Wednesday, April 16, 2014

This morning's release of the latest labour market statistics provides a dose of good news all around. The unemployment rate has fallen below 7%, and earnings are rising at 1.9% over the year. The rate of earnings growth is particularly pronounced in manufacturing, where it is 2.8%, possibly reflecting the onset of skills shortages. In finance and business services, meanwhile, earnings have grown at only 0.3%, possibly reflecting in part the decline of bonuses.

The detailed data still paint a more nuanced picture. Take productivity as an example. Output per job rose by 1.3% over the year to quarter 4 in 2013. This is a marked improvement on the 0.5% achieved the previous quarter, and certainly better than the declining productivity that was still being experienced in the first quarter of last year. However, improvement in output per hour has been considerably less impressive. This was still falling as recently as the third quarter of last year. The final quarter figures are a little more encouraging (suggesting 0.7% growth on a year earlier), but remain fairly muted.

Another aspect of the labour market which has been interesting in recent years is the dramatic rise of self-employment. Between December-February and the previous quarter, self-employment rose by some 146000, and the total now stands at more than 4.5 million. The latest figure represents a 7.1% change over the year. Self-employed workers now comprise 14.8% of the workforce. We know that much of the increase in self-employment has taken place amongst older demographic groups, and it remains unclear how much of the rise is due to entrepreneurial development as opposed to people running out of labour market options. Clearly more research is needed on this.

In sum, therefore, the statistics are encouraging. But the labour market is clearly changing rapidly, and an exclusive focus on the headline metrics risks being more than usually misleading.

Tuesday, April 15, 2014

The rate of growth of consumer prices in the UK has again slowed - to an annual rate of 1.6% in March. This has raised hopes that real wages, which have fallen and then stagnated over recent years, may finally have turned a corner. Earnings data become available tomorrow, but - since they are produced with a longer lag than the price data - will cover the three months to February. But clearly, if real wages do turn out to be on the rise, a major component of any explanation will be the slow increase in prices.

The low rate of price inflation thus merits some consideration. Since August of last year, the value of the pound relative to other major currencies has increased. Against the euro, it has risen over 5%, while against the US dollar it has risen by well over 20%. This has led to cheaper imports, putting downward pressure on price inflation. The fundamental basis for this appreciation is unclear - while confidence in the economy's ability to deliver growth has clearly increased, the current account balance has deteriorated sharply over the last two years.

If nominal earnings do indeed soon rise faster than prices, then that would suggest a turnaround in productivity - and that would of course be welcome. But the growth rate of productivity looks set to remain slow, well shy of its trend, for some time to come. The supply side issues underpinning low productivity still need to be addressed urgently. The labour market is still some way off returning to normal.

Tuesday, April 08, 2014

The latest figures for industrial production (up to February) have been released today. These allow me to report the latest forecast from my neural network model. The forecast is now for a less dramatic (but still pronounced) spike in output than previously predicted. The forecasts in the graph below cover a 24 month period, and suggest that, from early 2015, the rate of growth of output will slow down sharply. While the recent run of good news on the economy is cause for some celebration, caution about the medium term is still warranted.

Tuesday, April 01, 2014

The latest data on labour productivity show some positive movement. In the fourth quarter of last year, productivity grew by 0.3%, representing a 0.7% change over the course of the year.

A positive outcome on productivity is, of course, welcome following the dismal performance over the last few years. Nevertheless, this rate of growth remains below half of the long run trend.

The news coincides with the release of an important report from the Institute for Public Policy Research. This shows (Fig. 8.9, p.104) that British investment in training over the last few years has lagged way behind that of competitors. Without addressing the shortfall in human capital, productivity will remain a challenging feature of the UK economy, and will continue to pose a threat to the recovery.

Friday, March 28, 2014

The Bank of England’s Financial Policy Committee has sounded a warning about conditions in the housing market. It notes a rise in mortgage approvals of some 40% over the last year, and a record level of mortgages for which the loan is more than four times the borrower’s annual income. This warning reflects more widespread concern about the emergence of a housing market bubble.

The latest data on house prices do indeed show a rapid acceleration, with average house prices across the country growing by some 6.8% over the year January (with the Bank’s data suggesting a further sharp rise since). But this figure conceals some very substantial variations across the regions. In London, house prices are growing at a rate of 13.2%, surely unsustainable. In the South East, the increase is 7.1%. In other regions the rate of growth is much more modest – in the North East, house prices have grown by just 0.6%, and in Scotland by just 1.4%.

Regional unemployment disparities remain wide, with rates varying from 5.2% in the South East to 9.5% in the North East. Moreover, while unemployment is falling quite rapidly in the South East, the latest data record a rise in the North West, Yorkshire and Humberside, the East of England, and the East Midlands.

The latest available data on regional growth rates of gross value added – though somewhat out of date - likewise indicate a very uneven recovery. These show the South East growing at 2.5%, but most other regions growing at less than 1% per year, and with the East Midlands actually contracting.

In sum, these data indicate a considerable measure of spatial disparity. Recovery is proceeding apace in the South East, but has barely begun in some other regions. Past experience suggests that the improvement in the state of the economy will transmit across regions eventually – though it appears to be doing so more slowly this time than it has done in the past.

The extent of the disparities at this juncture is, however, a little worrying. The boom in the South East needs to be checked, but without stalling growth elsewhere. Monetary tools represent the mainstay of macroeconomic stabilisation policy, but a hike in the interest rate could not check growth in one region without causing profound damage in others. Different conditions across space call for policies that have different impacts across space. The solution to the South East housing bubble is not, therefore, to be found in macroeconomic policies – rather it is to address the supply side constraints. That means, quite simply, building more homes.

Wednesday, March 19, 2014

The latest report of the Office for Budget Responsibility (OBR), released to coincide with today's Budget Statement, raises the forecast for GDP growth to 2.7% for the current year. Since no forecaster has performed well in recent times, this news, in itself, is not terribly interesting. What is more interesting is the fact that the OBR forecast remains so far below that of the Bank of England - 3.4% - though the Bank does expect a somewhat more severe downward adjustment in the growth rate in 2015 than does the OBR. The discrepancy between the short term forecasts that drive judgements about fiscal and monetary policies is somewhat disconcerting; one might hope that, over time, each forecaster should learn from the other. And as things stand, the Bank of England appears to be closer in forecasting the growth spike than does the OBR.

The OBR report also provides a measure of the output gap, and this is now, at 1.4% of GDP in 2014, much closer to being in line with the Bank's assessment of the extent of spare capacity in the economy. Both measures remain low in comparison with most independent estimates, and hence support the view that a considerable portion of the government's budget deficit remains structural.

This last observation, of course, explains the continued caution of the government in producing a Budget that takes with one hand as much as it gives with the other. Work remains to be done to bring the public finances back into balance - views may differ about how much needs to be done, but it is clear that there is still some way to go. In any event, an expansionary Budget would, of course, have been inappropriate at a stage of the cycle at which growth appears to be surging ahead of trend.

Monday, March 17, 2014

The latest data from EEF (formerly the Engineering Employers' Federation) provide some very encouraging news. Much of the current recovery in the UK economy has come from increased consumer spending, and this has raised doubts about the sustainability of the upturn. But the new EEF data suggest that manufacturers are experiencing a substantial increase in orders for export - and that this increase is expected to accelerate into the next quarter. While the forecasts necessarily have an element of guesswork about them, if the export picture turns out to be close to the mark then it provides real cause for optimism.