GDP is provisionally estimated to have grown by 0.7% in the fourth quarter of 2013 and by 1.9% for the year as a whole. These numbers are likely to be revised higher. Quarterly GDP changes between the fourth quarter of 2012 and the second quarter of 2013 have already been raised by 0.2 percentage points per quarter. If current third and fourth quarter numbers – 0.8% and 0.7% respectively – are increased by the same amount, 2013 growth will rise to 2.0%.
Excluding North Sea oil and gas production, GDP expansion last year was 2.0% and will probably be raised to about 2.25% later in 2014 as revisions come through.
GDP in the fourth quarter was still 1.3% below peak, reached in the first quarter of 2008. The non-North Sea shortfall is smaller, however, at 0.3%. Monthly output data and official estimates indicate that GDP in December was 0.4% above the quarterly average – see chart. This, in turn, implies that the non-North Sea measure regained its peak level at end-2013, even before allowing for revisions.
A post in early December suggested that equities were at risk from a deteriorating liquidity backdrop. This warning was premature – global stocks reached a new post-recession high at end-2013 – but a sharp decline over the last week has pushed the MSCI World index to the bottom of its range since mid-October – see first chart.
The focus here is on the gap between global* six-month real (i.e. inflation-adjusted) money supply expansion and industrial output growth. This was mostly positive and large over 2011-13, suggesting the availability of “excess” liquidity to power asset price inflation. Stronger economic growth coupled with a minor slowdown in real money expansion, however, resulted in the gap closing in November 2013 – second chart.
Liquidity concerns have been partially alleviated by December monetary data, suggesting a rebound in global real money expansion**. Industrial output probably accelerated further last month but the real money / output growth gap may have remained close to zero. The liquidity backdrop, in other words, is currently neutral rather than negative.
The estimated December rise in global real money expansion partly reflects recoveries in China and India, which lifted the emerging E7 component – third chart. Current financial pressures could reverse the E7 pick-up but the suggestion is that emerging economies in aggregate will perform respectably through mid-2014, at least.
*G7 plus emerging E7.
**The final result will depend importantly on Eurozone data released tomorrow.
With their unemployment-based guidance strategy in tatters, MPC members are shifting focus to weak average earnings growth, as well as recent sterling strength, to defend their refusal to raise Bank rate. Official earnings numbers, however, may understate current pay expansion.
The chart below shows annual growth in three average income measures:
1. The official average weekly earnings series;
2. An alternative average pay measure derived by dividing aggregate wages and salaries in the national accounts by the number of employees in employment;
3. A broader measure of average income from economic activities including self-employment earnings and small business profits*.
The national accounts based average wage measure rose by an annual 1.9% in the third quarter of 2013, significantly faster than official average earnings growth of 0.8%. The broader measure including non-wage income expanded by 3.1%.
Annual growth of all three measures was depressed in the first quarter of 2013 and boosted in the second quarter by late payment of bonuses to take advantage of the cut in the top rate of income tax last April. The third quarter numbers, however, should be undistorted.
The difference between the two average wage measures partly reflects recent stronger growth in jobs than employee numbers. The official earnings series is measured on a per job basis but more people now have several positions – the total number of workers with a second job rose by 4.3% in the year to the third quarter and reached a 12-year high in the latest three months**.
The recent stronger growth of the alternative average wage and total income measures aligns with survey evidence of improving household finances, as well as solid consumer spending expansion.
The chart shows that divergences between the series can be significant but are temporary – their long-term growth rates are almost equal. The expectation here is that the current gap will be closed by a pick-up in the official average earnings measure during 2014.
*Wages and salaries plus the household sector’s gross operating surplus and gross mixed income divided by total employment.
**Includes self-employed. 1,176,000 or 3.9% of workers reported having a second job in the three months to November.
Inflationary risks from the labour market are building as weak productivity performance contributes to a rapid erosion of slack.
Employment continued to boom in late 2013, with a favourable full-time / part-time split. Aggregate hours worked surged by 1.1% in the three months to November from the prior three months. With GDP growth likely to have fallen short of this level in the fourth quarter – a preliminary estimate will be released on 28 January – the suggestion is that productivity weakened further in late 2013, following a 0.3% decline in the third quarter.
Unemployment trends, meanwhile, make a mockery of Bank of England forecasts that were revised significantly just two months ago. The unemployment rate fell sharply again to 7.1% (7.15% unrounded) in the three months to November, to stand 0.5 percentage points below the Bank’s fourth-quarter projection in the November Inflation Report. The current rate was expected to be reached only in late 2014.
The vacancy rate – i.e. the number of unfilled positions expressed as a percentage of employee jobs – is an employer-based measure of labour market tightness and rose to 2.0% in the fourth quarter, slightly exceeding its average since 1995*. The vacancy rate is positively correlated with the annual rate of change of inflation-adjusted regular earnings: its normalisation suggests that real earnings will resume growth later in 2014 – see chart.
The forecast here remains for inflation to rebound later this year and in 2015 as rising real wages combine with sluggish productivity to push up unit labour cost expansion, with capacity pressures causing firms to protect or increase margins. The main risk to this view is a further surge in the exchange rate; the Bank is likely to use recent sterling strength as a reason to maintain its dovish interest rate guidance.
*The vacancy rate was estimated before the second quarter of 2001 by linking the current employer survey based vacancies series with an earlier series, ending in the first quarter of 2001, covering vacancies at job centres. This linking assumes that 1) the vacancy rate was unchanged between the first and second quarters of 2001 (reasonable – unemployment was little changed between the two quarters) and 2) job centre vacancies were a constant proportion of total vacancies from 1995 to 2001.
Job openings suggest that payroll employment will expand respectably early 2014 while there is less slack in the labour market than Federal Reserve policy-makers believe.
Job openings lead employment and rose to a new recovery high in November – see first chart. This supports the view that December payrolls weakness was weather-related rather than fundamental, implying likely positive pay-back in early 2014.
The ratio of openings to employment, i.e. the vacancy rate, is an employer-perspective measure of labour market slack. It now stands at 2.9% versus a 2.7% average since December 2000, when the openings data start – second chart. Employers, in other words, are finding it more difficult to recruit suitable workers than on average over the last 13 years. This accords with survey evidence of rising skill shortages.
The current vacancy rate matches levels in the first halves of 2008 and 2005; the unemployment rate averaged 5.2% in both periods. With the jobless rate at 6.7% in December, this suggests that “structural” unemployment has increased by as much as 1.5 percentage points of the labour force since the late 2000s. If so, the Fed is optimistic in believing that the unemployment rate can fall to about 5.5%* without generating inflationary labour cost pressures.
*The “central tendency” forecast of Fed governors and regional presidents for the unemployment rate “in the longer run” is 5.2-5.8%.