The eurozone economy is booming. Purchasing managers are likely to report next week that manufacturing activity is expanding at its fastest rate since their survey began in 1997, with growth in services also strong. And Germany’s Ifo survey could show manufacturers enjoying the best conditions since their survey started in 1991, although expectations for future activity are more modest.
The US is also growing nicely. Official figures on Friday could show that real GDP grew at an annualised rate in the fourth quarter of almost 3 per cent. We should also see sales of pre-owned homes running at their highest level since the financial crisis, and a pick-up in durable goods orders, both of which would suggest the economy entered 2018 with some momentum.
The UK is sharing in this expansion. This should be most evident in Tuesday’s CBI survey of manufacturers, which should show strong order books, rising business confidence and high output expectations. The only blot upon this pretty picture might be that investment intentions are still weak.
The first estimate of fourth-quarter GDP growth should fit this pattern. If this is consistent with NIESR’s estimate, it will show that growth edged up in the fourth quarter, from 0.4 to 0.5 per cent.
Faster economic growth, however, might not be translating into growth in labour demand. In fact, Wednesday’s figures could show that total hours worked have fallen in recent months – which means we are at last seeing productivity grow after a decade of stagnation.
This might even be starting to raise wages. Wage growth in the year to the three months ending in November might be around 2.5 per cent, having been below 2 per cent in the spring. This, however, means that real wages are still falling in year-on-year terms.
It’s in this context that we should interpret the CBI’s report on retail sales on Thursday. If sales are in line with expectations, they’ll show moderate growth in January. One way to reconcile this with falling real wages is that consumers have borrowed or dipped into their savings in the belief that the squeeze on real wages is only temporary. With the labour market tight and productivity rising, that belief might be justified.
