A few more pennies in your pocket

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A few more pennies in your pocket

The growth plateau in UK economic growth in the first quarter of 2018 has passed. The latest GDP figures for the three months to end July, show significant improvement from the 0.2% growth recorded in quarter one this year. The recent data indicating that the UK economy expanded by 0.6% is higher than forecast.

Further data released by the Office for National Statistics saw UK wage growth reaching its joint-highest pace since 2008: Regular take-home pay growth is up from 2.7% in April to 2.9% in July.

Likewise, workers in the US received similar good news. Over the pond average hourly earnings expanded by 2.9% in August, their fastest pace since 2009.

The lack of wage growth in the UK and US has puzzled economists because the jobs market has tightened. Some employers are struggling to recruit which normally puts upward pressure on employers to pay more. However, academics point to low productivity as the reason, whilst others point to inaccurate data readings. If the data continues to improve the broken link between employment conditions and wages may be reconnecting.

Today, unemployment in the UK and US stands at 4% (lowest level since 1975) and 3.9% respectively. As you can see from the chart below, UK real wage growth (after adjusting for inflation) hit a bad patch from 2015 onwards. This happened despite unemployment falling, but what we can see now is a turnaround in real wage growth with recovery underway since early 2017.

Chart: UK wage growth and unemployment

Source: Bloomberg, September 2018

Recent data suggests competition for workers is finally beginning to show through, underpinning higher salaries. The big question now is can this be sustained?

Initial survey indicators suggest it can. Wage growth is expected to remain at 3% for the rest of the year. If the pool of skilled workers continues to shrink, wage growth may even accelerate. There is another side to this of course. Input costs can shift higher with higher wages and the general price level rises to create inflation.

In general, higher wages are welcomed by workers and at this stage of the cycle also by central banks fighting to avoid price disinflation: Falling prices can be pernicious when debt levels in an economy are high.

With a supportive economic backdrop and higher inflation, the Federal Reserve (Fed) and to a lesser extent the Bank of England will continue to push interest rates higher. At times the Fed is criticised for raising interest rates when core inflation is falling short of their 2% target level. However, higher interest rates are not restrictive at the current forecast trajectory. They are a sign of better growth.

After years of stimulus and initiatives from governments and central banks we are continuing to emerge from the long shadows cast by the 2008 global financial crisis. The lack of wage growth in developed countries is not such a puzzle, it seems it is operating with a long lag. Wages are now beginning to outpace inflation – a welcome sign for all

The information contained in this publication does not constitute a personal recommendation.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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