This week should see a flow of pretty good economic news for the Chancellor and for the Government. Today, the November Consumer Price Index, which measures inflation, dropped from 2.1 per cent and is now just 0.1 per cent off the Bank of England’s inflation target, which hasn’t been met for four years. That happen soon.
Tomorrow, Wednesday, labour market data for November are likely to show a continued fall in unemployment, and that the number of people in employment topped 30m for the first time ever. Then on Friday, the final figures for GDP in the third quarter will probably be revised up from 0.8 per cent to 0.9 per cent, following recent revisions to construction output.
That doesn’t seem like much to dance about, but it says the UK economy was expanding at an annual rate of 3.6 per cent. We haven’t seen anything like that since the immediate bounce back after the 2009 recession, or the credit-fueled boom before the financial crisis. Moreover, current estimates are that the economy ended 2014 growing by about 0.7-0.8 per cent, or roughly 3 per cent at an annual rate. This rate of recovery is stronger than in any other country in the EU, and most likely faster than in the US. Next year, the UK is expected to grow by close to 2.5 per cent: that’s the top decile among industrial countries.
These economic indicators will play well to the Government’s existing polling advantages when it comes to economic performance and competence. True believers will say this “proves” that Plan A for Austerity was right all along. The rest of us can take a rather more objective and circumspect view. We shouldn’t be churlish about good economic news but it is important to keep things in perspective and not crow too loudly.
The fall in inflation has been a long time coming to the UK for various reasons including the crisis-related slump in the value of the pound, but it isn’t peculiar to this country. In the US and the Euro Area, inflation has been falling too, becoming deflation—or an absolute decline in average prices—in Greece and Spain. Tumbling inflation reflects the relative weakness of aggregate demand, relative to what’s being produced. Percentage changes in economic indicators may look impressive. Levels are still worryingly low.
Subdued inflation also reflects the weakness of the purchasing power of wages and salaries. There is barely any movement in the level of wages in manufacturing or the wider economy in money terms, and adjusted for inflation, wages may only now have clawed their way back to flat from falling.
The weakness of wages and salaries—most people’s incomes—represents a major flaw in the argument that we now have a sustainable recovery. All recessions come to an end eventually, the Bank of England has been doing its bit with Quantitative Easing, which has driven equity prices higher, and the cost of capital for companies lower, and the Government has introduced schemes like Funding for Lending and Help to Buy.
This week’s GDP figures, however, are likely to show that a good part of the bounce in growth has been due to a fall in the household savings rate, when what we really want to see is rebalancing: a switch towards more investment- and export-led growth. The drop in savings isn’t going to be repeated, and could reverse in January when the Funding for Lending provision for mortgages ends. What we also need is evidence of gathering strength in productivity, steady increases in real take-home pay, and improvements in the quality of employment, as well as the quantity.
As the recent annual study of hours and earnings and other labour market reports show, people who feel better off tend to be those in the more educated and skilled parts of the labour force. Elsewhere, there has been a significant substitution of low pay jobs for middle wage paying occupations in the managerial, administrative and technical spheres. To be fair, this probably has more to do with advanced technologies than with macroeconomic policy. But the Government is not powerless, and this diminution in the number of middle wage jobs is a big drag on what a lot of people perceive as stalled living standards. And that will still give Ed Balls a lot to shout about.
George Magnus is Senior Independent Economic Adviser, UBS