Royal Bank of Scotland : Economics Weekly - Hiring sprees, wages squeeze

The familiar pattern of strong job growth and weak wage growth continues. Employment is up 774k y/y and the unemployment rate is down to 6.2%. The latter is closer to its pre-crisis trough than its recessionary peak. Real wage growth remains a distant memory: pay increased by around 0.7%y/y with prices rising more than twice as quickly. Are we becoming a nation of servants? Job growth is fastest among cleaners, gardeners, dog walkers and butlers, up 43%y/y.

Minutes showed the Bank of England's Monetary Policy Committee members voted the same way in September as they did in August, with a 7-2 split in favour of keeping interest rates at 0.5%. Two dissenters think interest rate hikes are warranted, but at a gradual pace. Explanations for the depressed state of wage growth were also offered. First, workers appear more reluctant to jump ship than they were pre-crisis, meaning generous pay rises are not needed to keep hold of staff. Second, the MPC thinks there's been a change in the jobs we do, with new workers less qualified or employed in lower paying sectors. And that will weigh down on average pay growth. Whatever factors are at play, most MPC members think the economy can continue to grow without sparking inflation. The question is for how long?

UK CPI inflation fell slightly to 1.5%y/y in August, from 1.6% in July. That's the lowest rate since 2009 and continues a slow but persistent fall that started in September 2011. Back then annual inflation reached 5.2%. Inflation has been below the Bank of England's 2% target for all of 2014, a fact that's likely to hold for the rest of the year.   

UK shoppers are still strutting their stuff. The volume of retail sales grew 4.5%y/y in August, slightly above the average reading seen over the past 12 months. Clothing and footwear grew by 7.2% while household goods and furniture stores are experiencing very strong annual growth on the back of the housing market recovery. And there is more evidence of the supermarket price war helping pockets. The average price in food stores fell by 0.1%y/y in August - the first fall since 2004. It supports the CPI readings, which show food prices have been falling since the spring. 

That at least is the message from the OECD's latest economic growth forecasts. The UK is expected to be the fastest growing advanced economy this year. The think-tank's forecasts are that the economy will expand by 3.1% this year and 2.8% in 2015, despite a Eurozone economy that is now expected to grow by just 0.8%. Italy's economy is expected to shrink by 0.4% this year. And the news gets no better for the beleaguered European economy in 2015, with the prior forecast of 1.7% revised down to just 1.1%. On the plus side, the US is expected to find its mojo next year, with an expected 3.1% expansion in the pipeline - the best figure of all the advanced economies in 2015.

House prices continued to rise in June according to the Office of National Statistics (ONS), with the pace of growth increasing to 11.7%y/y. London was out in front, with prices growing 19.1%y/y, while Yorkshire and the Humber saw the slowest growth of 5%y/y. In a sign of how far the capital has run away from the rest, it is only in the South East, the South West and the East of England that average house values are more than half of what they are in London. In Northern Ireland and the North East, they are less than a third.

If job market conditions continue to improve the US Fed will draw down the curtain on its quantitative easing programme next month. It reckons the labour market is healing but not yet healed. Unemployment remains above its normal rate and there are plenty of people who would look for work if there were more jobs. Along with dormant inflation, this explains why the stimulus of low interest rates will remain for some time yet. Fed members' forecasts suggest the first rate rise is likely to come next year.

The UK has struggled to generate a rebalancing toward exports in the post-crisis period. Our trade deficit is only slightly lower than it was pre-crisis. The Euro area on the other hand has moved from a broadly balanced trade position to one of surplus since early 2012. But look more closely and this trade surplus has more to do with lower imports rather than stronger exports. Eurozone imports have fallen by over 3% since early 2012 as the weakness in demand and elevated unemployment have checked import demand. And of course the weakness in Eurozone imports is a big reason behind our own rebalancing challenges.