging news for the Chancellor ahead of next month’s Budget. The bad news is the the OBR is to slash its productivity forecasts (again), hampering the economy’s ability to generate revenues.

Hints? China’s economy grew 6.8%y/y in Q3. Putting aside the usual scepticism of China’s GDP figure it’s fair to say that growth looks robust, driven by infrastructure spend, exports and consumer spending. But debt growth continues apace. These days, with the corporate sector encumbered by a hulking debt load, consumers are doing a bit more of the leveraging up. Another concern is that the real estate sector, which accounts for as much 20% of the economy, may be softening. Housing floor space sold fell in September for the first time since early 2015. Hints of a China slowdown in 2018?

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 Economics Department, as of this date and are subject to change without notice.

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Economic Analysis Interest rates 2017
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