Do you want the good news, or the bad news first? Most people tend to want to get the bad news out of the way first, and then end on a good note.
When it comes to the outlook for the UK economy - expect more of a bad news sandwich. That’s better than it sounds, with some good news before and after, the bad news. The good news is that UK unemployment is at a record low - today more Brits have jobs than in the past 42 years.
The latest labour market data out this week showed UK employment rising by 102,000 in the three months to November, taking total employment to a record 32.2 million. The slice of people out of work remained static at 4.3%, despite economists’ predictions that employment could fall. In 17 years there have never been more vacancies: 810,000 of them.
Dig deeper into the data and a further positive is that the new jobs created aren’t down to self-employment or part-time positions, but largely full-time jobs.
Now for the bad news… despite a record number of people being in work, our wages are still increasing at a glacial pace. Total earnings including bonuses screeched to a halt, remaining at 2.5% for the second reading in a row, while earnings excluding bonuses nudged up a pitiful 0.1%.
This will hurt hardworking households because it means our earnings continue to fall behind inflation, which stood at 3%, according to last week’s CPI figures. This means that as each month rolls by, we’re getting progressively poorer.
Wage growth vs. inflation over the past ten years: (%)
Source: Fidelity International/ONS, January 2018
Weak wage growth isn’t a new phenomenon. Our earnings fell during the height of the credit crunch (as the above graph shows) and while recovering from these dramatic falls, have flat lined ever since.
Economists scratch their heads as to why this is, calling weak wage growth the ‘missing piece of the puzzle’ when it comes to the economic recovery.
Typically, high employment should boost earnings because it means workers have greater bargaining power when it comes to the wage negotiation table. It also means employers who want to retain, or attract good workers, need to start paying more.
A possible reason for this ongoing disconnect between employment and wage growth could be the long-running backdrop of economic uncertainty. Many workers are only now getting the job security they have so long yearned for - it takes some time between breathing a sigh of relief at getting the full-time job you had hoped for and approaching the boss for a pay rise.
As more and more workers get better job security and a notable shift takes place from self-employment to full-time employment, we could see wages starting to catchup.
Indeed, one of the big questions this year is whether the global economic recovery will eventually feed through to wage growth. If it does, this should be supportive of consumer spending, the linchpin of the UK economy.
Other good news is that this week’s jobs numbers has helped propel the pound to its highest level relative to the US dollar since the Brexit vote. While the pound has been helped by a weaker dollar, the currency is also benefiting from a more upbeat mood around Britain’s EU divorce negotiations. The Brexit naysayers seem to be reigning in their pessimism with Goldman Sachs economist Jim O’Neill this week backtracking on his previous Brexit negativity. He said that global recovery had the potential to more than make up for the negative effects of Britain’s decision to leave the EU. This is supportive of our view in the latest Investment Outlook that the UK could be the ultimate contrarian call in 2018 with the bad news now largely in the price of this defensive market.
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