Graeme Wearden 

Britain’s cost of living squeeze eases; IMF blasts Trump’s trade tariffs – as it happened

After a year of pain, UK wages are rising (a little) faster than inflation again
  
  

A job centre plus in London, UK.
A Job Centre Plus in London, UK. Photograph: Bloomberg/Bloomberg via Getty Images

Afternoon summary

Time for a quick recap.

Britain’s workers have received their first inflation-beating pay rise in a year. Wages rose by 2.8% per year in the three months to February, meaning they narrowly overtook inflation.

In a solid set of data, the UK unemployment rate hit a new 42-year low of 4.2% and the employment rate climbed to a record high.

But.... workers are still around £800 per year poorer than before the financial crisis, and real wage growth is likely to remain modest this year.

Economists have also predicted that rising wages make a UK interest rate rise next month more likely.

This helped to push the pound up to a new 22-month high this morning. Although it has dipped since, it is close to its highest point since June 2016 (before the EU referendum).

The pound versus the US dollar

The International Monetary Fund has sounded the alarm over rising protectionism in the global economy.

In its latest World Economic Outlook, the IMF also predicted that global growth will be solid this year and next, but it also sees a slowdown further ahead.

World stock markets have gained ground today, thanks to strong financial results from Netflix and Goldman Sachs - and the absence of fresh geopolitical tensions.

That’s probably all for today...

The IMF’s warning about trade wars hasn’t spooked the financial markets.

Over in New York, the Dow Jones industrial average has gained 209 points, or 0.85%, to 24,782.

The S&P 500 and the Nasdaq indices are also enjoying gains, as investors shrug off the Fund’s worries about looming problems in the global economy.

Instead, Wall Street has been cheered by forecast-beating results from Netflix last night, and both Goldman Sachs and Johnson & Johnson today.

Why do the IMF’s long-term forecasts suggest Britain might outperform some EU members, despite Brexit?

Maurice Obsfeld says the Fund is using a rather optimistic model for Brexit, in which no new tariffs are imposed between the UK and the European Union and there is broad equivalency between the two sides.

This best-case scenario assumes that both sides aim for an agreement n their own interests.

So, “if all goes well...things do not look so bad” for the UK economy, Obsfeld said. But, there will still be losses compared to staying in the EU, he adds.

Chris Giles of the FT points out that the IMF’s World Economic Outlook is rather more positive than Maurice Obstfeld’s gloomy statement today. Is that because recent economic data, and spiralling trade tensions, mean the report is already out of date?

Obstfeld agrees that some “high frequency data” that suggests slowing economic growth has been released in recent weeks, since the report was completed. That includes various Purchasing Managers Index (PMI) reports, which have fallen back from recent highs.

The IMF is taking questions on its World Economic Outlook now.

Our economics editor Larry Elliott asks the Fund what it wants creditor nations (such as Germany and China) to do to help tackle trade imbalances.

Maurice Obstfeld replies that Germany has the ability to spend more on infrastructure, and also boost private investment - measures that would close its trade surplus.

On the other side of the coin, America should be more concerned about the sustainability of its public finances (the annual budget deficit could hit a staggering $1 trillion in 2020).

Updated

Some reaction to the IMF’s report:

IMF: UK growth will lag eurozone

The IMF has upgraded its forecast for UK growth by 0.1% this year to 1.6%, from 1.5% last October.

But growth in 2019 has been lowered by 0.1% to 1.5%.

That would see Britain lag behind the eurozone, which is expected to grow by 2.4% this year and 2% in 2019.

The IMF has also warned America against triggering a trade war with China.

In an unusually forthright comment, Maurice Obstfeld said the recent tariffs pushed through by Donald Trump will push America deeper into the red:

He says:

“These initiatives will do little… to change the multilateral or overall US external current account deficit, which owes primarily to a level of aggregate US spending that continues to exceed total income.

“Recent US fiscal measures will actually widen the US current account deficit.

IMF: Trade system risks being torn apart by protectionism

NEWSFLASH: The International Monetary Fund has warned that the world’s trade system is in peril, as the showdown between America and China over tariffs threatens to boil over.

The warning comes in the IMF’s latest assessment of the global economy, which is being released in Washington now.

Maurice Obstfeld, the IMF’s economic counsellor, singled out the dangers of protectionism, saying:

The first shots in a potential trade war have now been fired.”

“The multilateral rules-based trade system that evolved after world war two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart.”

Obstfeld also took aim at populism, saying:

“The renewed popularity of nationalistic policies is another after-effect of the financial crisis and its prolonged aftermath.”

But despite these concerns, the IMF expects the global economy to grow by 3.9% in 2018 and 2019 -- 0.2 percentage points higher than six months ago.

Here’s our news story on today’s labour market figures:

Confusingly, there’s some disagreement over whether Britain’s cost of living squeeze has actually ended.

It all depends which inflation measure you choose -- the benchmark Consumer Price Index (CPI), or CPIH, which includes housing costs.

Then there’s the choice between basic pay, and total pay (including bonuses). Fortunately, today’s figures both came in at +2.8% for February.

Once you’ve cleared that hurdle, there’s the question of whether to take the most recent monthly inflation figure, or the average of the last three months.

The Office for National Statistics favours CPIH, which was 2.7% in December and January and 2.5% in February - comfortably below February’s wage growth. Thus, the ONS says that real wages are rising.

But the Treasury prefers to use the average of CPI over the last three months - which, at 2.9%, is still slightly above nominal earnings. That’s why we’ve not heard the government celebrating the end of the pay squeeze.

The media, though, are generally taking February’s CPI reading (2.7%) and declaring that real wages are back (just!).

Updated

German confidence hits five-year low

Over in the eurozone, German investor confidence has tumbled into negative territory.

The German economic sentiment index, calculated by research institute ZEW, has slumped to -8.2 this month, from +5.1 in March.

That’s the lowest reading since November 2012, when the eurozone crisis was hurting confidence.

ZEW blamed the decline on fears of a global trade war, and recent data showing that German exports and production output have both fallen sharply earlier this year.

Carsten Brzeski of ING called today’s ZEW reading a “disastrous outcome”, which bolsters fears that Germany’s growth is slowing.

He added:

The German economy had a start to forget in the first two months of the year. In fact, while the weakening of soft data could still be labelled as a levelling off from record highs, hard data in Germany and the entire Eurozone have clearly disappointed. At least in Germany, it would require a strong rebound in March to prevent an unexpected weak first quarter.

Nevertheless, there are good reasons to blame exceptional factors like the weather, the timing of vacation and the flu for weaker economic activity in the first two months. Sound fundamentals still bode well for growth in the coming months. Let’s also not forget that up to now, trade tensions are noise for the economic outlook and central banks, rather than hard reality.

Here’s Margaret Greenwood MP, Labour’s Shadow Work and Pensions Secretary, on today’s jobs data:

“After nearly eight years of austerity, average wages are still lower than they were before the financial crash a decade ago. It is shameful that over 4 million children are growing up in poverty.

“While we welcome that there are more people in work, these figures mask serious inequalities in the labour market, including the employment gap faced by women, disabled people and BAME groups who have too often borne the brunt of austerity cuts.

“A Labour government will make tackling poverty an immediate priority with a real Living Wage of £10 per hour by 2020, an end to the public sector pay cap and urgent reforms to the government’s deeply flawed Universal Credit programme.”

Economist: Real wage growth could hit 1% soon

With unemployment at a 42-year low, many firms are struggling to fill vacant positions.

Today’s labour market report shows there were 815,000 job vacancies in the last quarter, which is 44,000 more than for a year ago.

Kallum Pickering of German bank Berenberg is hopeful that this gives workers the upper hand in wage negotiations (despite the IoD’s misgivings).

He writes~:

Accelerating wage growth, low and stabilising unemployment – the UK seems to be approaching full employment.

Employment gains are slowing despite record high labour demand. Instead, wage growth is edging up nicely as the degree of mismatch between the skills of the remaining workers and the skills demanded by firms increases.

With inflation expected to fall back towards 2% this year (from 2.7% in February) Pickering reckons real weekly earnings growth can rise towards 1.0% by the end of the 2018.

Pound dips a little

The pound has slipped back from the 22-month high struck this morning, and is now down 0.2% against the US dollar at $1.4319.

That’s a little surprising, given this morning’s pick-up in basic pay. It may reflect the fact that total pay (including bonuses) only rise by 2.8% -- weaker than the 3% expected.

Anthony Gillham, Old Mutual Wealth’s head of multi-asset, points out that wage growth is still rather anaemic - leaving some households vulnerable to an interest rate rise:

“Although symbolic, wage growth is still only marginally above the rate of inflation and the 2.8% increase has actually come in under expectations. This relatively sluggish wage growth is despite unemployment falling to its lowest level in over 40 years. It is somewhat disappointing that wage growth hasn’t come through more powerfully given that there is really very little room for unemployment to fall any further.

“Although wage growth does strengthen the outlook for the UK fractionally, it does not change the fact that over the long-term consumers have still seen real pay suffer since the financial crisis. And it is worth bearing in mind that with increased minimum pension contribution rates coming into effect this month, disposable income may even come down.

The Institute of Directors has poured a little cold water over today’s data, by warning that bosses will struggle to keep raising workers’ pay.

The IoD’s senior economist, Tej Parikh, says the worst of the pay squeeze seems to be over - but questions whether the “forward momentum” on hiring and wage growth can be sustained.

With skilled labour in short supply, productivity - long the bugbear of the UK economy - is crucial, Parikh explains:

Many employers are already straining to fill vacancies due to chronic labour shortages, which have been compounded in a number of sectors, including social care and hospitality, by the notable drop in the number of migrants coming to the UK.

“A further pick-up in salaries will also be restrained by the limited ability of SMEs – which employ 60 percent of the workforce – to compete for a shrinking pool of labour. As such, small business owners will need greater support in managing regulatory costs and raising their productivity if wage growth is to become a long-lasting facet of our economy.”

Updated

Via Resolution Foundation, here’s confirmation that real pay (wage increases minus inflation) is rising fastest in the financial world but still shrinking in the public sector, and beyond....

Updated

The small boost from the pick-up in wages could be wiped out for many borrowers if the Bank of England raises interest rates.

Hannah Maundrell, Editor in Chief of money.co.uk, says people should tackle their spending before the next rate hike lands:

“Now isn’t the time to start splashing the cash, you should make hay while the sun shines and keep control of your spending. Create a budget and make sure you aren’t spending any more than you need too. Spend 30 minutes looking at where you could make savings, from switching where you do your weekly shop to changing your energy supplier. Half an hour of research and admin could save you hundreds, if not thousands a year.”

UK jobs: The key charts

This chart shows how wages have caught up with inflation, after around a year of falling real pay:

UK real wages

And this one shows how the jobless rate is the lowest since Harold Wilson’s premiership:

UK unemployment

TUC: Pay growth is still weak

Britain’s unions have welcomed the news that workers’ pay has finally caught up with rising prices - but warned that earnings are still too weak:

TUC General Secretary Frances O’Grady says the government must do more:

Unions have negotiated pay rises for workers across the UK, from the counters at McDonald’s to the factory floor at Ford.

“But wage growth is still weak. Workers are £14 a week worse off than they were in 2007 – with pay packets not expected to return to their pre-crisis level until 2025.

“This is why tens of thousands of people will march through London on Saturday 12 May as part of the TUC’s ‘A New Deal for Working People’ demonstration.

“The government must get the economy working again for working people. Ministers need to increase the minimum wage to £10 an hour, fund a proper pay rise for all public servants, and give workers stronger rights to negotiate fair pay deals.”

(That 0.2% figure is based on CPIH - a measure of inflation including housing costs. If you use the Consumer Prices Index, real wages are up by 0.1%).

Secretary of State for Work and Pensions, Esther McVey, has hailed the news that Britain’s employment rate has hit a new all-time high.

She says:

“Another milestone for employment has been reached under this Government as employment reaches a record high, up 3.2 million since 2010 - the 16th time the employment record has been broken in the same period.

“That means on average, over 1,000 people have moved into work every day since 2010, and credit has to be given to the businesses who have created those jobs and the individuals who are taking those opportunities.

This chart, from today’s labour market report, shows how the employment rate has climbed to 75.4%:

Tara Sinclair of George Washington University tweets:

Updated

Resolution: People are still poorer than before the crisis

All this talk of pay rises may have a hollow ring in Britain’s public sector, where the government’s austerity programme has kept wage growth pinned on the mat for several years.

The Resolution Foundation points out that pay is not rising uniformly across the UK - instead, those in the City have been enjoying inflation-busting pay rises for a while:

Real pay (adjusted for inflation) has been rising by almost 2.8 per cent for those in finance for the past year, and 1.5 per cent for those in construction, yet the squeeze continues in the public sector.

Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, adds:

“Today’s figures confirm that Britain passed an important living standards milestone in early 2018 as its 12-month pay squeeze finally ended. Wages should continue to strengthen over the course of the year as inflation falls back.

“It’s good to see pay finally back in positive territory, but Britain has a lot of ground to make up after an awful decade of pay squeezes, stagnation and all too fleeting recoveries. On average, people are still taking home less than they did before the crisis.

My colleague Richard Partington points out that falling inflation, rather than bumper pay rises, is behind the pick-up in real wages:

That’s because the slump in the pound since the EU referendum has now largely passed through the economic system, especially given sterling’s recent rally.

Geraint Johnes, research director at the Work Foundation and Professor of Economics at Lancaster University Management School, says the UK jobs market is “gradually returning to a healthy state”.

He adds:

These trends seem to confirm that the labour market is gradually returning to a more stable state following a period in which many workers took on gig employment as a stop-gap in the aftermath of the recession.”

Fidelity: Prepare for an interest rate hike

Borrowers beware! While the pick-up in wages is welcome, it could also prompt the Bank of England to raise interest rates from 0.5% to 0.75% next month.

Tom Stevenson, investment director for personal investing at Fidelity International, explains:

“For the first time in more than a year, British workers are not feeling progressively poorer month by month....

Wage growth has been the missing piece of the puzzle in Britain’s long, slow recovery from the financial crisis. With the final piece now in place the Bank of England now has the catalyst to be able to follow through on its plans to raise interest rates at the next MPC meeting in May and start the move back towards monetary normality.

Jeremy Cook, Chief Economist at WorldFirst, says the real wage squeeze on the average UK worker is coming to an end (and not before time!).

While most of this improvement has been due to a collapse in inflation – something that should be shown to have continued tomorrow – businesses are paying higher wages as the labour market in the UK tightens.

Unemployment is currently at its lowest level since the mid-1970s and hopefully, that will propel higher wages for months to come. As we have noted before, real wage gains are the silver bullet for the UK economy.

Real wage growth is significant because it relies on optimistic employers being happy with business conditions, it allows consumers to re-balance spending figures from credit uptake and it promotes growth in generalised output with a central bank more comfortable to normalise monetary policy.”

UK jobless rate hits new 42-year low

In another boost, Britain’s unemployment rate has hit a new 42-year low of just 4.2%, as more people find jobs.

Today’s labour market report shows that there are now 32.26 million people in work, 427,000 more than a year ago.

The number of people classed as unemployed has dropped by 136,000 over the last year, and now stands at 1.42 million.

And the employment rate has hit 75.4%, the highest since records began in 1971.

Basic pay in the UK is now rising at its fastest rate since August 2015, as this chart from the ONS shows:

Pay including bonuses also rose by 2.8% over the last quarter. That’s weaker than the 3% which economists expected, but is still just ahead of February’s inflation rate (we get March’s figures tomorrow).

Cost of living squeeze eases as pay overtakes inflation

BREAKING: Pay increases in the UK have finally overtaken inflation, after a year-long wage squeeze.

Basic earnings rose by 2.8% per year in the three months to February, new figures from the Office for National Statistic show.

That means they rose a little faster than inflation, which dipped to 2.7% in February.

This is the first time in around a year that wages have risen faster than the cost of living - and means real wages are now rising by 0.1%.

That’s a small but important step towards ending the cost of living squeeze.

The Office for National Statistics says:

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.2% excluding bonuses, and by 0.1% including bonuses, compared with a year earlier.

More to follow....

Updated

You can get up to speed on the UK labour market with these tweets from economist Rupert Seggins:

Just over 15 minutes to go until the UK labour market report is released, and tension is growing in the City.

Viraj Patel, FX strategist at ING, says:

“It seems that we’re back to good old-fashioned U.K. data watching to determine the short-term direction for the currency. A 3% wage growth print in today’s U.K. jobs report should seal the deal for a May BOE hike.”

Updated

The pound is continuing to strengthen, and just touched a new 22-month high of $1.4376 against the US dollar.

Sterling had now risen for eight trading days in a row, as the City braces for UK interest rates to rise in May. It may also show that worries over a ‘hard Brexit’ are easing.

China: Trump's currency claims are 'a bit chaotic'

Speaking of China....Beijing has hit back at America after Donald Trump accused it of currency manipulation.

A China’s foreign ministry spokeswoman told reporters that information coming out of United States regarding the Chinese currency is “a bit chaotic”, following the president’s comments on Twitter.

Here’s the tweet in question:

This is part of Trump’s long-running claim that other countries are cheating America by keeping their currencies too low.

But.... one could argue that Trump is actually guilty of currency manipulation, as his wilder moves can prompt traders to sell the dollar:

As Kit Juckes of French bank Societe Generale puts it:

What matters now is the nervousness induced by both President Trump’s late-cycle fiscal largesse and his twitter feed. Yesterday’s observation that Russian and China are playing the currency devaluation game was an eyebrow-raiser.

Overnight, China reported that its economy grew by 6.8% in the first three months of this year.

That broadly matched estimates, calming worries that the Chinese economy might be cooling.

However, separate date showed that industrial output missed expectations and company investment has slowed.

European stock markets have risen in early trading, taking their cue from Wall Street which rallied yesterday.

Royal Bank of Canada are also eagerly awaiting today’s UK labour market report.

They say:

It is expected that the unemployment rate holds at 4.3% for what would be the seventh month in the last eight.

Of most interest though is likely to be the news on average earnings growth. The including-bonus measure looks as though it could hit 2.9% 3m/y from 2.8% 3m/y, and if the ex-bonus measure reaches 2.8% 3m/y, as expected, then it will be the highest rate since August 2015 and help reinforce the case for a May Bank Rate hike

Jasper Lawler of London Capital Group predicts that the today’s UK jobs report could drive the pound higher - if wages have indeed picked up in recent weeks:

Traders are looking optimistically towards today’s UK jobs data, with expectations that it will support a Spring rate rise by the central bank [Bank of England].

Whilst UK unemployment is forecast to remain constant at 4.3%, average earnings are forecast to hit 3% in the three months to February. Given that inflation was 2.7% in February we could start to finally see the pressure of falling wages in real terms ease for the UK consumer. A strong reading could pile the pressure on the BoE to hike rates as good inflationary pressures pick up, potentially pushing GBP/USD to $1.45.

Introduction: Pound hits post-Brexit high ahead of jobs data

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

After a year of pain, Britain’s cost of living squeeze could finally be easing.

New earnings figures released this morning are expected to show that pay has overtaken inflation, for the first time since last spring.

Economists predicts that average basic pay grew by 2.8% per year in the three months to February. Chuck in bonuses too, and pay packets may have grown by up to 3%.

That would overtake inflation, which dropped to 2.7% in February, meaning pay packets are no longer being totally eroded by the cost of living.

This would be welcome news for hard-pressed households....and would also raise the chances that the Bank of England hikes interest rates next month.

The pound has already reacted, by hitting a 22-month high this morning. At $1.4360, sterling is its strongest against the US dollar since the Brexit vote of June 2016.

Michael Hewson of CMC Markets explains:

It has already been established that a significant number of Bank of England policymakers are expecting wages to start outstripping headline inflation in the coming months, and today’s average earnings number for the three months to February, could well be the first sign post on the way to that becoming a reality.

The jobs data may also show that Britain’s unemployment rate has stuck at just 4.3%, a 42-year low.

Also coming up today...

The International Monetary Fund will release its latest assessment of the global economy, as its Spring Meeting gets underway in Washington.

Investors will also be watching the situation in the Middle East closely, following last weekend’s strikes in Syria. Any signs that the situation is escalating could hit stocks:

On the corporate front, Associated British Foods has reported a pick-up of sales at its Primark operation.

It adds:

Primark performed well with profit growth of 4% achieved against a backdrop of unseasonable weather in Europe and a margin decline following the adverse effect of currency on purchases.

High street retailer JD Sports has also defied the high street gloom, by reporting a 24% increase in profits for the last year.

Drinks retailer Majestic Wine has announced a new growth strategy. It is planning to invest up to £12m to win new customers - which will make a dent in its short-term profits:

Here’s the agenda:

  • 9.30am BST: UK labour market report
  • 10am BST: The ZEW institute publishes its survey of German economic sentiment
  • 2pm BST: IMF releases its World Economic Outlook

Updated

 

Leave a Comment

Required fields are marked *

*

CAPTCHA

*