Sunday, January 05, 2014
Looking for a pay, productivity and investment boost
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

What are the hopes and fears for 2014? One fear is that economists are now generally now much more optimistic about the British economy, which is sometimes a dangerous sign.

Another is that the eurozone, the dog that didn’t bark in 2013, still has a few crisis woofs left in it. The shift of focus from Greece, Portugal, Spain and Ireland to troubled France means we cannot yet relax about Europe.

Paradoxically, given that the Franco-German axis is central to any EU project, and always will be, France’s difficulties may not pose the kind of terminal anxieties about the euro that the problems in the peripheral economies did. But we’ll see.

In terms of hopes, I hope the return of growth has seen off the stale debate about the impact of austerity, and in particular contributions from supposedly eminent American commentators and economists who just do not understand the data.

I also hope that the word “bubble” will be used sparingly and judiciously, particularly when applied to the housing market. Both may be too much to hope for.

Anyway, what about the outlook? 2013, as everybody now knows, exceeded most people’s expectations and, while we will not get a fourth quarter gross domestic product figure until January 28, looks to have ended on a strong note. We may not quite get there this month but 2% growth for 2013 is now within statistical reach.

Before I get on to this year’s numbers, let me pick out two themes: there wil be time for plenty more in the coming weeks and months. Both of them, unfortunately, are in areas where the statistics pose more challenges than most.

The first is pay and the so-called cost of living crisis. Monthly figures from the Office for National Statistics show that pay remains depressed, up just 1.1% in the latest 12 months, still significantly below even a falling rate of consumer price inflation, currently 2.1%.

A different message was offered by the ONS in its annual survey of hours and earnings (Ashe), which suggested that the squeeze on real wages more or less came to an end in the 12 months to April.

It is possible to reconcile the two sets of figures. Pay was boosted in the monthly numbers in April by bonus payments (some of them to avoid the 50% top tax rate that applied in the previous fiscal year) and the Ashe could have reflected some of that.

I suspect, though, that the earnings picture is genuinely more robust, despite tight controls on public sector pay. But on both measures we should be nearing the end of the squeeze. After a dismal four years, wages should move modestly ahead of prices this year, alongside a necessary improvement in productivity.

Will this end the cost of living debate? It will take some of the sting out of it. But it takes time before such changes feed through, and not everybody will benefit.

And even if wages do creep ahead of prices, John Philpott, a labour market expert who runs the Jobs Economist consultancy, thinks real wages will not achieve the kind of growth rates (roughly 2% a year) we used to think of as normal until the unemployment rate gets down to 5%. That will not happen this year. So better news on pay, but no bonanza.

Why has consumer spending been rising alongside the pay squeeze? One possibility, as I say, is that the earnings figures have exaggerated the squeeze. Another, a favourite of mine, is that households are spending their lower mortgage payment windfalls. Unrecorded incomes, as a result of a 20% Vat rate that is tempting to avoid, may also be contributing. But this has not been a credit-fuelled spending surge, and nor is it likely to be this year.

The other area where the statistics can be a challenge is business investment. It may be that we have to re-think what we think of as investment, given that even today’s depressed levels are not much different from the norm - apart from a brief pre-crisis flurry - for most of the 2000s.

It may be that once we moved beyond conventional manufacturing plant and machinery, investment just became too hard to measure. It may be that business investment in Britain will always be lower than it should be, though America is similarly afflicted.

That said, a business investment recovery in Britain does now appear to be under way, and should be reflected in a 5%-6% increase this year. That is no boom, but better than the alternative.

What other numbers are we likely to see this year? Growth should resemble something closer to a normal recovery, maybe not quite 3% but 2.75%. The unemployment claimant count, now 1.27m, should drop to 1m. Though not the preferred measure these days, a drop below 1m will be a significant moment.

The current account should improve from last year’s very provisionally estimated £55bn deficit, but perhaps only to £45bn, leaving plenty of room yet for proper export-led growth. Inflation should end the year below target, 1.75%.

Because of this, and finally, I think Bank rate will remain at 0.5% all year, despite growing speculation in the City that this year will see the first hike in interest rates since July 2007 as the unemployment rate drops below 7%, which it surely will.

Why will that not result in a rate hike? When Carney set out his forward guidance it was to give the economy time to breathe and to grow at an above-trend rate for some time, inflation permitting, before starting to apply the monetary brakes.

Growth will be stronger, barring accidents, this year, but not by enough to convinced him or the rest of the MPC that it is time to start raising rates. It will, after all, only just have got back to where it was before the great fall. I’m not even sure rates will rise in 2015 but that’s another story.