Data and surveys show that productivity is rising at last and wages may be set to jump. Is the economy finally getting the tonic it needs?
The headlines focus on the negative. But it wasn’t that negative. In the three months to December, UK unemployment increased from 4.3 per cent, the lowest level since the first half of the 1970s, to 4.4 per cent, the second lowest level since the early 1970s.
But the good news is revealed if you look deeper, and at another set of data released yesterday (21st February).
Average wages rose 2.8 per cent in December on the year before. In the three months to December, average wages rose by 2.5 per cent. Inflation was 3.0 per cent in December, so real wages were still falling
But various surveys, including from the Bank of England’s agents’ survey and from XpertHR, suggest that pay settlements are set to rise. With inflation expected to fall this year, it seems that it is only a matter of time before real wages start to rise again, this would be good news for households, good news for retailers that sell to them.
But other data out on February 21st provided a genuine ray of hope. In the final quarter of 2017, UK output per hour rose by 0.8 per cent, following a rise of 0.9 per cent in Q3. Together, the data creates the best six-month period for productivity growth since the financial crisis of 2008.
It may not last of course, the data may point to a one-off, we will have to wait for the data on UK productivity in Q1 of 2018 before we get a better idea about that.
But if the hikes in productivity seen in Q3 and Q4 can continue, this will in turn increase the potential growth rate of the UK economy and probably lead to higher wages without risking an inflationary surge.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics put it this way: "Hard evidence that the economy is overheating remains hard to find.”
The Bank of England may well increase interest rates in May many expect it to, but if the Q3 and Q4 growth rate in productivity continues into 2018, the need for further rate hikes may diminish.