BoE has slashed its forecast for wage growth this year, warned that geopolitical risks are rising, and said contingency plans for financial upheaval over Scottish independence are ready. Here are key points from the Bank’s Quarterly Inflation Report…
This article titled “Business Liveblog: Bank of England cuts wage growth forecast, and reveals Scottish contingency plans” was written by Graeme Wearden, for theguardian.com on Wednesday 13th August 2014 12.51 UTC
US retail sales miss forecasts, with no growth in July
Over in America, a disappointing set of retail sales figures have just raises concerns over the strength of its recovery.
Retail sales were flat in July, the worst performance in six months, having only risen by 0.2% in June.
Car sales fell, and demand for electronics and home appliances was weak — not a great sign of consumer confidence.
Core retail sales, which strips out cars, gasoline, food services and building materials, rose by just 0.1% in July, and June’s figure was revised down from 0.6% to 0.5%.
Ahha! On page 29 of the BoE’s Inflation report is a bar chart, showing how most new jobs created in the last six months have been in ‘low skill’ professions.
This may help explain the low growth in average earnings in recent months, if more new hirers are taking lower paid positions.
Hat-tip to Jeremy Warner of the Telegraph for flagging it up:
Labour: Weak wage growth shows economy isn’t fixed
Chris Leslie MP, Labour’s Shadow Chief Secretary to the Treasury, has seized on the news that the Bank of England has slashed its forecast for wage growth this year, to just 1.25%.
“The inflation report shows why this is no time for complacent and out-of-touch claims from Ministers that the economy is fixed and people are better off.
“While the economy is finally growing again and unemployment is falling, working people are still seeing their living standards squeezed. Pay growth is at a record low and lagging behind inflation and the Bank of England has halved its forecasts for wage growth this year.”
Total wages (including bonuses) have shrunk for the first time since 2009. And stripping out bonuses, average earnings rose by the lowest since records began in 2001, up just 0.6%.
Michael Izza, chief executive of ICAEW (which represents accountants) says the Bank of England’s new, lower wage growth forecasts are a concern:
The numbers of self-employed and part-time workers, together with those on zero-hours contracts are contributing to a flexible labour market that is keeping wages down. In addition, auto-enrolment means that employers are having to fund pensions from somewhere, and wages are suffering as a result.
David Kern, chief economist at the British Chambers of Commerce, says the Bank of England is giving out “mixed messages” on the outlook for interest rates.
The higher growth forecast for 2014 and the lower estimate for the amount of slack in the economy may be seen as a signal to bring forward interest rate rises.
However, Governor Carney’s comments will reassure businesses that the MPC will not rush any increases in rates. He also acknowledged that the rising supply of labour in the economy may provide new sources of economic capacity.
An early UK interest rate rise looks a little less likely, reckons Neil Lovatt, director of financial products at Scottish Friendly.
“To read between the lines, the message today is that rates are still destined to rise, but when that will be is still up for debate. The fickle nature of the UK economy seems to keep everyone guessing.”
“Any rate rises will be small, but even very small rises in interest rates will have a significant effect on what is still a fragile economy. That said, savers thinking that the ‘good old days’ of high interest rates will return are going to be sorely disappointed and the sooner we adapt to this environment the better.”
Those new BoE forecasts
Berenberg Bank have kindly wrapped up the changes to the Bank of England’s forecasts:
- Growth up. The BoE raised its growth forecasts to 3.5% in 2014 and 3.0% in 2015, both up by 0.1ppts from their previous forecast. Although they cut their 2016 forecast to 2.6% from 2.8%
- Inflation up in 2014 but down in 2015 and 2016. The BoE now forecasts 1.9%, 1.7% and 1.8% inflation for 2014, 2015 and 2016, compared to 1.8%, 1.8% and 1.9% in their previous forecast.
- Unemployment down. To 5.9%, 5.6% and 5.4% in 2014, 2015 and 2016, from 6.3%, 6.0% and 5.9% in the previous forecasts.
- Pay growth cut in the near term but raised later in the forecast. Specifically, the BoE now forecasts wage growth of 1.25%, 3.25% and 4% in 2014, 2015 and 2016 from 2.5%, 3.5% and 3.75%.
- Slack now estimated at 1% of GDP, compared to 1-1.5% in the second quarter.
So, good news on growth and unemployment, but bad news on pay.
As Berenberg’s UK economist, Rob Wood, puts it, there’s “something for everyone”.
This fan chart shows the new growth forecasts:
One more key point — the Bank of England flagged up that geopolitical dangers (think Ukraine or the Middle East) are a growing threat to Britain’s recovery.
“Markets have been remarkably resilient to some of these geopolitical events and we’re only beginning to see the first advance signs of the middle through some of our major export markets such as Germany and the movements of some of the confidence indicators.”
(thanks to Reuters for the quote)
Bank of England’s quarterly inflation report – the key points
1) The Bank of England has slashed its forecasts for wage growth, conceding that the recovery has still not fed through to people’s pockets.
The BoE now expects earnings to rise by just 1.25% this year, down from 2.5% previously. It admitted that there appears to be more slack in the economy than it realised, although it is also being eaten up at a faster rate.
Governor Mark Carney said the UK was experiencing “strong output growth”, but this has not been matched by a material pickup in productivity, or wages.
2) The prospects of an early rise in UK interest rates appear to have faded.
The pound tumbled on the news, shedding one cent against the US dollar to $1.6714 as investors calculated that an early rate rise is less likely than before.
The Bank also hammered home that interest rate rises will be gradual and limited, when the time comes to end Britain’s long period of record-low borrowing costs.
3) “Contingency plans” have been drawn up in case Scotland votes for independence.
”Uncertainty about the currency arrangements could raise financial stability issues….We have contingency plans.”
4) During an occasionally barbed press conference, Carney denied that the Bank was increasingly clueless about the UK economy.
He argued that rising geopolitical risks mean there is naturally more uncertainty about the situation, and denied that his precious forward guidance policy has been a muddle.
5) Europe remains a big worry. The BoE says that:
Eurozone growth continued to disappoint, net lending has been falling and inflation has stayed low.
And deputy governor Minouche Shafik warned that the UK can’t rely on the eurozone to drive its recovery.
Eurozone industrial production hits recovery hopes
Incidentally, we had further confirmation this morning that the eurozone is struggling — a poor set of industrial production numbers.
My colleague Jo Moulds reports:
Factory output in the eurozone contracted unexpectedly in June, further damaging hopes of a strong recovery.
Industrial production dropped 0.3% on the month following a 1.1% drop in May, hit by the ongoing conflicts in the Ukraine, Iraq and Gaza.
Production was flat compared to the same time last year. Economists had been targetting a 0.1% rise on the year. The annual reading was the lowest since August 2013.
Bank of England: we can’t rely on the Eurozone for our recovery
Britain can’t rely on the eurozone economy to drive our recovery, warns the Bank of England’s new deputy governor, Minouche Shafik.
Asked about the impact of the European Central Bank’s new stimulus measures (including hundreds of billions of cheap loans for banks), Shafik urged caution, saying the new impact of this LTRO programme will become clear over time.
The eurozone still faces low growth and low inflation, Shafik says, and we need to see whether the ECB’s measures lead to stronger credit growth and a stronger recovery.
The UK can’t rely on a eurozone recovery to lift our recovery. It would be good if the eurozone could drive us forwards, as it’s such an important export market, that’s not very likely, she concludes.
And that was the end of the press conference. Summary and reaction to follow…
Asked about the rise in self-employed workers (as covered earlier in the blog) deputy governor Ben Broadbent plays down the suggestion that it’s a risk. This isn’t necessarily a bad thing for productivity, he claims.
The Bank of England is tweeting some of the key points from today’s briefing, including a rather dashing (and slightly menacing?) photo of the governor:
Carney treats a question about his ‘muddled’ forward guidance policy with some distain.
Asa Bennett of the Huffington Post points out that the initial pledge (no rate rise until unemployment has fallen below 7%), has evolved into a broader measure based on slack, wage growth, and the like. Was it a muddle, or a learning process?
Not an unfair question, frankly, if a little mischievous.
But Carney doesn’t look pleased, claiming that Bennett is the muddled one, and that his guidance has been entirely consistent across many inflation reports and MPC minutes.
It’s consistent, it’s boring, but what’s what you get, he smiles.
The audience aren’t smiling, though:
Mark Carney: Bank of England has contingency plans for Scottish independence
Mark Carney has revealed that the Bank of England has drawn up contingency plans in case Scotland votes for independence next month.
Asked for his views on the prospect of ‘sterlingisation’ (that Scotland would use the pound without a formal currency union), Carney reveals that that BoE is preparing for all eventualities, as “uncertainty” over Scotland’s currency arrangements could hit financial stability.
He concedes that
We have contingency plans…. but it’s never a good idea to talk about them in public apart from to say that you have them.
Carney says that in terms of the Bank’s responsibilities for financial stability, we have “a wide range of tools and plans”. And the BoE isn’t the only body with responsibilities here — some are shared with the Treasury.
Back on the markets…. Carney says he is “encouraged” that the financial markets are more responsive to the latest data.
James Macintosh of the Financial Times takes up Larry’s point, that the Bank is looking increasingly clueless (on a spectrum between certainty and cluelessness).
Mark Carney replies; if we can agree that the range is between perfect certainty and perfect uncertainty, it’s fair that there is more uncertainty, mainly around the issue of productivity.
Here’s a link to the inflation report (sorry for the delay #hectic)
Ah, the Scotland question — is it time for Alex Salmond to produce a Plan B on an independent Scotland’s currency?
Mark Carney takes a cautious line; the Bank will implement whatever policymakers decide, but it has “noted” the statements from the three main UK political parties that they would not enter a formal currency union with iScotland.
He also points out that the Bank has a responsibility for financial stability across the UK, and will keep discharging those duties until circumstances change.
Could the Bank of England raise interest rates by as little as 0.125%, or would that be the equivalent of ‘boiling the frog’, asks Szu Ping Chan of the Telegraph.
Carney chuckles at the analogy, but doesn’t suggest such a small rise is on the agenda.
Ed Conway of Sky invites Mark Carney to comment on the financial markets’ expectations for UK interest rate rises (harking back to his Mansion House speech in June, when he suggested they were too dovish).
Carney plays the ball deftly, saying that the overall shape of market expectations are consistent with an adjustment that is both gradual and limited.
Deputy governor Ben Broadbent chips in, saying that it’s a “false dichotomy” to suggest the Bank should either be completely certain about everything, or completely clueless.
Larry Elliott, the Guardian’s economics editor, isn’t impressed by today’s report:
Doesn’t today report show that the Bank “really hasn’t got a clue, the MPC is divided, and that anyone taking out a mortgage or an overdraft would be ill-advised, as anything you say must be taken with a very large pinch of salt?”, Larry politely suggests.
Governor Carney defends his record, suggesting rather archly that Larry should try speaking to a lot of firms around the country*. The firms I speak to insist that business have understood the Bank’s ‘forward guidance’, he adds.
Interest rates will go up as the economy improves, they will go up to a limited extent, ands gradually, Carney says. But there are geopolitical dangers, and we may need to react to them.
How much spare capacity is left to be absorbed in the UK economy?
Carney says there is “tremendous uncertainty” about the degree of slack, among policymakers on the Bank’s monetary policy committee (the overall view is that there’s 1% of capacity to mop up).
That’s not hugely reassuring, given the importance that the Bank now puts on the issue when setting monetary policy.
Alex Brummer of the Daily Mail wants more details about the Bank’s worries about geopolitics.
Carney replies that there is a “slight downturn skew” to today’s growth forecasts.
Bank of England press conference – Q&A session begins
Onto questions — Ben Chu of the Independent asks why the Bank has lowered its forecasts for productivity growth.
Mark Carney explains that firms have been taking on workers rather than investing in new equipment, as labour is cheaper than capital.
That process should end once cheap labour has been mopped up, meaning workers demand higher wages, and encouraging firms to invest in new equipment that will boost productivity. That process is taking longer than thought.
Pound hits 10-week low against the US dollar
The pound has hit its lowest level against the US dollar since last May, as the markets digest the inflation report (and the jobless data).
Sterling is down by 0.45% today, at $1.6732.
On interest rates, Mark Carney again reiterated that borrowing costs will rise in a “small, slow” manner, when the appropriate moment comes.
The economy is returning to a semblance of normality, Carney concludes.
Carney says that the amount of spare capacity in the economy has fallen somewhat in the last quarter, but the Bank also reckons there was more slack in the UK than before.
Bank of England slashes forecast for wage growth.
Over at the Bank of England, governor Mark Carney is unveiling the Quarterly Inflation Report.
He is declaring that the Uk recovery is “on track”…. “Robust growth” has taken output above the pre-crisis peak, and the Bank has revised its near-term forecast for growth up.
But the Bank has also slashed its forecast for wage growth in the UK.
- It now expects wages to rise by just 1.25% in 2014, down from 2.5% previously.
- It sees growth picking up to 3.25% in 2015, down from 3.5% before.
- And in 2016, it reckons wages will rise by 4%, up from 3.75% previously.
Carney is also warning that Britain faces rising geopolitical risks, while the eurozone economy remains weak.
And the persistent strength of sterling is also a worry.
You can watch the press conference live here (right-click to open in a new tab).
So much for the year of the pay rise
Today’s report have cast a shadow over hopes that 2014 will be “the year of the pay rise.”, says the Resolution Foundation.
Adam Corlett, their economic analyst, comments:
“Once again a strong employment performance is to be welcomed but concerns remain over wages. There is still good reason to expect that real pay will start increasing during 2014 but today’s disappointing performance pushes the wages recovery further down the road.
It’s now almost impossible for average real pay in 2014 as a whole to exceed last year’s unless we see an unprecedented surge in wages during the rest of the year.
The number of people receiving the Jobseekers Allowance could soon fall below the one million mark:
The Press Assocation reports:
The claimant count fell for the 21st month in a row in June, by 33,600 to 1.01 million, according to today’s data from the Office for National Statistics.
If the trend continues, the number of Jobseeker’s Allowance claimants will fall below a million next month for the first time since September 2008.
See the report yourself
Nearly forgot… you can see the full labour market report here (as a pdf).
Iain Duncan Smith: Long-term plan is working
Work and Pensions Secretary Iain Duncan Smith has claimed that his changes to the welfare system have helped heal the labour market.
Here’s his official response to the jobless figures:
“In the past, many people in our society were written off and trapped in unemployment and welfare dependency. But through our welfare reforms, we are helping people to break that cycle and get back into work.
“The Government’s long-term economic plan to build a stronger economy and a fairer society is working – with employment going up, record drops in youth unemployment and hundreds of thousands of people replacing their signing-on book with a wage packet.
“This is transformative, not only for these individuals and their families, but for society as a whole. That is why we have set full employment as one of our key targets – bringing security and hope to families who have lost their jobs and others who never had jobs, we put people at the heart of the plan.
“The best way to help even more people into work is to go on delivering a plan that’s creating growth and jobs.”
However….critics, such as our own Polly Toynbee, are less impressed with Duncan Smith’s performance, given the stuttering start to his universal credit project:
Today’s slump in real wages are a blow to hopes that the cost of living squeeze was easing — readers may remember that four months ago there was chatter that the squeeze was over, after pay rises (briefly) burst above inflation.
Could Britain’s falling real wages be partly due to changes in the composition of the labour market, with more people taking lower-paid jobs?
Newsnight’s economics correspondent, Duncan Weldon, reckons so:
Britain’s youth unemployment total has fallen:
The ONS reports that there were 767,000 unemployed people aged from 16 to 24 in April-June 2014; 102,000 fewer than for January to March 2014 and 206,000 fewer than for a year earlier.
These were the largest quarterly and annual falls in youth unemployment since comparable records began in 1992.
The recovery in the labour market has partly been driven by Britain’s army of self-employed people, which swelled by almost 10% over the last year.
The ONS reports that, since April-June 2013,
- The number of employees increased by 447,000 to reach 25.77 million.
- The number of self-employed people increased by 408,000 to reach 4.59 million.
UK unemployment, the key charts:
These two charts show what a bizarre jobs recovery the UK is experencing.
On the one hand, the employment rate is close to its highest level on record, as jobless falls and more people find work (820,000 in the last year).
But yet, real wages are shrinking – with the gap between earnings and inflation widening alarmingly (whether you include volatile bonuses or not)
One reason for caution — pay packets were boosted a year ago, because many bonuses were held back until after the UK top tax rate fell to 45%, in April 2013.
The ONS points out that “some employers who usually paid bonuses in March paid them in April last year.”
But if you strip out bonuses, pay is still up a measly 0.6% year-on-year, the lowest on record.
This chart from Bloomberg confirms that UK wages have suffered their first fall since the depths of the financial crisis:
Here are the key points on today’s unemployment data, from the ONS:
- For April to June 2014, there were 30.60 million people in work, 167,000 more than for January to March 2014 and 820,000 more than a year earlier.
- For April to June 2014, there were 2.08 million unemployed people, 132,000 fewer than for January to March 2014 and 437,000 fewer than a year earlier.
- For April to June 2014, there were 8.86 million economically inactive people (those out of work but not seeking or available to work) aged from 16 to 64. This was 15,000 more than for January to March 2014 but 130,000 fewer than a year earlier.
- For April to June 2014, pay including bonuses for employees in Great Britain was 0.2% lower than a year earlier, but pay excluding bonuses was 0.6% higher.
UK unemployment rate drops to 6.4%, but wages fall
Breaking News: Wage growth in the UK has hit its lowest level on record, and actually contracted if bonuses are included.
The Office for National Statistics reports that average earnings, excluding bonuses, rose by a mere 0.6% in the three months to June.
That means pay packets lagged well behind inflation — which hit 1.9% in June.
Including bonuses, total pay packets actually contracted by 0.2% during the quarter, the first fall since 2009.
In brighter news, the overall unemployment rate fell to 6.4% in April-June, which is the lowest since the end of 2008. And the claimant count fell by 33,000, showing that the labour market continues to recover.
But that recovery still isn’t reaching people’s pockets.
More details and reaction to follow
Nearly time for the UK unemployment data to hit the wires….
Reminder — economists expect another rise in employment, and a drop in the number of people claiming benefits.
But a crucial issue is whether earnings are picking up, after years of low pay rises.
As my colleague Katie Allen reports, many employees have been hit hard:
Angela Chicken was still in hospital with her newborn son when she was made redundant. She had been earning £11 an hour as a graphic designer. Ten years on, the 52-year-old single mother makes around £8 an hour working part-time at her local Sure Start children’s centre in Southampton.
With the cost of living rising faster than her pay, Chicken’s wages have fallen even further in real terms, a pattern likely to be reflected across the country in the latest official labour market figures today. After bills and housing costs, Chicken is left with £108 a week to feed herself and her son, buy clothes and anything else they need. They eat well, she said, but there is little left for treats or outings.
“We don’t really have enough money to go on holiday … I don’t get haircuts, I very rarely buy any clothes,” she said. “What I have had to do is pull myself back over the last 10 years to a position that isn’t as good as it was because I got knocked off my perch.”
Most of Europe’s stock markets have risen this morning, despite the worrying economic news from Asia overnight (details).
Germany’s DAX is leading the way, up 77 points or 0.86% at 9147.
Insurance group Swiss Re has cheered investors by posting a 3.5% jump in profits.
In London the FTSE 100 is flat (dragged back by a few companies going ‘ex-dividend’).
The Bank of England may admit this morning that it was too optimistic about wage growth, reckons Bloomberg’s Emma Charlton:
We also have confirmation that the eurozone has slipped worryingly close to deflation last month.
Fresh data this morning showed that Spain’s consumer prices index fell by 0.3% year-on-year in July, the biggest drop in almost five years. Month-on-month they slipped by 0.9%.
In France, prices were up by a meagre 0.5% last month compared with July 2013, and also fell on a monthly basis, down 0.3%.
Japan’s GDP shrinks by 6.8%; Chinese new lending slumps
Global economy watchers have two big pieces of economic data from Asia to digest today.
1) Japan has suffered its biggest contraction since the 2011 tsunami, in a blow to efforts to revitalise its economy.
Japanese GDP fell at an annualised rate of 6.8% between April and June (meaning it shrank by 1.7% during the quarter). The slump is being blamed on the recent hike in Japan’s sales tax, from 5% to 8%, which encouraged firms and households to bring forward their spending to January-March.
The government remains relaxed, saying the economy is recovering. But critics of prime minister Abe’s stimulus plan suggest he may have to postpone plans to raise the sales tax again in December.
2) The news from China isn’t too rosy either. The broadest measure of new credit has dropped to the lowest since the global financial crisis, suggesting many banks are cutting back on new lending.
Economists are concerned, as Chinese banks also face the impact of the property market downturn. Beijing may need to unleash further stimulus measures to avoid growth weakening. fastFT has a round-up of analyst comments.
Analysts at ING will be combing the inflation report for signs that the Bank of England’s monetary policy committee was divided last week, when it voted to leave interest rates unchanged.
The Bank will release new forecasts and update its forward guidance which will leave the door open for a rates rise this year. Any hints of dissent at the August meeting will boost the case for a November hike.
Inflation report: what to watch for
The Bank of England inflation report will be scrutinised for hints over interest rate rises, the latest assessment of ‘slack’ in the economy, wage growth (or lack thereof), and the outlook for growth (could possibly be revised up) and inflation (might be revised down).
Mark Carney can also expect a few questions about the UK housing market.
Here’s Angela Monaghan’s preview:
City analyst Michael Hewson of CMC Markets predicts that today’s data will show another welcome drop in the jobless rate, but an unwelcome drop in wage growth.
The latest ILO unemployment numbers for June are expected to see a drop from 6.5% to 6.4%, while jobless claims in July are expected to show another drop of 30k, slightly lower than the 36.3k drop seen in June.
Wages growth continues to be the economic head scratcher and is the Bank of England’s biggest problem when it comes to deciding when to raise rates. If we continue to see the gap with inflation widen out then it becomes increasingly difficult to see how the Bank could even contemplate a rate rise this year.
Expectations are for flat wage growth for the 3 months to June, down from the 0.3% rise in May.
* – The wages figures are skewed by the cut in Britain’s top rate of income tax back in April 2013. That prompted some firms to hold back bonus payments until then, making comparisons trickier.
UK unemployment and Bank of England inflation report in focus
Good morning, and welcome to our rolling coverage of the economy, the financial markets, the eurozone and business.
We’re tracking two big events in the UK this morning. First, the latest unemployment figures, due at 9.30am BST. They are expected to show another drop in the number of people out of work.
But that labour market recovery has come at a price — low wage growth, and today’s figures are likely to show pay rises lagging behind inflation again.
That would mean real wages are still falling; taking the shine off Britain’s economy recovery.
That data will set the scene for the Bank of England’s latest quarterly Inflation Report, released at 10.30am.
This is the Bank’s latest health-check on the UK economy, including forecasts for growth and inflation.
But the big issue is whether the BoE has moved closer to hiking interest rates — Governor Mark Carney will probably be quizzed on this during the press conference.
The key issue is whether the Bank thinks most of the spare capacity, or ‘slack’, in the economy has now been mopped up. Carney will probably reiterate that the Bank is watching wage growth closely – showing whether employers are having to pay more for talent, and whether households could cope with higher borrowing costs.
As Ian Williams of Peel Hunt explains:
Formal changes to the forecasts are likely to be minimal; the overall assessment of the degree of slack, especially regarding the labour market, will be the focus of investor interest.
Elsewhere, European stock markets are expected to rise modestly, despite ongoing geopolitical tensions [the Russian aid convoy chugging towards the Ukraine border could be the next flashpoint].
And in the euro area, investors are digesting yesterday’s slump in German investor confidence, and fretting about how bad tomorrow’s growth figures for the April-June quarter could be.
I’ll be tracking the key events though the day….
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