The return of the squeeze?
This is the latest in our regular round-up of the state of the economy. Last month my colleague Silkie Cragg discussed the contradictory nature of data regarding the state of the economy as we entered Quarter 4 of 2016.
This month the picture seems to be clearing a little. There are some positive signs. However, there is evidence of a few economic trends that will start to bite in the months ahead. GDP growth continues, but it is entirely in low-productivity, and low paid industries.
Too much employment is still irregular and insecure, not to mention low paid.
And most worryingly for working people, inflation and wages seem to be pointing in different directions; with a risk that household budgets will get squashed in the middle.
The Good news:
GDP is up again. This is the first time we’ve had an estimate of a complete quarter’s worth of data (an estimate that may be revised up or down in coming months) drawn from after the referendum, and it indicates that Gross Domestic Product (GDP) continued to grow. GDP rose 0.5% on the quarter before. Last week the Bank of England’s Inflation report noted that Q3 growth had been higher than expected: “(h)ousehold spending appears to have grown at a somewhat faster pace than projected in August, and the housing market has been more resilient than expected”
Quarter on quarter GDP growth, Q1 2010 – Q3 2016
There’s always a “however…”
However, Q2 actually saw GDP growth of 0.7% on Q1 so, while not bad news, 0.5% should be viewed in that context.
We are seeing growth, but it’s very unbalanced
We see some of the shine knocked off this growth rate if we analyse its components. All growth in the last quarter was in the service sector. Construction, production (manufacturing, energy production etc.) and agriculture were all negative. In terms of high productivity, well paid, secure work construction and production are much better bets than the service industry.
Contributions to GDP by sector – Q3 2016
This is not a new thing
This is a long term trend. Since the 1990s services have been stronger and less volatile than manufacturing and construction.
GDP growth by industry, quarter on a year ago
How does this play out in terms of employment?
The inexorable rise in self-employment
Self-employment has been a major driver of the growing employment levels recently. This is no blip, 43% of the net growth in jobs since 2008, 50% of net growth over the last year has been in self-employment. On top of this, almost half of the growth in self-employment has been part-time.
Growth in employment, by employment type employees / self employed
Work doesn’t pay like it used to
If jobs are increasingly irregular, they are also less well-paid. The chart below shows the difference between actual wage growth, and the level we could expect if pre-crash growth had been sustained (measured in 2000 prices, adjusted using CPI). This is alarming enough, but as we noted yesterday, the Bank of England expects interest rates to increase in the next year driving inflation.
Real earnings growth compared to pre-crash trend (regular pay, 2000 prices)
The BOE predicts Consumer Price Index (CPI) inflation to hit 2.7% in 2017. This would represent a serious squeeze on the income of families. Meanwhile the National Institute for Economic and Social Research have predicted CPI inflation at 4%, which would send real wages negative compared to prices. NIESR’s prediction is an outlier, but we don’t have to go that far to have serious concerns about household income in 2017. The chart below show that wage growth (Four quarter, total average weekly earnings in Q4) compared to inflation is essentially flat in 2017 and only gets back to 1.05% by 2018.
% change, AWE, CPI inflation and real wages
We see that GDP is reliant on low pay, insecure industries. A lot of employment growth has come from self-employment, and part-time self-employment at that. Finally, anaemic wage-growth will soon meet increasingly full-blooded inflation. Taken together, it seems likely that the next squeeze has started.