The last six months have not been particularly cheerful ones for many people, as wages have consistently lagged behind inflation. But the latest figures from the Office for National Statistics give some grounds for optimism. Is there finally light at the end of the tunnel?
We have written many times over the past six months about the struggle wages have had to keep up with inflation: about the simple fact that if your pay goes up by 2% and inflation goes up by 3% then you are 1% worse off in real terms.
In his Spring Statement Chancellor Philip Hammond said that he expected to see people enjoying wage rises in real terms “by the end of the year.” Well, it may be time to celebrate early – if not with champagne, then at least with half a pint of shandy as we enjoy the warmest April since 1949.
Official figures from the Office for National Statistics (ONS) have just been released for the three months to the end of February, and they suggest that the long-running squeeze on real incomes is coming to an end, with average wages rising by 2.8%. Using the Consumer Prices Index inflation went up by 2.9% which would mean that people would still be fractionally worse off. But using the new measure of inflation adopted by the ONS – one that includes the cost of housing – then inflation only rose by 2.6%, meaning that people are finally starting to see real wage increases.
The new measure of inflation – Consumer Prices Including Housing (CPIH) – became the “lead” measure of inflation last year, taking over from the Consumer Prices Index, which had, in turn, replaced the original Retail Prices Index.
Why is it important that we feel better off?
That may seem like a stupid question – obviously, we want to feel better off, that we can go out on a Friday night instead of staying at home with the TV. But people’s personal incomes are also one of the most important driving factors behind the wider economy, with household consumption accounting for around 60% of the value of the UK economy. If people are, on average, worse off then overall spending slows, and so does overall economic activity – so the country is producing less wealth and less taxation revenue. Gradually, a downward spiral develops as slowing economic activity leads to even lower wages, which slows the economy further…
So the news this month that real wages are breaking out of this downward spiral is good news not just for individual incomes, but also for the wider UK economy.
More people are in work
Meanwhile, there is also good news on unemployment. Figures for the latest three month period showed that unemployment fell by 16,000 to 1.42m. The unemployment rate is now 4.2%, the lowest since the three months to May 1975. There are now 32.2m people in work, which – according to the Bank of England – could start to push wages up, as employers try to recruit in a dwindling pool of labour. Then again, there are suggestions this morning that the Governor of the Bank of England, Mark Carney, has said that uncertainty over Brexit could delay any rise in interest rates.
So on that one you “pays your money and you takes your choice.” What is undeniable is that there is plenty of good news for UK plc at the moment and, for most people, the glass is starting to look half-full.
Is there any more good news?
Yes, is the refreshing answer to that question. The ONS also released figures for the fourth quarter of 2017, showing that UK exports of services had risen from £39.9bn in the third quarter to £43.2bn in the fourth quarter. “Brand Britain continues to have widespread appeal abroad,” said Baihas Baghdadi, global head of trade at Barclays.
“The picture continues to look positive for British exporters, with international consumers going out of their way to buy British.”
If you voted to Remain the good news was that the EU was Britain’s largest trading partner for services in the period. If you voted Leave then the good news was that the largest individual country was the USA, and Singapore was the country that saw the fastest growth in trade.
Less contentious was a bulletin from the International Monetary Fund, which raised its forecast for UK growth this year from 1.5% to 1.6% – although with the notable caveat that world trade risks being “torn apart” if there is a protracted trade war between the USA and China.
There was also good news for London, with a report due to be published confirming it as the world’s leading city for financial services. For the first time in five years, it has beaten New York to the accolade, according to analysis from the think tank Z/Yen. The rest of us might shrug and worry about the country becoming increasingly London-centric – but wealth created in London gradually makes its way to other parts of the UK and again, it is an indication that the UK is a place people want to do business.
There must be some bad news…
There was, of course, the traditional gloom for the retail sector, with Debenhams reporting that “the Beast from the East” hit its retail sales, thanks to the temporary closure of 100 stores throughout the UK. Like for like sales were down by 2.2% in the 26 weeks to March 3rd, with the department store’s profits slumping by an alarming 84%. The cold weather hit the retail sector generally, with sales volumes down by 1.2% for the month and by 0.5% on the previous quarter, according to figures from the ONS. And figures from the aptly-named Local Data Company confirmed that new stores opening on our high streets were at their lowest level for seven years.
So everything in the UK garden may not yet be rosy – there are though, some discernible signs of recovery and reasons for optimism. Green shoots, you might say – which sadly reminds me that my wife has arranged an appointment for me this weekend. With a spade…