We’re breaking records for the number of people in work, yet more productive jobs are what we really need.
Record breakers. 2016 ended with the highest share of people working for at least the last 45 years. At 74.6% the working age employment rate hit a new record, driven by employment reaching 30.6 million. That brings the total increase in jobs since 2010 to 2.8 million; it took the UK economy a decade to generate that amount following the early 90’s recession, this time around it has been seven years. Jobs are still being created but it looks like the pace of growth has slowed. 87,000 positions were filled in the last 6 months. Good, but not as good as the 216,000 increase seen in the first half of the year and probably not good enough to keep breaking records.
Unrewarding. Wage growth rounded out 2016 at an unspectacular 2.6%. That’s an improvement on 2015’s 1.9%, but not much of a raise given unemployment is now down below 5%. Low unemployment and low wage growth is a phenomenon we might be seeing a lot more of if the Bank of England is right. It believes that a variety of factors are weighing down on wage growth. Everything from poor productivity to an older, more educated workforce suggests the UK might be able to sustain a lower unemployment rate, without generating spiralling wage growth. The pre-crisis average pay rise of over 4% a year looks a long way from reach.
More pace. “Productivity isn’t everything but in the long run it is almost everything”. So said Nobel prize winning economist Paul Krugman. It’s true productivity largely shapes your prosperity and it’s true that the UK’s recent performance has been poor. Better news is that output per hour grew by 0.3% in the three months to December and throughout 2016. Yet that’s still half the 0.6% growth in GDP. The pace of productivity growth needs to pick up, not least to combat an ageing population. If we match the post-war average the UK economy could grow by ¼ over the next decade. Match the past few years and we’d be lucky to grow at all.
Up! Inflationary pressures continue to build. Consumer prices rose by 1.8%y/y in January, up from 1.6% in December and 0.3% a year ago. The main culprits are a lower pound and higher oil prices, most obvious in fuel costs (+16.8%). There’s more to come: producers’ input costs increased by 20.5%, some of which will be passed on to consumers. The Bank of England expected as much so won’t soon reach for the rate rise button. But if we compensate for higher prices by pushing up our pay more quickly the chance of a rate rise grows.
Back to life. The volume of retail sales fell by 0.3% between December and January, the third monthly decline in a row. But retailors should pause before pressing the panic button. Since 2014 annual growth in retail sales has skipped ahead at over 4% on average. This period, when wage growth was muted, was the anomaly. Even after this fall shoppers still spent 3.4% more than they did in the same month last year. So at the moment it’s perhaps a simple case of ‘normal service restored’.
Grey is the new black. A household’s typical spend was £529 a week last year, little changed from 2015 but almost £1,300 a year less than a decade ago in real terms. That’s more than the £1,150 the average family spent on package holidays in 2016. Who and how we’re spending is changing too. Compared with a decade ago, we’re spending at least £25 less on food, booze and transport each month, but over £37 more on recreation. Housing costs are up as well. The real winners over the past decade are those aged 65+, as only this age group has seen a real-terms increase in spending. Spending by those aged under 50 have fallen by at least 3%.
Unaffordable. At £220,000, the average house in the UK cost £15,000 more in December 2016 than a year earlier. Not too many people received a £15,000 pay rise last year so home ownership continues to become unaffordable for more people. At 7.2%, the year-on-year increase was up on November’s 6.1%. Prices are rising across the UK, fastest in the East of England (11.7%) and slowest in Scotland (3.5%). But everywhere they are rising faster than incomes, underlining the importance of the measures to boost supply outlined in the recent White Paper.
Scrutiny. Central bankers are held to account for their decisions by appearing in front of lawmakers, in the UK that means a couple of hours in front of the Treasury Select Committee, but in the US Janet Yellen just endured two days in front of Congress. Fortunately she had some good news to deliver. Unemployment is down at 4.8%, the US economy generated another 227,000 jobs in January and inflation edged closer to its target, reaching 1.6%. Yellen wasn’t able to say how many Fed rate hikes there’d be this year. The FOMC thinks it will need to raise rates three times but markets are betting on fewer.
