Low nominal wage growth and falling real wages mix with the UK economic recovery

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The UK economy has moved into 2014 with the lights green for go for economic growth. However the experience of the credit crunch era has made many wonder exactly who will be the beneficiaries of any such improvement. One fundamental question is when will workers see a benefit from higher wages and salaries? Actually some are claiming that this has already happened and I intend to address that today as there is a lot of misinformation being presented.

The UK economy in 2014

The business surveys (Purchasing Manager’s Indices) gave their final result for December yesterday and completed a sequence which has now gone 57.3 for manufacturing, 62.1 for construction and 58.8 for the service sector. This compares to a benchmark of 50 and led the compilers to suggest that the UK economy grew by 1% in the last quarter of 2013.

The British Chamber of Commerce has joined this particular party this morning.

Positive Q4 survey suggests that growth will continue and probably strengthen further in the short term

On the basis of these results, the BCC believes GDP growth in Q4 2013 could be 0.9%

There may be an element of hyperbole here as if the UK economy was growing at a quarterly rate of 0.9/1% in the last quarter of 2013 then an acceleration whilst welcome is not that likely. There is a danger that economists simply project the recent improvements forwards ad infinitum a bit like the way so many produced forecasts of disinflation in the Euro area after it was recorded at 0.7% at one point last year. However there were some hopeful hints in the detail of the report. Firstly according to it we may finally be putting the 2007 peaks behind us.

Most Q4 key balances are higher than their pre-recession levels in 2007

Also our perennial balance of payments problem could do with a lot more news like this.

Both export balances in the services sector are at record highs for the survey: export sales (+36%), and export orders (+33%).

Indeed there was an echo of something of a rebalancing theme here as we also were told this.

Five key manufacturing balances are at all-time highs, allaying fears in Q3 that the growth spurt in manufacturing was temporary

However it was not all good news as a familiar worry and concern was flagged up.

Cashflow continues to be an ongoing concern, and may hold businesses back from expanding to meet the growing levels of demand.

Car registrations

These boomed in 2013 as the Society of Motor Manufacturers and Traders or SMMT has told us today.

2,264,737 cars registered in 2013, up 10.8% on 2012 and exceeding SMMT’s 2.25 million forecast for the year.

On average, an additional 600 extra cars registered per day in 2013 than in the previous year.

UK firmly secured as Europe’s second largest car market and only one to grow consistently throughout 2013.

So consumption at least in the form of new cars was very strong in 2013 although as only one in seven cars bought was made in the UK there is yet again a balance of trade issue. Actually UK car production is strong as shown below.

Car production rose 4.5% in first 11 months of year to 1,424,023 units….. (on course to be) the best performance since 2007

In general terms we tend to make cars for export (79.4% of production) and the European markets have been weak so in a way the UK is something of a victim of its own success here as we have sucked in imports.

Also UK car registrations have been boosted from various sources. We wonder at the impact of the Funding for Lending Scheme of the Bank of England and note that it has been associated with more credit of this sort. Also if you regard the redress payments from the banks for payment protection insurance as a type of “helicopter drop” for the UK economy then it will have had an influence too. They totalled £8.9 billion at the end of January 2013 according to the Financial Ombudsman Service. As will the current ultra-low level of official interest-rates although, of course, the rates that individuals pay are usually far from ultra-low.

Why aren’t people feeling this?

There are two factors to intially take into account here. The first is that the recovery is relatively recent and there is always a lag before improvements flow from such a change. The second is that as we can see from the car registration figures we are “exporting” some of the gains and I hope that some of the beneficiaries, who are mostly in Europe, will give the UK some credit for boosting their economies.

Wages

However a major factor has been the behaviour of wages which so far according to the official data have not responded at all.

The average weekly wage, including bonus payments, rose by 0.9% comparing August to October 2013 with the same period a year earlier. Average weekly wages including bonus payments before taxes and other deductions from gross pay were £476 in October 2013, up from £471 a year earlier.

Not much of an increase is it? And if we look back to the inflation figures for October we see that it represents a fall in real wages of 1.3% (CPI) and 1.7% RPI. We get a little more hopeful if we note that October alone saw a rise in wages of 1.1% but whilst it is a rise it is a small one. If we look for some perspective, we note that in fact wage growth has been falling for some time, for example, the October 2011 figure was 2.1% and October 2012 saw 1.3%.

An alternative view?

An annual survey called ASHE (Annual Survey of Hours and Earnings) is undertaken by the Office for National Statistics and it is being used to present a different picture. Its results can be summarised below.

In April 2013 median gross weekly earnings for full-time employees were £517, up 2.2% from £506 in 2012.

This presents quite a different picture as whilst real wages were still falling as the Consumer Price Index had risen by 2.4% in the year to April the fall is much lower.

However we did see a “blip” upwards in wages in April 2013 which is likely to have distorted the numbers. The reason behind this was an increase in bonus payments related to the lowering of the top income tax rate from 50% to 45%. If we return to the average wages series from above it recorded growth of 3.8% in April due to this effect. As that has now dropped to 1.1% we can only suspect that a new ASHE survey would in fact show a much lower level of median wage growth than 2.2% as by chance it was taken at the top of a cycle.

So we find ourselves concluding that the situation on a like for like basis would be a lot nearer if the numbers were calculated now. There is a danger for those promoting the 2013 figures that the 2014 figures could in fact be weaker if the developments since continue. Of course the recovery may bail them out but it has not done so yet.

Lies damned lies and statistics

As ever care is required as, for example, these numbers do not cover the (increasing numbers of) self-employed. Also you might after looking at the distribution of UK incomes think that the average number should be above the median! And to be honest I will have to look into that as so do I.

Comment

We always need to be careful about treating any statistic whether official or not as a type of gospel truth as they all have their flaws. But from the sequence of numbers above it seems clear that as far as we can tell UK wage growth has remained very weak and real wages continue to fall. In fact any real wage improvement has so far come from the fall in annual consumer inflation. The somewhat Marxist theme that labour is being squeezed whilst capital benefits continues its drumbeat in the background.

Let us hope that this will change but even if we look at other statistics the drummer is hammering out his or her tune.

The income measure of GDP showed that compensation of employees (which includes wages and salaries, as well as social contributions made by employers) grew by 0.2% and the gross operating surplus of corporations grew by 3.8% in Q3 2013.

Ah yes economic growth of 0.8% and wage/salary growth of 0.2%….. A very different type of recovery seems to be in place at a time of “same as it ever was” for housing,trade and credit.

 

 

 

 

 

This entry was posted in General Economics, Growth, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • anteos

    Hi Shaun

    great article as always. Britains recovery, based on PPI payments and increased debt. What could go wrong ;-)

    interesting to see the MSM finally acknowledging a lot of the issues which have been raised on here.

    Guardian writier realising that george hasn’t been cutting, and that its almost impossible to cut the state with a 100bn deficit and index linked payments:

    http://www.theguardian.com/commentisfree/2014/jan/06/osborne-proposing-too-much-squeeze

    pesto realising that growth could be driven by PPi payments:

    http://www.bbc.co.uk/news/business-25635819

    keep up the good work.

  • forbin

    Hello Shaun,

    Thanks for trying to throw some light on the matter ( and succeeding somewhat ;-) )

    I think longer term trends are the ones to follow , like you have often said one months figures can be misleading. So what do the longer trends show us ?

    1, import / export gaps – not getting any better – trend worse

    2, Unemployment/employment – best to mention both – trending slightly better

    3, Borrowing – Government – trend worse

    4, Borrowing – Private – trend slightly better – ok that depends on what you mean by better – me , I think lower debt load for the man in the street means better – for the Loons in Westminister that means bitter ( :-) )

    5, Wages – exclude top 5% and bottom 5% and its worse , for those in the top 5% its better – good for you guys , now spend you way to recovery for us will you !

    6, Inflation – getting at last to target so should be trend better …… but nope lets change the goal posts and make that a worse trend ……

    7, Government debt interest – trend worse …… and see 3 …. oh deary me !

    7, Bank solvency – trend stable – since 2008 , tranlates to needed trend improvement ….. oh deary me they’re still bust !

    8, Rebalancing the economy – trend towards same old housing boom , industry still trends downwards……..

    So barring Events , we have the same old issue we’ve had for 30-40 years , regardless of North Sea oil.

    We still import workers and dont train our own ( apparently its cheaper that way ) our university trained grads have the incentive to go abroad snd not pay back a penny … these two contribute to an effective brain drain .

    We can argue the toss over the these itmes , and others , but its the balance of payments thats the real Nellyphant in the room

    Apparently our leaders can’t change that ……

    Forbin

  • Anonymous

    First they came for the young, and I said nothing. Then they came for the young again, and I said nothing. Then they came for the young again …. you get the idea.

    Oh dear the UK is looking messy now. Politicians understand that they are running a pyramid scheme that needs new entrants constantly. But the old think the UK is a going concern, that we can stop immigration and have ever-increasing pensions. Politicians can’t come out and say “we are running a boiler room” so they have to try and calm the masses. But things are getting too tight and they are fighting amongst themselves!

    Vince Cable should come out and say “look olds, it works like this! we bribe you, you vote for us. Because it’s a bribe we are paying over the odds so we have to get more and more immigrants all the time”.

    This is getting great to watch. No long now! I wonder what politicians will do when they can’t bribe the boomers+ ? The backlash could be quite something, after all it’s not like politicians want to look after the old, they just want the votes.

    It’s all about the boomers+, always was. Will they understand they are signing their own death warrants by going to UKIP and stopping help2buy?

  • Anonymous

    I think even top 5% of PAYE are hurting. 85K puts you in the top 3% according to this site:

    http://www.ifs.org.uk/wheredoyoufitin/

    Of course it excludes SMEs but I think for a percentile this is broadly ok. Now first don’t get me wrong – anyone on 85K is lucky. But given incomes have detached from housing, plus high marginal tax rates, being in the top 3% means nothing lifestyle wise. The only thing that makes any difference for someone on 85K vs 45K (77th percentile) is “did you buy before 1997?”. This is insane and utterly demotivating. Why have the stress of a top 3% job when teachers are kicking around all summer and living in a nice home near a good school who are 5 years older than you whilst you rent and could not even imagine being in their shoes?

    That is the divide, not wages unless you go into 1% and above. I also suspect this is why UK productivity is so low. There is no point trying for a 10K raise – it makes no difference to your life other than getting home later and not seeing your kids.

  • GusBmth

    Hi Shaun

    I think your observations about the lack of income growth are spot on. It will be very difficult for the economy to maintain recovery and growth without growth in incomes. My perception of the labour market is that there are still large numbers of applicants for most jobs (especially ‘good’ jobs) – indicating a large pool of underemployed/underutilised/under-incomed/unemployed workers – which is likely to maintain downward pressure on wages.*
    *[For low paid workers, falls in real wage rates can actually increase the supply of labour, as workers seek to increase their hours worked in order to maintain a basic income level]

    PPI compensation appears to have been a small but significant positive contributor to growth this year; but over 2014, this will turn from a positive to a neutral and then negative factor in quarterly and yearly comparisons.

    Economic growth in 2013 was much better than most forecasters predicted and many seem to assume that it will continue and even strengthen through 2014. Optimistic forecasts assume growth in real incomes this year, accelerating into 2015, but as you point out Shaun, there is scant evidence of that so far. If growth were to peter out this year, it would leave us in a right pickle, because it is extremely difficult to stimulate an economy which has lost momentum.

    How truly shocking, then, that the Chancellor should choose to couch his comments about future spending plans in such negative terms.’Austerity,you ain’t seen nothin’ yet’ is hardly the way to maintain confidence and optimism when the economy is in the midst of a fragile recovery. The golden rule for all Chancellors used to be that you never talked down your own economy. This is the second time Osborne has done this; in 2010 he knocked the wind out of the economy by talking endlessly about very tough austerity measures (and delivering austerity very light). I certainly hope he doesn’t have a similar impact this time. But, one should never underestimate the importance of managing (and manipulating) perceptions in running an economy.

  • forbin

    Hi prog

    I had to put a line in somewhere and I did consider 1% bracket

    but isn’t it a sign of our times that even a 45-85K job is not really high? inflation depressing buying power of the pound ( or Euro for that matter) and house prices inflating to the moon ?

    The time of the multi generaton mortgage is coming and thats not funny , even a Roman soldier could get out after 25 years . The million pound single bed flat ? as I typed that I fear it may already be here …… Crazy !

    Yes its demotivating , even for me a house owner , I can’t actually afford to move up the ladder , it would actually help me to have a defaltion in house prices , the current madness that no one must fail in thier mortgage is just daft.

    oh well – back to the popcorn and watch the show.

    Forbin

  • Anonymous

    Sure, it’s wasn’t a missive directed at you, more a clarification of how bad things are!

    Inflation is IMHO not as bad as the one thing that doesn’t go into inflation figures: house price inflation. Yes regular inflation has depressed spending but it’s dwarfed by rent increases and deposit requirements (I’m a supporter of a decent % deposit but on a reasonably priced home!).

    Multi-year won’t come. USA are getting rid of long-term mortgages. Anyone with brains will just leave the UK and it will get worse and worse. It’s certainly nuts. The show is however speeding up a little!

  • Justathought

    “The
    object of efficient totalitarian states, as George Orwell understood, is to
    create a climate in which people do not think of rebelling, a climate in which government killing and torture are used against only a
    handful of unmanageable renegades. The totalitarian state achieves this
    control, Arendt wrote, by systematically crushing human spontaneity, and by
    extension human freedom. It ceaselessly peddles fear to keep a population
    traumatized and immobilized. It turns the courts, along with legislative
    bodies, into mechanisms to legalize the crimes of state.” — Chris Hedges

  • Anonymous

    The UK has oppressed the young by bribing the old, it’s not a simple “people vs the state” yet. As it becomes clear that house prices cannot be realised and that boomer+ land is coming to an end the establishment will have their hands full. Plus for the young they have little to lose. Watch as the state turns from big but harmless into big and oppressive. Remember the London riot sentences? Too late now…

  • Blue brit

    As a 35year old i have come to the conclusion that i should leave this country. As i am not willing to pay into a giant ponzi scheme from which i will get nothing. House prices are nuts and taxes are ludicrous.

    The question is what country should i go to, any thoughts?

  • Anonymous

    Hi Anteos

    Thanks for the Guardian link which I have just taken a look at. It also has something of a reverse course here.

    “The problem is that, as we borrow more, we have to spend more on debt interest.”

    There have been plenty of writers in that paper as well as others who have argued against that point both explicitly and implicitly.

  • Anonymous

    Hi Progrock

    There is a lag before the numbers are released so we only have the numbers for 2010/11 for gross income according to the UK revenue (HMRC).

    The top 1% earned over £140k per annum

    The top 3% earned over £80.1k per annum

    The top 5% earned over £62.6k per annum

    The top 10% earned over £46.3k per annum

    The table also had data from 1999/00 so I wondere about rises/changes.

    The top 1% saw a rise of 45% over the period whereas at 50% the rise was 32%

    So for a “des res” in Central London we are looking at the 0.1% or perhaps even the 0.01%…

  • Anonymous

    Hi Blue brit and welcome to my part of the blogosphere

    I will be interested to see what replies/suggestions you get. As wherever one looks ponzi schemes of one form or another heave into sight. For example Latvia joined the Euro the other day and has a gearing of over 7 times on its down payment into the ESM. What could go wrong?

  • Blue Brit

    Power and hubris never make good bed fellows
    Europe is in serious trouble and the amalgamation of diverse states with wildly different levels of transparency and ethics is a recipe for disaster.

    But these individuals are not living in the real world. To make matters worse very few of them are numerate and can not analyse data. They would rather manipulate and spin a story which suits there own agenda.

    Where are the great statesmen when you need them

  • Anonymous

    Hi Gus

    The key for the UK economy in 2014 is the labour market. We have improving employment and falling unemployment which has given things a boost but for any real “feel good” sense we need a better path for wages. This may come but so far the signs have disappointed.

    I was surprise too by the Chancellor’s speech. If we put to one side the politics and the firing of the starting gun for the 2015 election there was an issue not raised. We have growth and something would have to go very wrong now for it not to be decent in the first half of 2014. Accordingly the budget deficit should be improving and I am left wondering if we will get a “surprise” in the Budget.

  • Justathought

    Hi Blue Brit,
    I am moving within 4 months in Eastern Asia….

  • Anonymous

    I’m 36 and have been 6 months in Quebec. So far the change is marked. It’s like what your parent’s tell you the UK used to be like in terms of community spirit. Good schools, nice food and less pressure at work in terms of hours. A welcome change to London. However property prices are high here and due for a crash.

    Last straw for me was looking at an area up the road near a good school (not a great one, just good). The rents in the catchment area were a fortune, 2K a month to live like I was in the 1970s, small, unmodernised and cold. It was the wakeup call I needed, I just thought “sod this”. Who needs it? Life is too short to be farmed by 60 year olds in the public sector. The only vote you have that will ever count is to take your tax away from them. I hope every last person under 35 leaves the UK – let ‘em beg for us to come back :-)

    I’m reading more and more about people emigrating. Brain drain time!

  • Anonymous

    Thanks for the reply. I suspect HMRC are way off in what the effective pay is. How many people declare 60K but in reality take home more than PAYE on 100K? No way to know for sure but when you look at all the expensive cars on the road I can’t believe I’m in the top 5%!

    Central London? North London in Finchley was 400K for a 2 bed terrace. Not a great area, often pretty depressing (not West Ham depressing but still). So on a 3.5x household income you’d have to be in the top 10% for a working couple. Up the road in Muswell Hill and you are talking more. We even looked at commuter towns, they were as bad, without the rail fair. Total madness.

  • Anonymous

    Isn’t the point to get into power? With all the existing pensioners and near pensioners are they better off understating inflation to do a soft default on pensions via the RPI/CPI spread on a “slow burn”? Would wage inflation not leave the boomers+ high and dry? I’d have thought this would be instant problems for both parties. Mild stagflation plus housing equity release (whilst propping up house prices!) is the tightrope of choice!

  • GusBmth

    Ah, of course! Set expectations low and then surprise with a move on income tax rates/personal allowances. Thus setting up a ‘small (efficient) state, low tax’ versus ‘large (profligate) state, high tax’ paradigm for the election debate; together with a ‘rewards for hard work’ versus ‘(unaffordable) welfare incentives not to work’ argument. Clever politics.
    But in terms of economics? Seems like that would be like trying to cut the deficit by cutting taxes. That has been tried before without success, hasn’t it?

    The next election should come with a health warning for savers – expect punitive (probably negative real) interest rates for the foreseeable future!

  • Jer

    Attila? Buried in Bulgaria somewhere I think.

  • Paul C

    Progrock, whenever I raise this generational argument I get shouted down as hater of old people. I think you are right, your way of saying it is entertaining but it is fundamentally true. As long the boomers continually get promised nothing has to change then all these new young folk need to pour over the threshold and be “assisted” into the pyramid.

  • Anonymous

    It’s changing, trust me. Forums where the average age is much lower than here are starting to change – sorry Shaun I asked a group of kids on the bus and they hadn’t heard of you :-) .

    There is much more awareness amongst the online young about house prices and the gap between what is being promised and what will (not) be delivered. IMHO this will reach a tipping point and then surge forward. It will be ably assisted by young people in journalism who are also excluded from financial freedom (Evening Standard and people like Faisal Islam plus older people who aren’t bastards like Paul Mason) who are biding their time waiting for this critical mass. When it comes the establishment will be very surprised.

    I’m also seeing more talk of emigration. For many it stays as just that, but a % do get out and they set an example for others. Again this is under the radar but good people leave and people with less education come in making for a balance on ONS reports but damaging the UK.

    A good example of an apparent shift would be the big change in immigration support in polls. Basically the establishment and media suppressed any discussion on immigration. If you even mentioned it you were racist, end of story. But people did have good reasons to oppose high immigration levels that were not racist. IMHO it was even so bad that people felt they could not say they were against it in a survey. Then suddenly there is more noise about it, things come to a head, it’s in the media and people feel they can say it’s not a great thing in a poll. So you suddenly get this apparent huge shift in sentiment when really only a small % changed their minds, the change was in the numbers *speaking* their minds.

    The same thing will come for the young. They all know *something* doesn’t add up but they have no financial education and can’t work it out amid the screaming of the media that owning a house makes you “a real person”. When this collective epiphany comes it will spread quickly.

    Already help2buy has cost the establishment a lot. They have had to expose the workings of money and the absurdity of house prices in one shot. They can never take that back. And in any case the UK is in managed decline which is accelerating.

  • JW

    Forbin’s 1 bed flat for over £1m is the norm in W8.

  • Anonymous

    And as if by magic…………………

    Met police want water cannon ready to use in Britain by summer

    http://www.theguardian.com/uk-news/2014/jan/08/met-police-water-cannon-britain

  • Anonymous

    Yeah they are getting their ducks in a row. The simple fact is however that it’s policing by consent. Once you get a big enough crowd or several distributed protests they will find it tough to stay on top of it. Depends how dumb they are. If they just go to one place which they tell the police about before and then let them kettle ‘em – well perhaps as a people we deserve to be farmed!

  • Noo 2 Economics

    “And in any case the UK is in managed decline which is accelerating” – the UK in terminal decline has been my view of the UK since 1977 (Johnny Rotten summed it up – “theres no future and Englands dreaming” and “we’re the future, your future”) but in hindsight I feel the decline began in the early 70′s, so it’s hard to tell when the final collapse will arrive.

  • Anonymous

    Yes, I’m sure they can string it out for a bit longer. But really it’s getting very clear now – all utilities have gone, rail, now we have the Chinese offering to build part of HS2 so they can rent it back to us. It’s never been more clear IMHO.