Posts Tagged ‘disposable income’

How much money do you have left after tax, and benefits? If it was more than £16,034 in 2011, then you are above average.

Mind you, it does depend on where you live.

London disposable income was on average £20,509. It was £18,087 in the South East and £16,608 in the East of England.

In Wales it was just £14,129.

Mind, you at least the Welsh enjoined more growth than average. On average the average Welsh householders saw disposable income rise by 2.8 per cent between 20010 and 2011. The figures are not adjusted to take inflation into account by the way, so after inflation the picture looks less positive.

The South East and South West enjoyed the fastest rate of growth in disposable income between 2010 and 2011 (up 3.0 per cent), the North East the lowest growth (2.3 per cent).

It may be worth pointing out that the ONS has used a rather curious term here: Regional Gross Disposable Household Income. It defines this as the amount of money that all individuals in the household sector have available for spending or saving after income distribution measures.

In the meantime here are some charts:

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Back in the day, real wages used to go up.

The days of ever rising wages may have come to an end some time ago, but during the boom years it didn’t really matter, because house prices went up. Who cared if wages only rose by a couple of per cent when our houses rose in value by a few thousand pounds every month?

But when recession bit in the UK in 2008 something odd happened. In terms of disposable income, the average Brit became better off. The average Brit, of course, had a mortgage and as interest rates headed to near zero, Brits with mortgages were laughing.

It wasn’t so funny if you lost your job, but then most Brits didn’t.

But then, as the recession came to an end, another odd thing happened. Inflation rose sharply, but wages didn’t. So to recap, during the recession most of us became better off, but during the recovery we were worse off.

And every month since April 2010, inflation – according to the retail price index – has exceeded rises in average wages.

Part of the problem is that inflation has proven to be stubborn. The other part is that wages have not been rising like they used to. In the year to April 2010, for example, wages including bonuses rose by 4.4 per cent. Alas they have increased by less than 3 per cent every month since.

Take the latest data. This morning the latest inflation numbers were out – this time for November. They were disappointing.

Another disappointment occurred a month ago too, when inflation – as measured by the CPI Index – rose from 2.2 in September to 2.7 per cent in October. Core inflation – that’s without food, energy and tobacco – rose from 2.1 to 2.6 per cent, and the RPI version of inflation rose from 2.6 to 3.2 per cent.

Never fear we were told. Next month will be better. Well this morning was next month, and it wasn’t, or not much.

Both CPI and core inflation stayed on hold, while RPI fell a smidgen to 3.0 per cent.

Last week the latest figures on wage inflation were out too. In the three months to the end of October average wages with bonuses rose by 1.8 per cent. Look at October in isolation and the numbers look even worse – average wages with bonuses were up by just 1.3 per cent in the year to October. To recap, RPI Inflation was 3.2 per cent in October.

So another month goes by and, allowing for inflation, wages fell.

The snag is that this time last year, many economists were predicting something quite different. They forecast that during the course of 2012 inflation would fall sharply, wages would rise, real wages increases would thus go positive, and UK consumers could then afford to start spending more, pushing up GDP.

It just ain‘t happening.  And now even the most doveish of economists are admitting that inflation may not fall back any time soon.

So what does it boil down to?

Quite simply we have to wait quite a while longer before wages start to create the foundations for economic recovery.

PS. As an aside, central bankers across the world – except in the euro that is – are coming around to the idea of changing the way central banks target inflation. And by the way, the Bank of England’s next governor Mark Carney is very much taking part in the debate. They are now talking about targeting what’s called nominal GDP – that’s GDP not allowing for inflation. So take the UK, up to now the Bank of England has targeted 2 per cent inflation. It hasn’t had much luck of late, but that’s been its aim. So if inflation was 2 per cent and growth 3 per cent, that meant nominal GDP growth would be 5 per cent. But in recent years growth has been nearer zero. The big idea being considered is that central banks should target nominal growth of around 5 per cent, meaning that if real growth is zero, inflation would be 5 per cent. The idea, of course, is that by doing this, GDP would rise. But here is the irony. At the moment, as was explained above, it is looking as though inflation is what’s stopping us from having sustainable growth. So it is all very well, saying let’s have a little inflation in order to create growth. The story of 2011 and 2012 is that a little inflation is what has been stopping growth.

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Whether you believe the UK downturn is slowly ending does to an extent depend on what you believe caused its problems in the first place.

Let’s look at the data, the theories, and the policies and ask: do they stack up?

First there’s data on employment. It has improved and that’s good, of course it is. But the quarter also saw a 24,000 rise in the number of part time workers. There are now 1.42 million people working part-time in the UK, which is the highest number ever recorded – and records go back to 1992. So maybe the improvement in employment is not quite as impressive as it seems.

The jump in industrial production in July, the highest in 25 years, is to be celebrated, but to an extent this occurred as producers made up for lost production in the previous month due to the Jubilee celebrations.

What about forecasts that real wages are set to rise in the UK? Here the news is more encouraging but it hinges on an ‘if’.

The CEBR reckons average real disposable income for households will rise by 0.5 per cent in 2013. If it is right, then it will be the first such rise since 2009. Incidentally, average wages in the year to June increased by 1.5 per cent, according to stats out last week. In the year to June, inflation – as measured by the retail price index – was 3.2 per cent. So during the 12 months to the end of June the average worker became a lot worse off.

The CEBR also forecast that the households who will benefit the most from rises in real disposable income will be those on lower incomes. It reckons households whose disposable income is less than £26,000 will see their income rise by 1.5 per cent next year, after inflation. Middle income earning households will see real disposable income rise by 1 per cent. And those receiving more than £50,000 are expected to see a rise of 0.7 per cent.

So what assumption did the CEBR make to draw these predictions? Firstly, the improvement for lower incomes is down to falls in bonuses. (In the year to June bonus pay fell by 4.7 per cent.) Secondly, the CEBR assumed that inflation is set to fall. It may be right about that, but the question mark here relates to the price of food. Droughts in Russia and the US are hitting crop yields. At the same time, too much arable land is being used to grow bio-fuels, a policy that seems pretty mad. As for the euro area, ECB President Mario Draghi said he will do whatever it takes to save the euro, and now he has delivered – or tried to anyway. The ECB is engaging in its own form of quantitative easing. It is not outright QE, it is not creating new money; rather it is taking deposits from commercial banks to match its bond buying. See: It’s QE Jim, but not as we know it.

But Mario’s scheme is complicated. It is really aimed at Italy and Spain, but for either of these countries to take part, they must first ask the European Stability Mechanism for help. And they must sign a memorandum of understanding, relating to the austerity cuts they must make. In other words, in order to avail themselves of ECB money, Italy and Spain must agree to cuts.

“Don’t do it,” says Nobel Laureate Joseph Stiglitz. In an interview with a Spanish paper he said that for Spain to sign on the dotted line, to ask the ESM for help and agree to Germany’s insistence on austerity, would be tantamount to economic suicide.

As for the US, something pretty interesting is happening across the pond. While some of the Christian fundamentalists that seem to be gaining more sway over the US political scene seem hell bent on enacting policies designed to pretty much terrify the rest of the world, amongst economists the QE debate has reached a new level. Professor Michael Woodford is a big cheese at Columbia University. He also happens to be the most respected academic on monetary economics in the world.

He reckons that when the Fed sets its monetary policy, it should take into account what’s called nominal US GDP – that is to say GDP measured in dollars, not adjusted for inflation. He is also a big fan of the Bank of England’s big idea: funding for lending, in which the central bank lends to banks if they agree to lend this money on to businesses and for mortgages.

But what all this really means is that the thinking at the Fed and among its advisors is slowly coming round to the view that that a little bit of inflation may be a good thing. Let’s face it, when you are in debt and inflation is quite high, and your income is rising with inflation, then the value of your debt relative to income is falling.

So that’s just a hint that the Fed is relaxing its inflation intentions. Bear in mind that the CEBR’s forecast for the UK economy is based on the assumption that inflation will fall, you can see how the whole thing is based on contradictory ideas.

But this still leaves the questions: is the UK on the mend?

Markets have overreacted to the latest news on QE. The UK has plenty of problems and challenges ahead, but yes, the outlook right now is more positive than a week ago.

The real snag is that neither central bankers nor indeed many governments are fixing the underlying problem. And to find out about that, read on.