Royal Bank of Scotland : It's jobs, stupid - Economics Weekly

Thriving.

The UK job market continued its record-setting run between May and July. Employment rose by 174,000, taking the proportion of people in work to 74.5%, another new high. The unemployment rate fell to 4.9%, its lowest level since 2005. Particularly encouraging is the improved fortunes of young people. The unemployment rate among 18-24 year olds ballooned during the recession. At 11.8% it's still high. But this group, who represent only one in seven working-age people, accounted for almost half of the fall in unemployment.

Sticky wages.

The average weekly pay packet grew by 2.2%y/y in July to £505. With prices rising by just 0.6% that month, real spending power was rising. However, wage growth at that pace is no harbinger of inflationary problems. Far from it.

Who's the boss?

Across the UK 16.5% of people in work are in public sector jobs. The total has fallen by close to 800,000 since 2005, when the number peaked, while the number of private sector jobs has grown by getting on for four million. Public employment matters much more in some places than in others. In the North East, Northern Ireland, Scotland and Wales, more than one in five jobs is public. In contrast, it's just one in seven in London.

Steady, but not for long.

Inflation stayed steady at 0.6% in August as higher food prices were offset by cheaper clothing. The Bank of England's Monetary Policy Committee (MPC) had been expecting a rise to 0.8% due to the effect of last year's fall in petrol prices dropping out of the calculation. But they won't have to wait long for the next increase. Manufacturers' input prices leapt 7.6% compared to a year ago, largely due to sterling's weakness. This cost pressure will be passed on, though not quite on that scale. The MPC expects inflation to be back to near 2% by this time next year.

Beating expectations.

No change to interest rates from the Bank of England last week, but a slight shift in its outlook. Back in August the MPC said it expected to cut rates again this year if the economy behaved as predicted. Last week it concluded that asset prices and the housing market have instead performed better than anticipated and business confidence had rebounded faster than forecast. As a result, Q3 GDP growth is predicted to be 0.3%. Not stellar, but a lot better than the 0.1% forecast in August. Does this take further rate cuts off the table? No, they are still a possibility, but the MPC has conceded that economic conditions are better than it thought just six weeks ago.

Surfing and shopping.

The volume of retail sales fell by 0.6% in August, having grown very strongly in July. Comparing June to August with March to May, sales were up 1.6%. Shop prices continued to fall, by 1.9%y/y, boosting shoppers' spending power and eating into retailers' margins. The star of the, ahem, 'High Street' remains internet shopping. Online sales grew by 0.4% on the month and by a whopping 18.5%y/y. In just a decade we've gone from spending a little over £2 of every £100 online to more than £13.

Where to?

More evidence that the latest burst of credit expansion has stabilised China's economic growth. Industrial production grew 6.3%y/y, matching the pace achieved since the spring. Retail sales are a similar story, rising by 10.6% annually. But since the crisis the question has been the same. What will be the response when the stimulus measures wear off? The choice is between accepting lower growth or again boosting credit. The route they'll probably take is clear. Its continued success and sustainability less so.

Teetering.

The Eurozone remains afflicted by low inflation or even mild deflation. Italy has clocked up seven months of falling prices, albeit the declines have been modest. In Spain, the deflationary run extends to two and a half years. Even Germany has an inflation rate of just 0.4% and a core rate (which strips out food and energy) at a lowly 1%. Weak demand is primarily responsible, partly a consequence of deep-rooted economic challenges. As so often, avoiding the treatment intensifies the remedy, which will have to become more radical.