Figures next week are likely to highlight a big puzzle – that an apparently tight labour market isn’t pushing up wage inflation.
The ONS could say on Wednesday that the unemployment rate has fallen to 4.4 per cent, its lowest rate since 1975. Despite this, wage inflation might fall to just 2 per cent. Such weakness isn’t due merely to disguised unemployment; there are 2m people out of the labour force who want to work. Instead, as Bank of England chief economist Andy Haldane said recently, it reflects a decline in workers’ ability to exploit a tight labour market to push for higher wages.
Because of this, wage growth is lagging behind price inflation: Tuesday’s figures should show the latter to be around the 2.6 per cent we saw last month. This, in turn, is holding back retail sales. Thursday’s figures could show these were flat in July, and only 1.3 per cent up in volume terms on a year ago: rising employment is boosting spending, but the pay squeeze is mitigating this.
There might, however, be signs the squeeze will be only temporary. Other figures on Tuesday should show that producer input prices have fallen since January, which points to no great inflation in the pipeline. And Wednesday’s numbers could show that total working hours fell in the second quarter, which means productivity rose. If this continues (and it is an if), it should allow real wages to grow soon.
Elsewhere, we should see decent growth, but signs that this might not last.
Official eurozone figures could show that industrial production fell in June. This, though, would follow strong growth earlier, and would leave output 1.2 per cent up in the quarter. However, Germany’s ZEW survey could show that optimism among finance professionals is flatlining below its long-term average, which points to slower growth in coming months.
A similar picture might emerge in the US. Surveys by the New York and Philadelphia Feds, as well as official data, should show that manufacturing is growing well – and industrial production more so thanks to higher oil output. But those surveys could show that optimism is falling slightly, and is only around its post-2009 average. What’s more, retail sales are likely to be flattish yet again, which suggests that consumers aren’t as confident in the future as surveys suggest.
All this is consistent with secular stagnation – an inability of the economy to grow more than around 3 per cent even in the best times.
Watch out too for capital flows numbers from the US Treasury. These could show rising foreign buying of US equities in recent months, which is a sign of increasing confidence and hence of lower returns on equities in the future.
