Expert from Markit, Chris Williamson comments on the UK economic news
“Unemployment has sunk below 6.0% for the first time in just over six years, wage growth is rising in real terms and households are feeling the most optimistic about their finances since the recession struck.
“However, the data will do little to convince policymakers that the economy is ready for higher interest rates, with the Bank of England growing gloomier about the economic outlook and the ?hawks? dropping their calls for rate hikes.
Labour market improves
“Official data showed the rate of unemployment dropping to 5.8% in the three months to November, its lowest since August 2008.
“Pay growth meanwhile continued to revive. Total pay rose 1.7% on a year ago in the three months to November, up from (a downwardly revised) 1.4% in the three months to October. Regular pay growth, excluding bonuses, also accelerated, up from 1.6% to 1.8%, its highest for just over two years. The trend in private sector pay growth was even more encouraging, up from 2.0% to 2.2%, matching the previous pre-crisis peak seen in the second quarter of 2011.
“What’s particularly important is that regular wage growth is outstripping inflation to the greatest extent since 2008. This ‘real’ wage growth has been the missing ingredient of the UK’s economic recovery from the recession.
Household confidence at post-recession high
“The data therefore bode well for a revival of consumer spending and household well-being in coming months: increasing numbers of people are in paid employment and wage growth is outstripping inflation, meaning incomes are rising, and falling oil prices mean that more of these incomes can be saved or spent on goods and services other than fuel.
“Not surprisingly, households’ views on the outlook for their finances have risen to a post-recession high in January, according to Markit’s Household Finance Index, also released today.
“One could argue, therefore, that households are in a better position to cope with higher interest rates than at any time over the past six years.
Gloomier Bank of England
“However, the minutes from the latest Bank of England Monetary Policy Committee reveal that the the likelihood of interest rates rising this year has fallen, with policymakers having grown more concerned about the economic outlook.
“Two of the nine Committee members dropped their calls to raise interest rates, resulting in the first unanimous decision to keep policy on hold since last July.
“The gloomier view is justified: recent PMI surveys signalled a broad-based slowing in the economy late last year, hitting a one-and-a-half-year low. The surveys suggest GDP growth slipped to 0.5% in the fourth quarter, down from 0.7% in the three months to September. The global economic backdrop has likewise deteriorated, notably in the Eurozone and across many emerging markets, leaving the global economy overly dependent on the US, which is itself now showing signs of slowing.
“The additional concern among policymakers is that inflation expectations could become entrenched at a worryingly low level, especially if interest rates were raised. Inflation has already slumped to a 14½-year low of 0.5%, and the recent decline in oil prices suggests it could fall even further below the Bank’s 2.0% target in coming months.
“Today’s labour market report also contains some warning lights to justify caution over rate hikes, confirming survey signals that the economy’s growth rate cooled late last year: employment growth has slowed, highlighting increased caution among employers in relation to hiring. Although 37,000 extra jobs were created in the three months to November, that was the smallest rise since the three months to May 2013. The 58,000 drop in unemployment was also the smallest since the third quarter of 2013.
No rate hikes until 2016
“There’s still an outside chance for rates to rise later this year, but it would require wage growth to continue to revive and for policymakers to see clear evidence that falling oil prices are driving a substantial upturn in consumer spending, as well as a significant improvement in the Eurozone economy.
“The catalyst for the latter may come tomorrow, in the form of more aggressive stimulus by the ECB as it looks set to announce full-scale quantitative easing. However, even if QE works, it will take time for the euro area economy to show signs of healing. UK rate rises before 2016 are therefore only a remote possibility.”
