Catch-up - Economics Weekly
The New Year presents an opportune time to do a bit of a stocktake. In this extended brief we take a look back at 2017 and ahead to 2018.
08 January 2018
Growth and the Labour Market
Downslope. How does the UK economy’s performance in 2017 stack-up? We won’t know definitively for a few weeks but it looks as if growth won’t be around 1.8%. That’ll be the slowest since 2012 just before the recovery accelerated. And it’ll be below the post-war average of about 2.5%. But it’s far from diabolical. A modest slowing is the consensus view for 2018 with growth of 1.5% pencilled in. 2019 looks similar. On the ground it means things won’t feel much different. And it’ll leave the UK as a lower-middle G7 performer (below the US, Germany, France and Canada, but above Italy and Japan).
Buttress. The last PMI reading of the year supports the above view. December’s headline figure for the services sector rose to 54.2 from 53.8 in November. But new business slipped to its lowest reading since August 2016 and although confidence over the future improved the reading was well below its long-run average. The manufacturing sector was a bit better. Its reading of 56.3 pointed to solid growth with output, new orders and employment all looking good (weak sterling and stronger global growth take a bow). Steady as she goes for the UK economy as it enters 2018.
Party over. In the three months to October last year there were 325k more people in employment (and all full-time jobs) compared to the same point in 2016, pushing the unemployment rate down to 4.3% from 4.8%. The problem was that after strong job growth in H1 the jobs machine ground to a halt around mid-year. The consensus forecast is for employment growth of 0.5% in 2018 (half the rate of 2017) and for the unemployment rate to remain unchanged (the lowest since the mid-1970s). Here’s hoping the jobs machine just spluttered. Something more permanent would leave the UK in bother.
Prices and Wages
Squeeze here. The re-emergence of the consumer squeeze was the key trend in 2017 with inflation outpacing wage growth since February. The latest reading (November 2017) shows inflation running at 3.1%. It was below 2% at the beginning of the year. That’s sterling’s Brexit-related correction at work. The expectation is for a gradual moderation over 2018 but it’s still forecast to be above 2% come Q4. If wage growth doesn’t improve the squeeze will endure.
MIA. “Where’s the wage growth?” ran the cry from workers (and economists) again in 2017. October’s data showed UK wages growing at 2.5%, a year earlier it was 2.4%. In the past 108 months wage growth has reached 3% a mere three times, leaving incomes susceptible to being squeezed with even modest bouts of inflation. Surveys suggest employers are feeling the pressure to raise wages. But they have reported similar developments to survey takers for years with no material improvement in the hard data.
Figure it out. It’s the enduring puzzle for policy-makers. Will 2018 see higher wage growth as tightening labour markets finally prompt the bidding up of wages, and potentially inflation with it? Or has the landscape been permanently changed by technological change and globalisation and a host of other factors including reduced union membership, meaning low wage growth is a permanent feature? And what’s the best response to that? Is it low rates to keep inflation in line with central banks’ 2% inflation targets? Or is it higher rates to prevent things like asset price bubbles? Big questions leaving plenty for policy-makers to grapple with in 2018.
Gently. Greater clarity on the above would give greater clarity on the outlook for rates. But markets don’t expect November’s 25bps hike in Base Rate to 0.5% to mark the opening salvo in a steady tightening cycle. At the moment they indicate we’ll be into the next decade before Base Rate hits 1%. However, the Bank of England thinks there might be a need for a little more urgency if the economy performs in line with their expectations.
Light. Closely related to the issue of weak wage growth is, of course, paucity in our productivity growth. Output per hour is an astonishingly small 1.3% higher than it was in 2008. As the Office for National Statistics reminded us last week this is among the weakest since official records began and could be the weakest since the early 1820s. But there was some good news last week, giving a modicum of hope for 2018. Productivity grew 0.9% in Q3 2017, the largest increase since Q2 2011 and reversing the falls of the previous two quarters.
Slowing. House price growth continued to slow in 2017 with prices estimated to have risen by just under 3% according to Nationwide. London bore the brunt of the slowdown with prices in the capital falling 0.5% last year, the first decline since 2009. Stretched affordability, tax changes and political uncertainty are among the factors. According to the Royal Institution of Chartered Surveyors prices could remain virtually flat in 2018, with constrained supply preventing outright declines. The consensus is for very weak price growth of 1.7%. It will give wages an opportunity to catch up.
The Global Picture
Cracker. There’s plenty of optimism surrounding the global picture. The strengthening of the eurozone’s recovery during 2017 was the upside surprise. And there’s reason to believe it still has legs. Inflation is low and there’s plenty of spare capacity (high unemployment). Monetary policy, too, remains very supportive. The breadth of the recovery in the eurozone is the most striking feature. The big four of Germany, France, Spain and Italy are all firing. The consensus is for the Eurozone to notch up another year of 2% growth, its fourth in succession and its best performance in a decade.
Unflappable. After 1.5% growth in 2016 the US economy looks to have moved back above the 2% mark in 2017 (Trump impact?). The forecast is pretty rosy with 2.5% the estimate for 2018 amongst the consensus. Like the UK job growth has been good and unemployment is very low. But so too is wage growth. In contrast to the UK the inflation issue in the US last year (as it was in the Eurozone) was its weakness. That didn’t deter the Fed, which is putting more weight on the traditional relationship between unemployment and inflation, expecting price pressures to ignite at some time or another and wanting to pre-empt it. It hiked three times last year with three more forecast for this year. Although a new Fed Chair may alter that.
Back on the radar. China almost quietly churned out a growth figure of what looks to be close to 7% last year. 6%+ is the forecast for 2018. Nothing to worry about here? Perhaps not. After some time on the sidelines 2018 could well see China clamber the list of financial and economic concerns. Its all-important property sector is showing signs of fatigue. And the usual concerns of too much debt, too quickly, remains There’s an added layer here of household debt having risen sharply, in addition to corporate debt. But after President Xi Jinping fully established his power base last year 2018 is set to see more meaningful economic reform, apparently. It just might not be the economic liberalisation programme long expected.
Populism – so last year?
Ride the wave. The populist upsurge of recent years is unlikely to be done. Deep, structural forces lie at its heart. Globalisation and technological change, particularly the latter, are forces with brute strength. Among their consequences in the UK are issues of geographical and wealth inequality. And they’re tricky for policy to respond to. But some home-made factors aren’t helping, namely housing policy and what is for some the receding prospect of home ownership. These are not things that can be solved quickly. And there’s a fair chance they will intensify. What’s uncertain is how populism will manifest itself. An election result that up until last year seemed unthinkable? Or a policy response with unintended consequences?
Events, dear boy. Chances are much of the above won’t turn out as predicted. Events have a nasty habit of taking things off in a different direction. And it would be a dereliction of duty as economists not to dish out some warnings. Geopolitical tensions may buck the trend of recent years and ignite the oil price, prompting a squeeze on the consumer. Unresolved issues in the euro area may flare up. The Italian election may return an out and out populist and a sharp change in policy. The unwinding of quantitative easing in the US might spook the market. US rate hikes and dollar strengthening may prompt a casualty in emerging markets. And of course there’s Brexit negotiations. Oh and Bitcoin…..no predictions here, I’m afraid.
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The UK economy can chalk up 2017 as a decent, if unspectacular, 12 months. Growth will likely be slower this year compared to last, but not by much. The trouble is some signs of weakening are appearing, most importantly on the jobs front, after what has been a lengthy period of economic expansion. A bumpier 2018 ahead?
The big let down of the post-crisis recovery has been the failure of wage growth to ignite in the face of an ever-tightening labour market. Will 2018 finally be the year it changes? Prolonging the recovery might depend on it.