Over the threshold - Economics Weekly
Two years of falling real wages look likely to come to an end, just what an embattled high street is crying out for.
27 March 2018
Full speed ahead. To paraphrase, nothing in life is certain except death, taxes and clear evidence that, so far, Brexit has had no discernible impact on the labour market. The number of workers swelled by a mammoth 162,000 between November and January. The rise in the number of full-time employees was actually higher, at 182,000, meaning self-employment fell once again. While not yet a trend, it is starting to resemble one, so worth watching.
Pay now work later. Welcome relief as average wages rose by 2.8%y/y in the three months to January. That’s the fastest rise in almost three years. Pay growth will soon catch up on rising prices. Still, until 2008 wages tended to rise by about 4% a year. The reason why strong jobs growth hasn’t boosted pay by more is due to supply. The share of total population in work is higher now than it was in the 1970s, despite an extra five million people aged 60 and over. Female participation, those joining from abroad and more people working longer have all played a role.
Inflationary shock? Not quite, though the latest UK CPI figures did take some analysts by surprise. The annual rate of consumer price inflation slipped below 3% for the first time since last August. That was expected, but February’s drop to 2.7% - a seven-months low - was slightly lower than anticipated. Consumers will welcome the move as the gap between pay growth and CPI has almost closed. As flagged by the OBR, a return to real wage growth in the next few months looks likely as CPI moves closer towards the MPC’s 2% target. But such a move will require interest rates to be nudged higher.
It’s coming yet for a’ that. The Monetary Policy Committee (MPC) left Bank Rate at 0.5% last week by a margin of seven votes to two. But another small rise is in the post. The MPC doesn’t expect terribly rapid growth, quite the opposite. But it reckons the economy’s speed limit is a good deal slower than it was, meaning even pedestrian rates of expansion will push up inflation over the next few years if unchecked. The Committee will make a, “fuller assessment,” of the outlook in May and could well take that opportunity to make a 0.25% rise.
Respite. After a depressing December and January, the fortunes of Britain’s retailers picked up in February. The volume of sales rose 0.8% on the month after falls in each of the previous two. Comparing the past three months to the previous three months – a ‘cleaner’ reading – still reveals a soft picture with sales off 0.4%. In tandem with the CPI, price growth appears to be moderating, chalking up a 2.5% rise in February after a 3.1% reading back in December. In other words, the end of the squeeze on real incomes is glinting on the horizon. It can’t come soon enough for many.
Sterling job. Sterling’s post-EU referendum slide has been a mixed blessing for UK manufacturers. Export price competitiveness was boosted but so too was industry’s cost base. Around two-thirds of inputs (raw materials) required for manufacturing are imported. Following a 32-months run of deflation, manufacturers have notched up twenty straight months of rising prices. The exchange-rate effect has largely washed through. Indeed, last month’s 3.4% y/y rise was the weakest in the series - a far cry from the 20% y/y surge at the start of 2017. Factory gate inflation is also waning. Following a 3.7% peak last March, the price increases of manufactured goods slowed to 2.6% y/y in February. With sterling feeling a good bit perkier of late these trends should continue.
Powell to the people. As new governor Jay Powell marked his first Fed meeting with an interest rate hike; a widely anticipated move taking America’s equivalent of Bank Rate to 1.5%-1.75%. Of more importance to markets was the Fed’s forecast, where the committee is split down the middle. Six members expect two more rate hikes this year, whilst another six think three more raises will be appropriate. But the Fed did raise its expectation for 2019, forecasting three hikes instead of two, citing a strengthened economic outlook and increased confidence that the inflation target is set to be hit later this year. For good measure a two further hikes are forecast in 2020. That would take rates to 3.5%-3.75% - a level last seen in early 2008.
Keep up. US policy on international trade just got a little more complicated on two fronts. First the EU managed to negotiate a temporary reprieve from the tariffs on aluminium and steel. That means the list of friendly countries where the tariffs don’t apply has grown substantially from the initial announcement. But second, a new front was opened up with the imposition of tarrifs on Chinese sectors covering robotics, trains and the aerospace industry. Exporters need a social media account to keep up with the rule changes these days.
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The Chancellor opted not to make any changes to tax or spending policy at last week’s Spring Statement, so instead the focus was firmly on the economic assumptions that underpin the public finances.