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'You don't raise rates when unemployment is rising' – experts debate Brexit watch data 'You don't raise interest rates when unemployment rises' – experts debate Brexit watch data
(about 10 hours later)
Andrew SentanceAndrew Sentance
Senior economic adviser at the PwC consultancy and member of the Bank of England’s monetary policy committee from October 2006 to May 2011Senior economic adviser at the PwC consultancy and member of the Bank of England’s monetary policy committee from October 2006 to May 2011
The UK economy is currently feeling the pull of two opposing forces. The strength of the global economy and healthy growth in other European economies is boosting growth in export-oriented sectors. This is confirmed by robust manufacturing growth recorded in both official data and the CBI’s latest industrial trends survey.The UK economy is currently feeling the pull of two opposing forces. The strength of the global economy and healthy growth in other European economies is boosting growth in export-oriented sectors. This is confirmed by robust manufacturing growth recorded in both official data and the CBI’s latest industrial trends survey.
Meanwhile, consumers continue to be squeezed by high inflation while Brexit uncertainty is holding back business investment. Consumer indicators, including the latest retail sales data, point to very sluggish growth in household spending.Meanwhile, consumers continue to be squeezed by high inflation while Brexit uncertainty is holding back business investment. Consumer indicators, including the latest retail sales data, point to very sluggish growth in household spending.
Over the crucial Christmas and New Year period from November to January, retail sales volumes increased by just 0.1% on the previous three months, adjusted for seasonal factors. Car sales in January were 6.3% down on a year ago, with private sales nearly 10% below a year ago.Over the crucial Christmas and New Year period from November to January, retail sales volumes increased by just 0.1% on the previous three months, adjusted for seasonal factors. Car sales in January were 6.3% down on a year ago, with private sales nearly 10% below a year ago.
The services sector, which is more reliant on domestic spending, is therefore acting as a drag on UK economic growth. This is being reflected in slower employment growth over the second half of last year and a slight rise in the unemployment rate from 4.3%to 4.4%.The services sector, which is more reliant on domestic spending, is therefore acting as a drag on UK economic growth. This is being reflected in slower employment growth over the second half of last year and a slight rise in the unemployment rate from 4.3%to 4.4%.
High inflation – driven by the post-Brexit fall in the pound, and rising food and energy prices – is the main factor squeezing consumer spending. CPI inflation is still running at 3% while RPI inflation is stuck at 4%. There have been some signs of relief, with the pound rising against the dollar to around $1.40, up from $1.20-1.25 about a year ago. But sterling remains weak against the euro – the most important currency for UK imports and exports. At around €1.13, the pound is still nearly 20% below its average value in 2015 against the euro.High inflation – driven by the post-Brexit fall in the pound, and rising food and energy prices – is the main factor squeezing consumer spending. CPI inflation is still running at 3% while RPI inflation is stuck at 4%. There have been some signs of relief, with the pound rising against the dollar to around $1.40, up from $1.20-1.25 about a year ago. But sterling remains weak against the euro – the most important currency for UK imports and exports. At around €1.13, the pound is still nearly 20% below its average value in 2015 against the euro.
The oil price has recently fallen back from $70 a barrel to about $65 a barrel, but remains 20-30% above its level last spring. And it would not be surprising if continued strong global growth exerts further upward pressure on food and energy prices in the year ahead. As a result of these global price pressures and the weakness of the pound against the euro, inflation is likely to be slow to subside. The squeeze on consumer spending, and its dampening effect on the UK economy, is therefore likely to continue into the second half of this year.The oil price has recently fallen back from $70 a barrel to about $65 a barrel, but remains 20-30% above its level last spring. And it would not be surprising if continued strong global growth exerts further upward pressure on food and energy prices in the year ahead. As a result of these global price pressures and the weakness of the pound against the euro, inflation is likely to be slow to subside. The squeeze on consumer spending, and its dampening effect on the UK economy, is therefore likely to continue into the second half of this year.
David BlanchflowerDavid Blanchflower
Professor of economics at Dartmouth College, New Hampshire, US, and member of the Bank of England’s monetary policy committee from June 2006 to May 2009Professor of economics at Dartmouth College, New Hampshire, US, and member of the Bank of England’s monetary policy committee from June 2006 to May 2009
The big news on the month is that the number of unemployed rose by 31,000 between the rolling quarters of September to November and October to December – which provides a monthly look at how the labour market is doing rather than the Office for National Statistics’ favoured three month averages.The big news on the month is that the number of unemployed rose by 31,000 between the rolling quarters of September to November and October to December – which provides a monthly look at how the labour market is doing rather than the Office for National Statistics’ favoured three month averages.
Young female unemployment numbers took a notably big jump. As a result, the unemployment rate rose unexpectedly from 4.3% to 4.4%. There were big increases in the unemployment rates of young people also.Young female unemployment numbers took a notably big jump. As a result, the unemployment rate rose unexpectedly from 4.3% to 4.4%. There were big increases in the unemployment rates of young people also.
Looking on the monthly basis, employment fell by 60,000 with two-thirds of the fall accounted for by full-timers – despite what the ONS might say about employment rising by 88,000 over the three-month average. The UK labour market is hard to read when the ONS is the only statistical agency in the world to produce three-month averages – every other country produces estimates by single month. That is a disgrace. When you look at the monthly movements, there is early evidence that the labour market is turning down.Looking on the monthly basis, employment fell by 60,000 with two-thirds of the fall accounted for by full-timers – despite what the ONS might say about employment rising by 88,000 over the three-month average. The UK labour market is hard to read when the ONS is the only statistical agency in the world to produce three-month averages – every other country produces estimates by single month. That is a disgrace. When you look at the monthly movements, there is early evidence that the labour market is turning down.
In contrast the eurozone is booming and unemployment rates there are falling. In the latest data unemployment rates fell in Belgium; France; Germany; Ireland; Spain; Italy, and the Netherlands. The UK is a less attractive place to work for eastern Europeans who are seeing falling not rising unemployment rates at home and who are now increasingly staying home. These English speaking, skilled and mobile workers grease the wheels of the labour market. When they leave that lowers UK output and raises prices.In contrast the eurozone is booming and unemployment rates there are falling. In the latest data unemployment rates fell in Belgium; France; Germany; Ireland; Spain; Italy, and the Netherlands. The UK is a less attractive place to work for eastern Europeans who are seeing falling not rising unemployment rates at home and who are now increasingly staying home. These English speaking, skilled and mobile workers grease the wheels of the labour market. When they leave that lowers UK output and raises prices.
The evident weakening of the labour market will come as a surprise to the Bank of England’s monetary policy committee, whose unduly bullish inflation report last week signalled that rate rises were coming as they concluded the labour market was not weakening. Oops! You don’t raise rates, which causes unemployment to go up, when unemployment is already rising. A week is a long time in economics.The evident weakening of the labour market will come as a surprise to the Bank of England’s monetary policy committee, whose unduly bullish inflation report last week signalled that rate rises were coming as they concluded the labour market was not weakening. Oops! You don’t raise rates, which causes unemployment to go up, when unemployment is already rising. A week is a long time in economics.
The labour market is not separate from the rest of the economy. Weekly wage growth remained unchanged on the month at 2.5% but real wages fell for the ninth month in a row. As real wages slow, consumers inevitably have to reduce spending; they have reduced saving for some months but that can’t go on for ever. January was a particularly tough month on the high street, showing the extent of the squeeze on consumers as sales barely bounced back from a terrible Christmas.The labour market is not separate from the rest of the economy. Weekly wage growth remained unchanged on the month at 2.5% but real wages fell for the ninth month in a row. As real wages slow, consumers inevitably have to reduce spending; they have reduced saving for some months but that can’t go on for ever. January was a particularly tough month on the high street, showing the extent of the squeeze on consumers as sales barely bounced back from a terrible Christmas.
There was also signs of slowing elsewhere. The housing market is far from in rude health, as the number of sales and new buyers falls. There is also evidence among companies that economic growth more broadly is set to slow. The Markit/CIPS UK PMIs, for services, manufacturing and construction all dropped in January.There was also signs of slowing elsewhere. The housing market is far from in rude health, as the number of sales and new buyers falls. There is also evidence among companies that economic growth more broadly is set to slow. The Markit/CIPS UK PMIs, for services, manufacturing and construction all dropped in January.
Not good.Not good.
EconomicsEconomics
Guardian Brexit watchGuardian Brexit watch
Interest ratesInterest rates
Economic growth (GDP)Economic growth (GDP)
Bank of EnglandBank of England
analysisanalysis
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