Economic Update: 19 May 2017

UK INFLATION AND EARNINGS

On Wednesday, the latest employment figures released by the Office for National Statistics (ONS) disclosed that unemployment fell to 4.6% in March from 4.7% in February, its lowest rate for over forty years. This good news recently encouraged the Bank of England to revise up their forecast for wages next year.

However, the March figure for wage growth of 2.1% is set against a backdrop of inflation rising.

 

UK CPI Inflation and the Wage (ex Bonuses) Growth

Source: UK Office for National Statistics, 31 March 2017

 

When inflation is taken into consideration wages are 0.2% lower in real terms. This has generated a lot of negative headlines because of course if wages do not keep pace with inflation it crimps the ability of consumers to spend more on non-essential items, or indeed to save more.

We have pointed out previously that many economic indicators lag and actual outcomes for one variable often lead to changes in other variables. For example, wage setting acts differently under different conditions, not just changes in the labour supply and the profile of the workforce. Global economic conditions, which have been steadily improving since the ending of the credit crisis, also influence domestic economic conditions.

We can see from the chart that a collapse in wages occurred after the credit crisis and despite monetary stimulus and underlying job creation, wages only started to pick up in the early part of 2014.

We conclude that global economic indicators are generally still positive, and the most recent UK labour market performance exceeded expectations with employment increasing by 122 thousand to a record 31.9 million. UK economic growth is forecast by a number of bodies to remain robust.

 

TRUMP AND AMERICA

Political difficulties for US President Donald Trump have become elevated this week as suggestions that Trump may have disclosed classified information to foreign officials and obstructed justice by putting pressure on the FBI when his national security adviser Michael T. Flynn was under investigation. The allegations came from former FBI director James Comey whom was fired by Trump last week.

Arizona senator, John McCain, has compared Trump’s situation with that of the 37th US president, John Nixon, when he allegedly ordered a break-in to opposition headquarters for intelligence. This forced Nixon to resign as a president.

It is interesting to note that despite political turmoil over recent months including the recent revelations mentioned, investors have not reacted as expected to this backdrop of uncertainty.

As you can see from the below chart of market volatility, which acts as a barometer for uncertainty, the levels in recent months have been muted relative to history. The recent spike up relates to the release of news around Trump, but this did not register particularly highly on the scale of uncertainty, particularly when viewed against previous extreme events like the credit crisis spanning 2008 and 2009.

 

S&P 500 Volatility (VIX) Index

Source: Chicago Board Options Exchange, 18 May 2017

 

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