5th August 2014 by The Harried House Hunter
The UK economy has received some more welcome news this morning. The purchasing managers index or PMI for its services sector could hardly have been more positive for output and growth. As you can see below the headline was extremely positive.
UK service sector continues to expand sharply in July
Indeed we see that the review was positively gushing about the state of play.
The July PMI showed the sector expanding at the fastest rate since last November, as demand for services continued to increase at a rate rarely seen in the survey’s 18-year history.
If we continue into the detail we see that there was also good news in many of the component parts.
Moreover, another considerable increase in new work also drove activity up over the month,
Demand from both at home and abroad reportedly strengthened
The latter piece of news provides something of a counterpoint to the media barrage we have been subjected too recently which has informed us that many of the UK’s businesses are struggling for export business after the rise of the UK Pound. If this survey is correct then our service sector appears to be shrugging off any change in price competitiveness.
Also the trend for employment looks strongly positive.
services employment continued to increase at a historically marked rate.
A feature of the survey data during recent months has been increased hiring activity amongst UK service providers…..Staff were recruited to help support efforts to keep on top of current workloads and in anticipation of further growth in the coming months.
So if the service sector is any guide we can expect the UK economy’s strong employmnt gains to continue. However there was a consequence of these gains.
There were reports from companies that a key driver of higher operating costs was an increase in wages.
This poses several questions. The first is whether the official numbers for average earnings will pick this up? We have been in a situation where private-sector estimates of wages growth have been more optimistic than the official ones for a while now. Also we are left wondering whether the pick-up in wages will be enough to stop the falls in real wages and perhaps a miracle of miracles for these times some actual growth in them.
What is the state of play in the UK labour market?
This for a while has been an example of the good (employment), the bad (wages) and the ugly (real wages). If we start with the good then the optimistic sheen for employment signalled above was joined by the latest forecast from the NIESR (National Institute for Economic and Social Research) yesterday.
We remain optimistic about further job creation and expect unemployment to fall below 6 per cent later this year.
I wish to look a little deeper into this because if you consider the numbers below alongside the fact that we have only marginally exceeded pre credit crunch levels of output you get to the core of the current debate about the UK economy.
Total employment is more than 4 per cent higher than it was at the start of 2008, and the employment rate has returned to its 2005 peak.
So more people employed with output virtually the same has this inevitable consequence.
The productivity performance, therefore, remains abysmal. With output per hour worked still around 4.5 per cent below the pre-crisis peak (2007Q4), we expect pre-crisis productivity levels to be regained only in the latter half of 2017– although, given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain.
There are to my mind all sorts of issues here. As the credit crunch era has progressed we have seen statistic after statistic turn out to be less reliable than we either thought or hoped. I suspect that the productivity numbers will be critiqued and would suggest that the root of the problem is that we were not doing as well back in 2007/08 as we thought we were back then. If we consider one major sector which is banking and finance there are clear examples of over recording of output and hence productivity. We have been reminded of one of those only this week as several of our major banks have increased their provisions for Payment Protection Insurance miss-selling. The total for this is now of the order of £23 billion which should be subtracted from pre credit crunch output. I do hope we are not doing any double-counting by leaving it in the numbers back then and counting it as a boost to the expenditure numbers now.
The other major issue in the wages and productivity debate is what is happening to the self-employed? The official average earnings figures do not include them and neither does the main annual ASHE survey which means that it is not only first world war commenerations which have the lights out. So we have very little idea as to what they are being paid. However the official numbers do count their levels of employment and output which are often in the service sector and accordingly are not so easy to measure. We could easily have got it wrong and maybe very wrong. Especially if we consider that the self-employed are likely to be a very diverse mix from the extreme those in thriving industries to those who have moved to it because of no other alternative. There may be no connection between their circumstances at all.
In short the list of things we do not know is nearly as long as the things we think we do and then we plough treating 0.1% changes in economic output as if they are significant! At best our knowledge of our economy is equivalent to being in a darkened room with only a candle to push back the shadows.
What about the Bank of England?
If we switch to central banking policy it is my suggestion and indeed recommendation that their policies should reflect the uncertainty I have highlighted above. Bank of England Chief Economist Andy Haldane has reflected some of this in an article published today in the Central Banking Journal. But he strongly hints he prefers this alternative option.
In this world, it would be very difficult for monetary, regulatory and operational policy to beat an orderly retreat. …….In this world, macro-prudential policy to lean against the financial cycle could become more, not less, important over time……In this world, central banks’ operational policies would be likely to remain expansive.
There are all sorts of problems with this in my view, but we have not yet reached the full consequence of such a plan.
In this world, central banks’ words and actions would be unlikely to diminish in importance. Their role in shaping the fortunes of financial markets and financial firms more likely would rise. Central banks’ every word would remain forensically scrutinised.
Apart from the obvious moral hazards here my argument against such a policy is highlighted by our uncertainty about the actual state of play in our economy. The sort of central planning forever philosophy apparently supported by Andy Haldane has the problem that it will be based on flawed data and so the central planners are as likely to lead us in the wrong direction as the right one.
As to their role as regulators I have three words in response, Banco Espirito Santo.
In a way it was kind of Andy Haldane to confirm one of the earliest themes of this blog which was that central bankers would delay withdrawing from the economy. A bit like Frodo and the ring of power they will find it very hard to give it up. Back in 2009 my main fear was that they would be too slow to respond to any upturn but now I am just as concerned that central bankers do not wish to give their power up at any point. As well as being seductive their power is also apparently addictive.The issues of UK wages and productivity and the uncertainty surrounding them show that a lot more humility should be displayed and that the current recovery should be used by the Bank of England to retreat from the peaks of its power. Otherwise it is trapping both it and us in ever increasing circles for it but decreasing ones for us.
Still perhaps banking is all round contrary as look what our economic recovery has done for our banks.
Moody’s changes outlook for UK banking system to negative from stable