Posts Tagged ‘ons’

ID-100109044There are two big question marks hovering over the UK economy. The answers  may determine whether the UK is seeing a temporary recovery or something a good deal more real.

First consider the surveys. Every month Markit and CIPS get together to produce Purchasing Managers Indices (PMIs) covering UK manufacturing, construction and services. Then they add them all together and produce a composite index. Over the last few months these indices have been really rather exceptional. A couple of months back the composite PMI hit an all time high. Okay data only goes back to 1998, even so it was impressive stuff.  Since then the PMIs have fallen back a tad, but they still remain way above historic averages.

Some economists reckon that the PMIs are consistent with quarter on quarter growth of around 1.5 per cent. To put that into perspective, there aren’t many emerging markets growing that fast.

But here is the thing, the hard data from the Office of National Statistics (ONS) is not so good. For the third quarter of last  year the ONS had quarter on quarter growth at 0.8 per cent. That growth rate is good, compared to what we have become used to it is marvellous, but it was less than the level the PMIs were indicating.

As for Q4 of last year, the PMIs suggested that was even better than Q3. Alas, not so the data from the ONS, it had the economy growing by 0.7 per cent. Okay, that growth rate may get revised upwards, but it is still way down on what the PMIs suggest.

Drilling down, construction may provide a partial answer. The ONS had this contracting 0.3 per cent in the last quarter of last year, the PMIs had it surging to its highest level in several years. Since then the PMIs tracking construction have got even better. This suggests that the ONS will either revise its estimate of construction’s contribution to UK growth in Q4 upwards, or we will show a marked improvement in Q1.

The latest PMIs also point to the largest backlogs in orders within the services sector since May 2007. That seems to suggest we are either set to see the sector’s output surge, or we may get rising prices instead. Or both.

Then there is business confidence, in the services sector this rose to its highest level since 2012.

These days, it’s popular to talk about that elephant in the living room. You hear the phrase so often, that is a wonder there are any elephants left in the wild, so busy are they filling up our livings rooms. Well apologies for adding to living room congestion, but as far as the UK economy is concerned there are two elephants in the living room

Elephant number one is household debt/house prices. Part of the UK’s recovery is coming on the back of rising house prices, making households feel richer, encouraging them to spend more. This is not new, the idea that the government is repeating the mistakes that led to the finance crisis in the first place is rehearsed most days in the media, and indeed by politicians.  Some deny it of course. But one piece of hard data needs to borne in mind. The fact is in Q3 of last year the savings ratio fell, this was the main contributor to growth. We haven’t got the data for Q4 yet. But given the imminent retirement of the baby boomers, is creating growth via less households savings really a good idea?

The other elephant in the living room is cash sitting on corporate balance sheets. If they could be persuaded to spend it, ideally invest it, the UK economy would boom like it hasn’t done for a very, very long time.

Just to remind you, according to the PMIs work backlogs are soaring, business confidence is rising, might that be enough to get companies spending again?

What will you be doing when you are over 65, assuming that is that you are not already over that age? Do you think you will still be working? Now forward wind the clock. Let’s for the sake of argument say the date is 2035, meaning that if you are 43 today, you will be passing the 65 mark. What will things look like then?

This is perhaps the single most important underlying force at the work in the UK economy today. It may determine future growth, future prosperity, or indeed poverty. Understand this, and you are closer to understanding what is really going on beneath the surface.

According to the Office of National Statistics (ONS), between February and April this year just over one million people over the age of 65 were in work. It was the first time ever that this number topped the million mark. The ONS says the rise in the number of over-65’s working is partly down to more people staying on at work and also more people of this age group in the population.

So let’s drill down a little. In April 1992, 478,000 over-65’s were working. That was 94.2 of the population of this group. By April 2000, not a lot had changed. 457,000 over-65’s were working, or 94.7 per cent of the population of this age group. Throughout the noughties things did change, however, and by quite a lot. Between 2000 and 2013 the number of over-65’s in the UK leapt from around 480,000 to about 1.1 million. During that same period the percentage over 65 who were working rose from just over 5 per cent, to a fraction less than 10 per cent.

In 2013, the proportion of the UK population over 65 is around 16.5 per cent.

Now forward wind the clock. The ONS reckons that by 2035 the population of over-65’s will be around 17 million or 23 per cent of the overall population. Assuming the proportion of those over 65 in employment stays the same, this means that by 2035 roughly 1.7 million will be working. Given that it seems certain the proportion of over-65’s working will rise, that means by 2035 the number of over-65’s with jobs will probably exceed 2 million, and will more likely top 3 million, even more.
Is this a disaster for UK plc?

Superficial analysis says that as more over-65’s work, there will be less work for under-65’s. But that is not how it is supposed to pan out. The more people in the UK who are earning, the higher will be demand, and demand creates new jobs.

There is another point, however. The appalling performance of the stock market over the last 13 years, combined with the fragility of the housing market, means that this growing population cannot just assume their pension pots will grow at the kind of rates enjoyed by those who were saving in the 1980’s and 1990’s for example.

But is it a good thing that more older people are working and that this number is set to rise?

One way of looking at is to say consider the alternative. Would you rather live longer but work longer, or would you rather it was like the 1960s, when you retired at a younger age, but almost certainly keeled over a good deal younger too?

And here is a bit of selfishness for you. The author of this article would actually quite like it if he was still writing until the day he died, providing that day is still some time off – say when he is 110…

© Investment & Business News 2013

In April wages, including bonuses, fell by 0.3 per cent. This was a staggeringly awful piece of economic data, but was it just a one-off?

This morning data for May was out, and it was much better, with average wages rising 3.3 per cent in the year to May. During the same period, inflation was 2.4 per cent, so for the first time in a very long while, average wages rose faster than prices, meaning that average workers were better off.

There are some buts, however.

Firstly, it appears that the figures were distorted by the end of the tax year. Bonus payments were delayed until after April to take advantage of lower income tax rate. So that at least partially explains why the data for April looked so awful, but so good for May.

The ONS prefers to look at a three month periods. And in the three months to April, average wages rose by 1.3 per cent compared to a year ago. That was better than April when they rose by 0.6 per cent, but still at the lower end of what we have seen over the last few years. In other words, once again, the average worker was worse off in the three months to May, after taking into account inflation compared to the same period in 2012.

Secondly, because the end of the tax year distorted bonus payments, maybe on this occasion we should consider wages before bonuses – or regular pay as the ONS calls it. In May regular pay rose by 1.3 per cent, but in the three months to May it rose by just 0.9 per cent, which was the second lowest increase in the last 12 months.

Inflation is expected to rise over the next few months, so there is little reason to believe wages will grow faster than inflation meaning that there will be no positive growth in real wagesfor many months.

This is the flip side to better data on the jobs front. At 1.51 million, the unemployment rate in the three months to January (the latest period for which we have data) was at a two year low.

But relatively low unemployment – that is to say low considering where the economy is at – is being paid for by low wage growth. So the economy is still in a downturn, unemployment is surprisingly high given this, but look to wages for a partial explanation. This is why some say we have a problem of zombie companies in the UK, maybe even a zombie workforce, keeping low paid jobs, with low levels of productivity growth.

© Investment & Business News 2013

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:

236          237

If house prices boom all over again, then the chancellor may be able to take much of the credit. In fact, it rather looks as if he is gambling on rising house prices. It’s a shame, because there is something else the UK really needs to rise, and that is its stock of entrepreneurs and wealth creators.

George Osborne is spending £3.5 billion on helping people chasing a new mortgage. That’s a lot, and he is guaranteeing £130 billion worth of mortgages. That is a risky thing to do but perfectly safe, if – and it is a big if – house prices rise.

The plan is for the UK government to extend its share equity scheme, so that the government will offer an equity loan worth up to 20 per cent of the value of a new build home to anyone looking to move up the housing ladder. House buyers will be required to put down a five per cent deposit from savings, and the government will then loan a further 20 per cent interest free for the first five years and repayable when the house is sold.

“It’s a great deal for homebuyers,” said George.

The government will also offer a new mortgage guarantee, to be available to lenders to help them provide more mortgages to people who can’t afford a big deposit. These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending. In all, the government will guarantee £130 billion of mortgages.

These are bold moves. But what effect will they have?

The risk is that these measures will push up house prices, which will soon become unaffordable again, but for a new reason. At the moment the challenge for home buyers is raising finance. If house prices rise, the challenge will relate to being able to afford mortgages, even if the finance is available.

If the government really wants to help more people own their own homes, it needs to try to get house prices down, not up. It can do this by taxing land that is lying idle, and reforming planning regulation. It can do this by forcing zombie banks and home builders to revalue the value of land on their balance sheets. Such measures will benefit the UK in the long run, but will be hugely controversial.

You can’t blame George for not implementing these measures, because if he did, an election disaster may await but it would have nonetheless been the right thing to do.

For too long the UK has grown on the back of rising house prices, giving consumers the confidence to borrow and spend.

The UK needs to grow via business making bold investments, entrepreneurs creating wealth by dint of their ingenuity, and through creating an innovation culture in which innovators are not afraid to risk failing.

Instead George tweaked. Sure corporation tax is falling to 20 per cent: “The lowest business tax of any major economy in the world,” he said. But US companies are sitting on $1.4 trillion worth of cash, according to Moody’s. Companies in the UK and across the world have money, and they are not spending it.

Cutting UK corporation tax will give the UK an advantage over rivals in much the same way that a trade subsidy would benefit UK exporters, but it will do nothing to solve the problem of cash lying idle and sitting on corporate balance sheets around the world. There is a case for saying we need to see a global fixed level of corporation tax. Mr Osborne is pushing for the opposite.

The Chancellor is also cutting £2,000 from every employer’s contribution to national nsurance. This is a bold move. George put it this way: “For a person who’s set up their own business, and is thinking about taking on their first employee, a huge barrier will be removed. They can hire someone on £22,000, or four people on the minimum wage, and pay no jobs tax.” Hats off to George – that is an interesting move.

But the UK’s underlying problem is productivity. According to the ONS, output per hour in the UK was 16 percentage points below the average for the rest of the major industrialised economies in 2011, which was the widest productivity gap since 1993. On an output per worker basis, UK productivity was 21 percentage points lower than the rest of the G7 in 2011. To enjoy sustainable growth, the UK needs improvements in productivity, and reducing the tax on jobs will not help.

The Chancellor announced other measures: a fivefold increase in the value of government procurement budgets spent through the Small Business Research Initiative; vouchers available to small firms seeking advice on how to expand, but these are little more than tinkering.

The most interesting idea to help business may have been his plan to cut stamp duty on shares traded on the AIM market. The Chancellor said: “Many observers of the British tax system complain that it has long biased debt financing over equity investment.” So the reform to stamp duty will encourage equity investment over debt.

Now it is time to turn to the missed opportunity. What entrepreneurs need is hard cash – money they can see, touch and smell.

Supposing that the £3.5 billion set aside to help home buyers was instead spent on funding entrepreneurs; perhaps spent on a sort of student loan system but for entrepreneurs, or just invested into venture capital firms and business angel networks. Now that really would have created the foundations for the UK to become the most dynamic economy in the world.

©2013 Investment and Business News.

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Of course it boils down technical definitions. The odds that the UK is not currently in the midst of recession are improving, but that does not mean the UK economy is in great shape.

It might also be worth pointing out, that actually the UK may not even have suffered a double dip, but that is no real cause for celebration either.

By the time the ONS has finished revising its data for Q4 2011 and the first two quarters of 2012, it may well revise its estimates for GDP up, so that they no longer show three months, or even two successive months of contraction.

But recession or not, what is true is that the UK’s total output is almost 4 per cent down on the peak recorded some five years ago. To celebrate that the UK did not suffer a recession during the midst of this particular downturn is like celebrating when your football team only gets beaten five nil, because the week before it was beaten seven nil.

According to our official compiler of statistics, the UK economy contracted by 0.3 per cent in Q4 last year, but over the course of 2012 expanded by 0.2 per cent, whereas it previously estimated flat growth.


But what about the here and now?

The Purchasing Managers’ Indices or PMIs from Markit/CIPS are as good a guide as any. In fact, they are typically a more accurate guide than early ONS estimates.

According to the latest PMIs out during the first few days of March, February was a bad month for manufacturing, and a bad month for construction, but services were sufficiently okay for recession to have been avoided.

Put the three PMIs together to form a composite and the composite PMI reading for February was 50.8, from 51.7 in January.

Any score over 50 is mean to be consistent with growth.

Markit reckons its surveys suggest the UK is on course for expanding at a quarterly pace of 0.1 per cent.

It’s growth, but not much growth.

On the other hand, service sector confidence about the year ahead lifted to its highest since last May and, according to Markit, at least some of the weakness in manufacturing and construction in February was due to business being disrupted by bad weather, meaning a brighter picture may emerge in March.

Markit did say, however that it is clear that the bad weather alone was not to blame for the weakness, and that underlying demand remains fragile. It said: “The underlying picture is one of a modest and hesitant upturn.”

The UK needs wage growth to exceed inflation, and then sustainable demand can lift GDP. It needs exports to rise, and it is being aided by recent falls in the pound in this respect. It needs greater investment to help improve the pretty awful productivity performance. Alas, it can’t have all three.

©2012 Investment and Business News.

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Growing demand and growth in productivity are a bit like a horse and carriage. You can’t have one without the other. At least you need both, if you want sustainable economic growth.

In an ideal world, over time we want to produce more output for every hour we work, and we want our hourly pay to go up in proportion to our extra productivity. Multiply that across the economy and we get more output, and more demand to meet the extra supply.

In the UK, we have a double problem. Wages are not going up with inflation. In fact in the three months to December average pay including bonuses rose by just 1.4 per cent. Annual inflation back in December was 2.7 per cent. So once again, average workers were worse off during the period in question. If you compare wage growth with inflation as measured by the RPI index, the picture looks even worse. Inflation by this index was 3.1 per cent in December, and has, in fact, been greater than wage inflation every month since March 2010.

RPI inflation versus average wages

But that is just half of the UK’s problem. The other half relates to productivity. That too has been awful. According to the ONS, output per hour in the UK is 21 percentage points below the average for the G7. Look at the big picture. The UK economy is either in recession or very close, yet employment is rising. How can that be? Answer: because productivity is declining.

In other words, in the UK we have the precise opposite of the ideal world. We have falling wages and falling productivity. Sure employment is at a record high, unemployment at 7.8 per cent is surprisingly high considering where we are with the economy, and yet the price we seem to be paying for jobs is a declining economy.

In the troubled regions of the Eurozone, the problems at face value are quite different. But perhaps the end result is very similar. The story for the Eurozone takes a slightly different view. The focus this time is on unit labour costs. That is to say the cost of labour for every unit produced.

First let’s look at some history. From the moment the Euro was launched to the point when things went pear shaped in 2008/09 the so called peripheral economies – that’s  Portugal, Ireland, Italy, Greece and Spain – saw their growth in unit labour costs race ahead of the growth seen in France, and even more so relative to Germany.

Since 2009/09 the gap has closed. In fact with Ireland and Portugal, the gap with France has closed and gone into reverse, so much so that growth in unit labour costs in Ireland and Portugal since 1999 is now lower than the equivalent for France. Spain is not far behind. Greece has a bit more work to do. Look at the figures and official data indicates that since 2008/09 unit labour costs have fallen by 14.7 per cent in Greece, 14.1 per cent in Ireland, 7.6 per cent in Spain, and 2.4 per cent in Portugal. They have risen 1.1 per cent in Italy, however. There are doubts over the accuracy of this official data, but you get the point. The gap has been closing.

The markets are chuffed. They see falling unit labour costs in these countries as evidence that the slow march to recovery is well on its way.

But is that right? As you know, unemployment in these countries is much higher than in the UK, and indeed in Greece and Spain – where more than a quarter of the working population is out of work – this is at a level one can only call terrifying.

Sure unit labour costs are falling, but given the massive level of unemployment, is that surprising?

The Eurozone really needs exactly the same development we require in the UK: rising productivity and rising wages. Perhaps, because of their lack of competiveness with Germany, and because – unlike the UK – they are not tied into a fixed exchange rate with Germany, they need productivity growth to slightly exceed wage growth.

This is just not happening.

The markets may love the data, but just like a bad marriage, when truth dawns, things may unravel badly.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here