UK Q3 2017 GDP Preliminary Estimate +0.4%

Filo25

Eric_the_half_a_bee wrote: »

If you read the MPC minutes carefully, you will see that they are expecting wage growth to pick up over the coming months. From the September minutes:

"The unemployment rate has continued to decline, to 4.3%, its lowest in over 40 years and a little lower than forecast in August. Survey indicators are consistent with continued strength in employment growth. Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years. Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. Underlying pay growth has shown some signs of recovery, albeit remaining modest...

Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more
rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2%
target over the next three years. "

http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2017/sep.pdf

If you do believe the analysis then surely the most worrying development is that we now view growth of about 1.5% as being unsustainable given our poor productivity growth.

Personally I still think that while unemployment is low there is a fair amount of underemployment around, so there may be more excess capacity around than one would expect from headline unemployment numbers.

Eric_the_half_a_bee

Filo25 wrote: »

If you do believe the analysis then surely the most worrying development is that we now view growth of about 1.5% as being unsustainable given our poor productivity growth.

Yes but remember we are only talking about an increase from 0.25% to 0.50%. That doesn't require growth to be judged "unsustainable".

Thrugelmir

Filo25 wrote: »

Debt growth appears to be slowing though and the decline in real wages doesn't point to an inflationary spiral developing.

As was the case several decades ago. This is bad inflation. Due to imported factors not domestic wage growth. Austerity is still very much on the agenda. Wage growth can only come about by solving the productivity puzzle.

Filo25

Eric_the_half_a_bee wrote: »

Yes but remember we are only talking about an increase from 0.25% to 0.50%. That doesn't require growth to be judged "unsustainable".

Sorry I meant more that the Labour market is continuing to tighten even though we are only seeing GDP growth of around 1.5%, implying that this growth is ultimately unsustainable (you can't keep lowering unemployment indefinitely, ultimately with no competition for people's jobs we start to see growth in wage increases and resulting inflation)

If our new long term trend growth is sub 1.5% then the new normal may be a pretty painful experience.

Filo25

Thrugelmir wrote: »

As was the case several decades ago. This is bad inflation. Due to imported factors not domestic wage growth. Austerity is still very much on the agenda. Wage growth can only come about by solving the productivity puzzle.

It is pretty much imported inflation due to devaluation of Sterling, however in the absence of significant wage growth that is more likely to be a one-off shock rather than much more dangerous inflationary spiral.

Obviously that has a very significant downside (falling living standards) but also something of an upside in the increased competitiveness of UK exports.

You are right though that ultimately productivity growth will be the ultimate driver for sustainable real wage growth for all of us, which doesn't paint a particularly optimistic picture in recent years.

Eric_the_half_a_bee

Filo25 wrote: »

Sorry I meant more that the Labour market is continuing to tighten even though we are only seeing GDP growth of around 1.5%, implying that this growth is ultimately unsustainable

The labour market is still loose, with negative real wage growth. It can continue to tighten quite a lot before it creates unsustainable effects on inflation.

Filo25

Eric_the_half_a_bee wrote: »

The labour market is still loose, with negative real wage growth. It can continue to tighten quite a lot before it creates unsustainable effects on inflation.

The unemployment figures would imply it is very tight, and the BoE seem to take that view.

As I said earlier I tend to agree it isn't as tight as it appears to be, the restrained nominal wage growth in the face of inflation doesn't imply that the workforce across the country feels that it has a lot of bargaining power, in spite of low unemployment

Of course Wage growth will tend to lag behind inflationary bumps a bit so it is possible that we will still see a bit more wage growth to come, but for now it doesn't appear to be happening to any significant degree.

Maybe it is a case of us still having a fair bit of underemployment, or maybe we have just added a lot of low skilled, low pay, low productivity jobs where workers still feel very replaceable even with low unemployment.

Thrugelmir

Filo25 wrote: »

It is pretty much imported inflation due to devaluation of Sterling, however in the absence of significant wage growth that is more likely to be a one-off shock rather than much more dangerous inflationary spiral.

Imported goods are costing more also. The new growing Asian middle class is growing. No longer content with working for a $ an hour to provide you with cheap goods. They want a good standard of living as well.

michaels

Thrugelmir wrote: »

As was the case several decades ago. This is bad inflation. Due to imported factors not domestic wage growth. Austerity is still very much on the agenda. Wage growth can only come about by solving the productivity puzzle.

Interesting - I would describe a one off change in the price level due to devaluation as neither good nor bad whereas a wage/price spiral would be bad inflation.

Eric_the_half_a_bee wrote: »

If you read the MPC minutes carefully, you will see that they are expecting wage growth to pick up over the coming months. From the September minutes:

"The unemployment rate has continued to decline, to 4.3%, its lowest in over 40 years and a little lower than forecast in August. Survey indicators are consistent with continued strength in employment growth. Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years. Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. Underlying pay growth has shown some signs of recovery, albeit remaining modest...

Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more
rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2%
target over the next three years. "

http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2017/sep.pdf

And it is the sort of bad inflation described above that the bank fears. Interest rates are not being increased due to the devaluation inflation blip but due to the change in the balance of labour supply and demand due to...brexit. This is difficult for the establishment to articulate because it admits that free movement has held down UK wages in the past so not surprisingly they are couching it in highly technical jargon.

Bottom line :
1) balance of EU migration has swung from strongly positive to potentially slightly negative and at the same time
2) the inflationary blip caused by devaluation has led to the public sector wage cap, another anchor on wages becoming politically unsustainable

Leading the bank to fear the really nasty sort of inflation, the sort where prices rise at the same time as output stagnates.

(Oh and there may be some truth in the suggestion that rates need to go up now so that they can be cut to boost the economy when the economy stalls due to rising rates and Brexit)

Thrugelmir

michaels wrote: »

Interesting - I would describe a one off change in the price level due to devaluation as neither good nor bad whereas a wage/price spiral would be bad inflation.

Wage inflation can be tempered by interest rates. Whereas imported product prices are uncontrollable. From the early 90's onwards the UK has benefited from outsourcing the manufacturing of many items. Although wages weren't rapidly rising. Items got cheaper.