David Blanchflower: The Bank of England is living in cloud-cuckoo land on wages
|
Version 0 of 1. In his reply to a letter from the Monetary Policy Committee this week outlining why CPI inflation was 2 per cent below the target he had set for them, the Chancellor made clear there was more austerity heading everyone’s way. “Ultimately, the credibility of our economic policy rests on the strength of our public finances. This new Government now has a clear mandate to take the steps needed to return them to surplus and ensure continued economic security.” Here we go again, and this time he thinks he has a “mandate’ to slash and burn. It really is amazing that he hasn’t learnt from his past errors. In 2010 George Osborne imposed austerity and the economy stalled for two years; he relaxed austerity and went to plan B, and growth picked up. So Slasher Osborne is back to his old tricks. Sadly for Slasher this time he has a slowing economy to deal with, rather than the rapidly growing one he inherited in 2010. Now the bond markets really do seem to be in free-fall, just as they weren’t in 2010. As the Governor of the Bank of England, Mark Carney, made clear in his press conference this week, “there is persistent fiscal drag … just as there has been over the last several years”. That’s one of the headwinds that weighs on the economy. The headwinds are once again going to become hurricane force. Hurricane Slasher is heading your way. Austerity is likely to smash growth once again. It seems almost inevitable that monetary policy will have to compensate for such tightening, so I fully expect the next interest rate move to be downwards, with another significant round of quantitative easing, if this austerity is implemented. There is no such thing as an expansionary fiscal contraction. Just to remind readers, GDP growth was 1 per cent in Q2 2010 and 0.3 per cent in Q1 2015, the latest data that we have. To put this in context, the first chart plots quarterly GDP growth rates for the 19 EU countries that to this point have produced estimates. The UK’s growth rate of 0.3 per cent is below both the EU and the eurozone averages of 0.4 per cent, and is growing at half France’s growth rate of 0.6 per cent. The UK ranks joint 11th with Belgium, Germany and Italy. There are several other countries who are yet to report for 2015 but whose growth rates for Q4 2014 were higher than 0.3 per cent: the Czech Republic, Denmark, Luxembourg, Malta, Poland and Sweden, plus two non-EU members, Norway and Switzerland. The UK is now one of the slowest-growing European economies. The MPC in its latest Inflation Report couldn’t have pleased Slasher much either, as it lowered its growth forecasts for the UK economy to 2.5 per cent in 2015, 2.6 per cent in 2016 and 2.4 per cent in 2017. These estimates still look wildly optimistic as they assume that the so-called productivity puzzle is solved. Prior to the recession, productivity was tanking along with a growth rate of around 2 per cent per annum, in line with its historic trend. Productivity growth since 2011 has been as flat as the proverbial pancake, as the second chart shows. Indeed output per hour worked fell between Q3 and Q4 2014, from 99.0 to 98.8, and now is below its 2011 level (=100) as well as the level in Q1 2008 of 100.5.
In its report, the MPC argues that “absorption of remaining slack and a pick-up in productivity growth are expected to support wage growth in the period ahead”. As a result they are forecasting wage growth of 2.5 per cent in 2015, down from the 3.5 per cent, I criticised heavily, in the February Report, rising then to 4 per cent in 2016 and 2017. More cloud cuckoo land wishful guessing. No productivity pick-up is on the horizon, sorry. The MPC does give a strong caveat though that “weak wage and productivity growth may imply a more persistent slowing in activity”. You bet they do. The latest data release from the Office for National Statistics shows that wages have grown by £1 a week between December 2014 and March 2015, from £488 to £489. The average for the three months from October -December 2014 to January-March 2015 is also up £1, from £485 to £486. So there is no evidence of rising wage growth. The chances of getting 2.5 per cent in 2015 seem slim. Of note also is that the MPC in the Inflation Report also noted that wage settlements, which had been running at 2 per cent, have now fallen back to 1.9 per cent in Q1 2015. No wage pick-up, either. The MPC does make clear, however, that the revival in productivity, which they expect to pick up gradually over coming years, supports supply and real income growth is one of its key judgements. In the press conference Deputy Governor Ben Broadbent argued that productivity growth has been “disappointing, particularly over the last year or so during the recovery … the last two years, when normally the cyclical pattern would be for productivity growth to pick up”. Hence it is, according to Broadbent, “the biggest uncertainty over the forecast”. Sure is. Growth will disappoint again. The MPC in their report note, rightly, that a number of factors have weighed on productivity. They argue that low investment can account for only some of the weakness. Business investment slowed in the second half of 2014, and is likely to slow even further with the prospect of Brexit. One influence they point to very recently has been a shift in the mix of employment growth towards lower-skilled occupations, with a rising proportion of staff new to roles. But this shows no sign of changing. The new jobs were bad jobs. The MPC also admits that wage growth may be a little less sensitive to domestic labour market slack if it is also influenced by the potential supply of labour in other countries, and therefore economic conditions outside the United Kingdom. The factors holding wage growth back could prove more persistent: for example, if low inflation affects wage settlements. “They could, however, unwind more quickly and wage pressures could pick up quite sharply as unemployment falls towards its long-run rate.” Most unlikely, of course. Why these forces will suddenly change now they don’t tell us. So we are supposed to believe wage growth, productivity and GDP growth will not be impacted by the austerity that is to come, even though they were last time? Eventually though the peasants will come after you with a pitchfork. |