Summary
The UK cost of living squeeze has unexpectedly eased, albeit only marginally.
According to the latest data from the Office for National Statistics, average weekly earnings grew by 2.1% year on year in the three months to June, much better than the 1.8% analysts had been forecasting. But, even with inflation holding steady at 2.6% rather than rising, that still means a 0.5% fall in real wages.
As for the jobs figures, the unemployment rate fell to 4.4%, marking the lowest level since early 1975.
The pound recovered from early losses after the data, although not many analysts believe the figures make an imminent UK interest rate rise any more likely.
Over in the eurozone, second quarter GDP rose by 2.2% on a year on year basis, slightly better than expected, and by 0.6% compared to the first three months of the year.
On that note, it’s time to close the blog for the day. Thanks for all your comments, and we’ll be back tomorrow.
US housing starts disappoint
Some below par figures from the US housing market.
Housing starts fell by 4.8% in July, compared to expectations of a 0.4% increase. June’s figure has been revised down from an 8.3% rise to a 7.4% increase.
US Housing starts & permits miss expectations...
— Sigma Squawk (@SigmaSquawk) August 16, 2017
Starts: 1155k vs exp 1220k
Permits: 1223k vs exp 1250k
US July housing data: housing starts and building permits both fall for July, could be seasonal and summer related...
— City Index (@CityIndex) August 16, 2017
More on the UK wages squeeze:
Continuing pay falls come with avg weekly earnings still £15 below peak. OBR forecasts suggest point of recovery now well into next decade pic.twitter.com/FzJK7B3nDl
— ResolutionFoundation (@resfoundation) August 16, 2017
Pay squeeze is being felt across the economy; pay now falling in around 80% of sectors pic.twitter.com/08NNmCYvw9
— ResolutionFoundation (@resfoundation) August 16, 2017
UK productivity keeps falling, according to the second quarter jobs and wages data.
Output per hour worked fell 0.1% quarter on quarter after a 0.5% decline in the first three months of the year. Howard Archer, chief economic advisor to the EY ITEM Club, said:
The further relapse in the second quarter’s productivity fuels concerns over the UK’s overall poor productivity record since the deep 2008/9 recession. This even allows for the possibility that there may well have been an appreciable cyclical element in the drop as GDP growth was slow in the first half of 2017 and business seemingly remained keen to employ amid potential shortages of labour. Given the uncertain economic and political outlook, it may be that several companies are trying to meet extra work by taking on labour rather than commit to investment. Persistent low earnings growth is facilitating labour growth. Productivity had seen growth through 2016, but it was hardly dynamic.
The further second quarter dip in productivity is all the more disappointing as the UK has a lot of catching up to do on the productivity front as it has been markedly lagging its performance before the 2008/9 downturn.
There may be structural factors at work, said Archer:
Many of the new jobs that have been created are in less-skilled, low-paid sectors where productivity is limited.
The economy’s past prolonged weakness and financial sector problems may have hurt productivity through under-investment and an inefficient allocation of resources. There is particular concern that an extended inability to access capital held back innovation and investment by smaller companies.
Updated
Less noticed in today's labour market stats is that the growth in the number of EU migrants in work has fallen to lowest point since 2010 pic.twitter.com/HBqNWZHS5h
— Stephen Clarke (@stephenlclarke) August 16, 2017
The jobs and wages data increase the chances of a UK rate rise before too long, reckons Kallum Pickering, senior UK Economist at Berenberg:
For the UK monetary policy outlook, today’s upside surprise for labour demand and acceleration in wage growth matters far more than yesterday’s downside surprise for headline inflation (2.6% in July versus an estimated 2.7%).
Unemployment fell to 4.4% in June (4.5% expected) while weekly earnings excluding bonus accelerated to 2.1%, for the third month in a row, in line with our expectations but above the consensus (2.0%). Because monetary policy works with a lag, interest rate setters at the Bank of England (BoE) focus more on what the inflation picture will look like in a year or two.
The UK’s current period of above-target (2% target) inflation is mostly driven by the fall in sterling since the Brexit vote, which has pushed up import prices. But this effect will fade as the annual change in import prices washes out of the consumer price index. As the BoE is already looking through the sterling-effect, whether or not current inflation is a little higher or lower than expected is largely irrelevant for the policy outlook.
However, in the BoE’s model, an acceleration in wage growth today will cause underlying inflation to rise in the future. Today’s upside surprise thus raises the chances of a policy tightening soon.
Back with the UK data, and here is the chancellor’s reaction to the unemployment numbers (no mention of wages so far, though):
Lowest unemployment rate for 42 years is good news for every family. We are building an economy that works for everyone.
— Philip Hammond (@PhilipHammondUK) August 16, 2017
Euro zone Q2 y/y growth estimated to beat UK by 0.5pp, most since Q3 2011
— Jamie McGeever (@ReutersJamie) August 16, 2017
Average relative outperformance since euro launch is 0.5pp for UK pic.twitter.com/1U3dSOvuck
The eurozone economy appears to be firing on all cylinders, said economist Bert Colijn at ING Bank:
Eurozone annual GDP growth has been revised upwards to 2.2% year-on-year in the second estimate. While growth could come down a touch in the second half of the year, we expect growth to come in at 2% for 2017.The quarterly growth rate was unrevised at 0.6% quarter on quarter, confirming the robust growth pace for the Eurozone in the first half of the year.
No breakdown by components has been released as of yet, but some of the individual countries show the economy is firing on all cylinders right now. Domestic demand is improving significantly, while exports continue to grow despite uncertainty among trade partners and an appreciating euro. While some countries remain laggards in the eurozone, the good news at the moment is that poorer performers are also exceeding expectations. Italian growth in the second quarter lags the Eurozone average, but the 1.5% year on year growth did surprise analysts.
Among the larger economies, the Dutch economy grew at an extraordinary pace of 1.5% quarter on quarter, a rate more commonly seen in booming developing economies. Spain also continues to record tremendous growth rates as the second quarter came in at 0.9% quarter on quarter, accelerating from 0.8% in the first quarter.
The countries that experienced a deeper real estate crisis all seem to be recovering quite robustly at the moment as Irish growth is currently at 6.6% year on year, although figures for the second quarter have yet to be released.
Given the incredible Dutch GDP growth and continued strength in Germany, the push for an end to QE in northern economies will become even louder as some key events are coming up. With inflation one of the few indicators that have not recovered to pre-crisis rates, the ECB will continue to be very cautious in its communication about the possible endings of QE.
Eurozone growth revised higher
More signs of strength in the eurozone economy.
On an annualised basis, the region’s GDP grew by 2.2% in the second quarter, better than the original estimate of 2.1% and higher than analyst forecasts.
The quarter on quarter growth figure was left unchanged at 0.6%, as expected. In the wider European Union the quarterly rise was also 0.6% while the annual figure was 2.3%. Here is a graph showing the EU and eurozone compared to the US:
Dennis de Jong, managing director at UFX.com, said:
Strong economic performances from Germany, France and Spain have contributed to the eurozone’s GDP being exactly where ECB president Mario Draghi would like it.
Draghi has made it clear that he will refuse to budge on interest rates for the foreseeable future – a policy that appears to be working well.
Given the political uncertainty in Europe over the past year, Draghi has sailed the ECB ship safely through the choppy waters of the Italian referendum and French election.
The ECB will be hoping for calmer times ahead, but global financial instability is beyond its control. Should there be a slowdown in external trade due to a wobble in China, the UK or US, dark clouds could be on the horizon once again.
And here is the pokesperson for Economic and Financial Affairs at the EU Commission:
Q2 2017 is 17th consecutive quarter of #GDP expansion; 3rd consecutive quarter of growth of #GDP >/= +0.5% in #euro area
— Annika Breidthardt (@A_Breidthardt) August 16, 2017
Particularly strong #GDP growth in #CzechRepublic (2.3%) #Sweden (1.7%) #Netherlands (1.5%) #Latvia (1.3%) #Austria (0.9%), #Spain (0.9%)
— Annika Breidthardt (@A_Breidthardt) August 16, 2017
More reaction to today’s UK data:
Ann Francke, chief executive of the Chartered Management Institute:
It should be a real cause for concern that the UK’s productivity has fallen again, especially considering we still lag well behind our G7 peers in this area. UK productivity per hour is now 35% below the German level, and 30% below the US, and it’s becoming increasingly clear that decisive action is needed if we are to end this downward trend.
Most people still don’t realise that the largest drag on productivity is poor management and leadership skills, estimated to account for almost half of the productivity gap. Investing in apprenticeships to boost management talent, as well as technical skills, is therefore vital. Not only will doing so help solve our productivity problem, it will be crucial to building a globally competitive UK plc.
Professor Geraint Johnes, director of research at the Work Foundation:
Overall, the evidence suggests that, despite the low headline rate of unemployment, there remains a lot of slack in the labour market.
With employment continuing to rise while rates of immigration fall, this slack is likely to diminish over the coming months. But, with pay settlements now well below the rate of price inflation, there is no evidence to suggest that this is turning into sustained wage pressure.”
Kathleen Brooks, research director at City Index:
There are signs that wage pressure could start to build. If you dig a bit deeper into the ONS data then you find that employment levels made another record high, the employment rate is at 75.1%. There has been a drop of 157,000 unemployed people in the UK in the last year, and the number of economically inactive people has also fallen by 90,000 in the past year. Although 883,000 people remain on “zero-hours” contracts, this has fallen by 20,000 in the past year. Although this is a fairly small decline, if more firms stop hiring people on zero hours contracts then we could see wage growth start to rise on a sustained basis.
The market impact was a swift move higher in the pound, the FTSE 100 is also higher this morning along with other European indices, while the UK 10-year bond yield has also jumped back above 1.10%, which could sustain a deeper recovery in GBP. So far this data hasn’t had any impact on UK consumer discretionary stocks like M&S or Next, we may need to get confirmation of decent July retail sales figures before these stocks make a move.
James Smith, economist at ING Bank:
Wednesday’s jobs report was slightly healthier than might have been expected...The big question for the Bank of England is whether the ever-tighter jobs market starts to translate into a sharp acceleration in wage growth. We have seen slightly more momentum in the level of average weekly earnings recently following a particularly sluggish start to the year. That appears to corroborate the BoE’s view that some of the recent weakness in pay growth is attributable to temporary factors like the apprenticeship levy and pension costs.
However, even as the probability of a Brexit transition period increases, there’s still plenty of political uncertainty facing businesses. Throw in rising import costs, which will keep pressure on firm’s cost bases, and slowing economic growth and consumer demand, then it looks unlikely that wage growth will pick up rapidly over coming months. Or at least, not enough to meet the Bank’s 3% target for 2018.
In fact, we expect wage growth to hover around the 2% level for the rest of this year. With inflation likely to inch closer to 3%, that means real incomes will continue to be squeezed.
We expect the Bank of England to increasingly “look through” rising inflation and focus instead on the muted outlook for growth. A 2017 rate hike looks very unlikely.
Here is our report on the jobs and wages figures from economics editor Larry Elliott:
Pay growth in the UK has started to pick up amid signs that the steady fall in unemployment may be boosting the bargaining power of workers.
Figures from the Office for National Statistics showed that earnings growth in the three months to June was 2.1% higher than in the same months of 2016 – up from 2.0% in the three months to May.
The ONS said unemployment in the quarter ending in June was down 57,000 on the previous three months at 1,484,000. The jobless rate fell to a fresh 42-year low of 4.4%. Employment was up by 125,000 at 32.1m in the three months to June.
Despite the acceleration in earnings growth, living standards remained under pressure because pay has failed to keep pace with inflation, which stood at 2.6% in June.
The full story is here:
And here is the wages growth data:
Ben Brettell, senior economist at Hargreaves Lansdown, said:
Some positive news on the UK’s cost of living squeeze from the ONS today, with average earnings growth beating expectations by growing 2.1% year-on-year in the three months to June. When inflation is taken into account, however, real wages still fell by 0.5% in the three month period...
There is some cause for optimism that the squeeze on household finances could come to an end later this year, though ultimately the light at the end of the tunnel could be provided by falling inflation rather than rising wages. Yesterday’s CPI numbers showed inflation remaining at 2.6% in July, and the hope is this will fall back towards the 2% target as the Brexit-induced weakness in the pound starts to fade.
Yet despite today’s good news on wages, sustained growth could prove harder to come by.
Conventional economic theory - the Phillips curve - suggests that with unemployment as low as it is, sooner or later demand for labour will outstrip supply and workers will be able to demand higher wages. However a fundamental shift in the labour market has led this relationship to break down, meaning wages remain depressed despite low unemployment. The cause seems to be a lack of underlying inflationary pressure, combined with technological developments and global competition which has weakened the bargaining power of the worker. Throw continuing lacklustre productivity growth into the mix too, and the Bank of England’s prediction of 3% wage growth by next year could look optimistic.
All this has implications for interest rates. If unemployment can fall further without causing wage inflation, there is absolutely no pressure on the Bank of England to raise rates.
The unemployment rate of 4.4% is the lowest since March-May 1975:
And here are the changes in the number of jobs by sector:
Updated
Pound recovers after wage data
Sterling has edged higher after the stronger than expected wages growth figures.
The pound is now up 0.19% against the dollar at $1.2892, and against the euro it is 0.21% higher at €1.0986. Ipek Ozkardeskaya, senior market analyst at London Capital Group, said:
The UK wages growth surprised on the upside, as the British households saw their average earnings improved by 2.1% (3 month-on-year) versus 1.8% anticipated by analysts. Still, consumer prices rose by 2.6% over the same month. Although, the divergence between the price and wages growth will likely continue weighing on British households’ purchasing power and cool down the inflationary pressures, the Bank of England (BoE) hawks will remain alert on the economic data as long as the rates remain at the historical low levels. The pound-bulls came back in charge following the solid wages growth.
Sign up to our email
Guardian Business has launched a daily email.
Besides the key news headlines that you’d expect, there’s an at-a-glance agenda of the day’s main events, insightful opinion pieces and a quality feature to sink your teeth into each day.
For your morning shot of financial news, sign up here:
Number of people on zero hours contracts falls by 20,000
More detail on the jobless numbers.
- There were 32.07 million people in work, 125,000 more than for January to March 2017 and 338,000 more than for a year earlier.
- There were 1.48 million unemployed people (people not in work but seeking and available to work), 57,000 fewer than for January to March 2017 and 157,000 fewer than for a year earlier.
- There were 883,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 20,000 fewer than for a year earlier.
UK WAGES AND JOBS DATA RELEASED
Breaking:
Better news for householders, UK average earnings have come in higher than expected.
Average weekly earnings rose by 2.1% year on year in the three months to June, better than the forecast 1.8%. Excluding bonuses the figure was also 2.1% compared to expectations of 2%.
Meanwhile the July claimant count fell by 4,200 and the unemployment rate came in at 4.4%, better than the expected 4.5% and the lowest since 1975.
Updated
Mario Draghi, president of the European Central Bank, does not plan to give any new monetary policy statements at the gathering of bankers at Jackson Hole in the US at the end of the month.
European shares are higher today after a Reuters report said that #Draghi will eschew a new policy message at Jackson Hole next weekend
— City Index (@CityIndex) August 16, 2017
Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets, said:
This reinforces our view that the ECB is going to stagger the taper and normalisation process as much as possible so as to avoid a taper tantrum or anything of that nature. We will continue to favour selling rallies in EURUSD for the next month or so...At the July rate decision Draghi said announcements (on policy) would come in the autumn. The term autumn as opposed to a specific date gives the ECB flexibility.
Updated
Pound hits lowest level against euro since October flash crash
With some nervousness ahead of the UK wages and jobs data, sterling slipped to a ten month low against the euro before recovering slightly.
The pound was trading at 91.44p a euro before edging back to 91.07p, a 0.12% decline. A Reuters report said dealers were speculating on a weaker than expected wage growth figure.
Italy's economy continues to grow
The Italian economy grew by 0.4% in the second quarter, the same rate as the previous three months and in line with expectations.
Domestic demand offset a weakening trade position, and analysts said the figures suggested the country would meet its 1.1% annual growth target.
Italian GDP QoQ (Q2): 0.4% vs 0.4% expected, prior 0.2%.
— David Madden (@dmadden_CMC) August 16, 2017
Italian GDP YoY (Q2)): 1.5% vs 1.4% expected, prior 0.8%.
Over in Europe, there have been some better than expected economic growth figures from the Netherlands:
#Netherlands: Powerful Q2 GDP growth. +1.5% QoQ vs +0.6% est, +0.4% prev; +3.3% YoY https://t.co/GS6Mh94CxL #ECB #Nederland pic.twitter.com/DWQVnE52mS
— Yannis Koutsomitis (@YanniKouts) August 16, 2017
Here’s a look at what is expected from the imminent UK data:
1. UK labour market statistics out today. And employment growth is expected to rumble on. Consensus is for a gain of 97,000 on Q1. pic.twitter.com/GiWDuIDOoJ
— Rupert Seggins (@Rupert_Seggins) August 16, 2017
2. Earnings growth (excl. bonuses) expected to hold steady at 2%y/y, but that's not enough to keep up with rising consumer prices. pic.twitter.com/A6ka4as5lN
— Rupert Seggins (@Rupert_Seggins) August 16, 2017
Connor Campbell, financial analyst at Spreadex, said:
Following yesterday’s unchanged, if still high, UK inflation reading attention turns to the latest jobs report and, specifically, the state of the country’s wages.
Including bonuses the average earnings index for the 3 months to June is expected to remain at 1.8%, meaning real wages are continuing to suffer under the tyranny of UK inflation (and explains Thursday’s expected fall in retail sales). Elsewhere in the jobs report the unemployment rate will likely stay at 4.5% for the second month in a row, while the claimant count change – the most up to date figure – is forecast to shrink from 5.9k to 3.2k.
Away from Europe for the moment, and ratings agency S&P has confirmed its view on Brazil after president Michel Temer survived a vote related to corruption charges. S&P said:
Since we placed our ratings on Brazil on CreditWatch with negative implications in May, the political landscape is somewhat more settled as President Temer survived a vote--by the Federal Electoral Court (TSE) in June and by Congress in August--related to corruption charges.
Meanwhile, the economy appears to have stabilised despite fluid politics, Congress passed a labor reform in July, and the government remains committed to advancing some pension reform, containing expenditure growth to minimise deviation from its primary fiscal targets, and advancing its active microeconomic reform agenda.
We are removing our long-term sovereign ratings on Brazil from CreditWatch with negative implications and affirming them at ‘BB’. We are also affirming our ‘B’ short-term sovereign ratings.
The negative outlook, however, reflects ongoing political challenges and the risk of a downgrade over the next six to nine months--given Brazil’s high and rising debt burden--should Congress fail to advance legislation that begins to reduce Brazil’s fiscal rigidities, which hinder deficit reduction and sustained moderation in spending growth.
European markets open higher
The week’s stock market revival is continuing as investors put aside concerns about North Korea and indulge in a little bargain hunting.
The FTSE 100 is up 0.5%, Germany’s Dax has opened 0.6% higher and France’s Cac has climbed 0.4%.
Wage growth is unlikely to pick up to 3% next year as the Bank of England is forecasting, says ING foreign exchange strategist Viraj Patel, while the pound is likely to continue to come under pressure:
The combination of lacklustre UK economic data and political noise has served to highlight the pound’s vulnerabilities this week and we expect these factors to further weigh on the currency.
The ‘hot, but not too hot’ core inflation release yesterday has all but silenced any 2017 Bank of England rate hike calls; markets see a ≈20% chance of a 25bp rate increase by year-end.
Those looking to wage growth as evidence for rising underlying price pressures are unlikely to find much support in the UK jobs report today. We expect average hourly earnings growth to remain unchanged at 2% – and stay pretty much anchored at this level for the rest of 2017. This might not come as too much of a surprise to markets given that it would be in line with the BoE’s forecasts outlined in the Aug Inflation Report.
Yet, the bigger question is whether wage inflation can pick up to 3% in 2018 as the Bank predicts; such a sharp uplift in earnings growth is unlikely given signs of greater than anticipated slack in the labour market.. We expect the pound to remain on the back foot today, with the pound/dollar moving below the 1.2850/60 area and the euro/pound grinding higher towards 0.9140/50.
FTSE 100 expected to open +17 - early calls - BALFOUR BEATTY UP 2%, ADMIRAL DOWN 1%, CLS HOLDINGS UP 2%.
— David Buik (@truemagic68) August 16, 2017
Stock markets are expected to continue their recent mini-revival, as last week’s turmoil amid the tensions between North Korea and the US fade further. (President Trump of course has other matters closer to home to deal with at the moment).
Here are the opening calls from IG:
Our European opening calls:$FTSE 7399 +0.20%
— IGSquawk (@IGSquawk) August 16, 2017
$DAX 12201 +0.20%
$CAC 5147 +0.13%$IBEX 10498 +0.16%$MIB 21758 +0.16%
Updated
Agenda: UK jobs and wages data in focus
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Continuing evidence of Britain’s cost of living squeeze is expected today with the latest wages and jobs data.
Despite inflation unexpectedly holding steady at 2.6% rather than rising further, cash strapped households are likely to find little relief in the wages figures. They are expected to continue lagging the cost of living, with analysts predicting that average weekly earnings grew by 1.8% year-on-year in the three months to June, the same figure as last time. Stripping out bonuses, the figure is expected to hold steady at 2%.
But Michael Hewson. chief market analyst at CMC Markets UK, says that wages growth has been on an upward trend:
The most recent wages numbers saw weekly earnings excluding bonuses for June come in at 2%, up from 1.7% in May, an encouraging sign that we may have seen wages start to show signs of a rebound at a time when ILO unemployment is at and expected to remain at a 42 year low of 4.5%.
With employment levels at record highs any signs of a tighter labour market could well offer the pound some significant support which means that a strong wages number today could offer the Bank of England that “goldilocks” scenario of falling inflation and rising wages and potentially move the debate back to the timing of a possible rate rise.
Ipek Ozkardeskaya, senior market analyst at London Capital Group, disagrees:
The divergence between the price and wages growth will likely continue weighing on the real wages and cool down the inflationary pressures as a consequence. Under these circumstances, the Bank of England will be in a position to keep the interest rates at the current historical low levels for an extended period of time and walk the UK businesses through challenging Brexit times.
The pound seems undecided too, edging down just 0.05% against a recently revived dollar at $1.2862.
Also coming up today are eurozone second quarter growth figures, expected to show an increase of 0.6%. This compares to a 0.3% rise in the UK in the second quarter.
The agenda:
- 9.00 BST: Italian second quarter GDP
- 9.30 BST: UK unemployment and wages data
- 10.00 BST: Eurozone second quarter GDP
Updated
