“For the first time in a long time you don’t have to be an optimist to see the glass is half full. The recovery has finally taken hold,” says Bank of England Governor Mark Carney.
However, the recovery is still in its early days, and prone to risk. And the ongoing weakness of pay awards means a key prerequisite of sustainable economic recovery remains absent.
The Bank of England Monetary Policy Committee (MPC) notes that, “uncertainties over the durability of the recovery” remain, with “risks surrounding wage and price-setting.”
Pay awards hold firm at 2%
The median whole-economy pay award remains stuck at 2% over the three months to 31 October 2013, according to latest readings from the XpertHR pay databank.
This sustains the subdued pattern for pay awards seen throughout 2013, says XpertHR pay specialist Rachel Sharp:
Over the year so far pay awards have remained stable, with the headline award moving in a narrow range between 2% and 2.3%.
So what of pay prospects for 2014?
- XpertHR offers a range of interactive data resources on private-sector pay prospects for 2014.
Focus on pay awards for HR professionals
In contrast to the situation for whole-economy pay awards, pay awards for UK HR professionals are looking rather better, latest XpertHR Salary Surveys data indicate.
Basic pay for HR professionals rising by 3% in the 12 months to 1 September 2013, while basic pay plus bonuses rose by 3.3%.
Average earnings: Public-sector earnings continue to shrink
A new pattern of earnings growth would appear to be emerging in latest ONS data. The private sector is seeing anaemic earnings growth, while earnings are falling in the public sector (sustaining last month’s unprecedented fall):
- Whole-economy total pay (average weekly earnings including bonuses) rose by 0.7% over the three months to September 2013.
- Total pay in the public sector (average weekly earnings including bonuses) fell by 0.4% when compared with a year earlier.
- In contrast, total pay in the private sector rose by 1.1% over this period.
- Average weekly pay in the public sector (at £487) remains higher than in the private sector (£473).
- Whole-economy average regular pay (average weekly earnings excluding bonuses) rose by 0.8% between July and September 2013.
Average earnings outlook: Earnings to overtake inflation in 2014?
A strong and sustained revival in earnings growth will be essential for full economic recovery to occur, says Mark Carney:
[F]or recovery to be sustained we need to see a rise in real incomes, which hasn’t happened yet.
There is no consensus among economic commentators as to when we will see such a sustained rise in real incomes, XpertHR’s earnings forecasts round-up finds:
- “[I]t is likely that wage growth will recover once productivity growth does,” says the Bank of England. “But companies may wait until the recovery is entrenched before awarding higher pay rises. Continuing labour market slack may also limit the extent to which wage growth picks up.”
- The CBI expects average earnings to overtake inflation in 2014 – but only just. It sees average weekly earnings (excluding bonuses) growing by 1.1% in 2013, before accelerating to 2.6% in 2014 (above its 2014 CPI forecast of 2.5%).
- The European Commission thinks earnings growth will average 1.7% in 2014 and 2.8% in 2015. “The expectation is for [UK] consumers to dip into their savings and continue spending with the outlook for real wage growth to turn positive at the end of 2014 and into 2015.”
Inflation: Gap between pay awards and inflation narrows slightly
Inflation showed an unexpectedly sharp fall in the latest ONS data, pulled down by fuel price-cutting, and resulting in a slight narrowing of the ongoing gap between pay awards and inflation:
- RPI inflation stood at 2.6% in October 2013, down from 3.2% in September.
- RPI is 0.6 percentage points above the headline pay award as measured by XpertHR (which was worth 2.0% over the three months to 31 October 2013).
- RPIJ inflation was 1.9%, down from 2.5%.
- CPI inflation was 2.2% at in October (down from 2.7% in September).
- CPIH inflation was 2.0%, down from 2.5%.
Inflation outlook: Inflation to fall back gradually
With oil prices looking set to fall further, inflation could follow suit over the coming months – although recently-announced utility price hikes could exert upward pressure on inflation.
Here is XpertHR’s monthly round-up of inflation forecasts:
- The Bank of England has cut its forecasts for CPI in 2013 (from 2.9% to 2.2%), 2014 (from 2.4% to 2.1%) and 2015 (from 2.0% to 1.9%).
- The CBI says CPI will “average 2.5% in 2014, falling back to 2.1% in 2015, with upward pressure in the near future from the recently announced rises in domestic energy prices.” The CBI expects RPI inflation to average 3.2% in 2013, 3.4% in 2014, and 3.1% in 2015.
- The European Commission sees CPI inflation “falling at a leisurely pace,” to average 2.6% in 2013, 2.3% in 2014, and 2.1% in 2015.
- NIESR thinks “CPI inflation will fall gradually,” running at 2.3% in 2013, 2.6% in 2014, 1.7% in 2015.”
- The OECD expects CPI to average 2.6% in 2013, 2.4% in 2014, and 2.3% in 2015.
UK economy grew by 0.8% in Q3 2013
“The UK’s hard work is paying off and the country is on the path to prosperity,” comments HM Treasury in response to the stronger outlook for growth.
The UK economy grew by 0.8% in the third quarter of 2013, according to first revised estimates of growth in gross domestic product (GDP) published by the Office for National Statistics (ONS)
“The economy is growing robustly as lifting uncertainty and thawing credit conditions start to unlock pent-up demand,” says the Bank of England. “But significant headwinds – both at home and abroad – remain, and there is a long way to go before the aftermath of the financial crisis has cleared and economic conditions normalise.”
XpertHR GDP forecasts round-up December 2013: Recovery to ‘build steadily’?
Here is XpertHR’s round-up of GDP forecasts for December 2013 (click here for expanded coverage and links to all sources):
- The Bank of England has upgraded its forecasts for UK GDP growth in 2013 (from 1.4% to 1.6%) and 2014 (from 2.6% to 2.8%).
- The CBI “has raised its growth forecasts for 2013 and 2014 and expects growth to gather pace in 2015 as the recovery continues to build steadily.”
- Citi is the most optimistic forecaster, predicting “growth of 3% next year and 3.2% in 2015,” the Sunday Times reports.
- The Guardian’s Larry Elliott notes that the UK economy is currently seeing potential growth in excess of 3% per year, but cautions that this “consumer-led recovery” is built on shaky foundations, with an in-built risk of another crash.
- The European Commission forecasts UK GDP growth of 1.3% in 2013, 2.2% in 2014, and 2.4% in 2015.
- NIESR predicts that “the economy will grow by 1.4% this year, and by 2.0% in 2014.” NIESR “expect[s] GDP to return to its previous peak in early 2015, although per capita GDP will still remain well below the 2008 peak.”
- The OECD has raised its forecasts for UK GDP growth in 2013 to 1.4% and for 2014 to 2.4%. This is the biggest such upgrade for any major economy in the OECD’s latest economic outlook report.
UK labour market: Headline unemployment rate falls to 7.6%
Unemployment is falling sharply, wrongfooting economic commentators and the Bank of England:
- The headline unemployment rate (on the ILO definition) was 7.6% over the three months to September 2013, down by 0.2 percentage points from the rate for the previous rolling quarter (7.8%).
- The number of unemployed people fell by 48,000, to 2.47 million.
- The total number of job vacancies rose by 6,000 to 545,000 over the three months to October 2013.
- The vacancy rate stood at 2.0 vacancies per 100 employee jobs over this period.
- Output per worker increased by 0.5% between the first and second quarters of 2013.
What might falling unemployment mean for interest rates?
The Bank of England announced in August 2013 that under its new forward guidance policy, it will not review the level of interest rates until unemployment falls to 7%.
Strong growth and rapidly falling unemployment have raised speculation that interest rates could be raised (from the current record low level of 0.5%, at which they have been parked since March 2009) sooner rather than later.
However, the MPC comments that concerns over the “durability” of economic recovery and the ongoing weakness of pay awards mean “there could be a case for not raising Bank Rate immediately when the 7% unemployment threshold was reached.”
Labour market forecasts: ‘Uncertainty’ on when unemployment will hit 7%
Here is XpertHR’s latest monthly round-up of labour market forecasts:
- The Bank of England thinks “a sustained period of strong growth is likely to be needed before slack [in the labour market] is materially eroded.” It expects the unemployment rate to stand at 7.6% in Q4 2013, before falling throughout 2014, to hit 7% in Q4 2014.
- The CBI expects the headline unemployment rate “to fall back only gradually, as hours worked increase and productivity begins to recover,” averaging 7.7% in 2013, 7.5% in 2014, and 7.3% in 2015. “Our central expectation is that interest rates will remain on hold out to the end of 2015.”
- The European Commission’s “forecast is for unemployment to decline slowly from 7.8% in 2013 to 7.3% in 2015.”
- NIESR says “unemployment will fall gradually, to about 7.4% by the middle of next year.”
- The OECD predicts that unemployment will average 7.8% in 2013, 7.5% in 2014, and 7.2% in 2015.
Autumn Statement 2013: What to expect
George Osborne delivers his Autumn Statement 2013 on Thursday 5 December 2013 (a day later than originally announced, due to David Cameron’s visit to China).
So what might we expect from Osborne’s Autumn Statement 2013?
- No immediate tax cuts or spending increases are expected. These are more likely to be deferred until closer to the 2015 general election.
- However, some ‘giveaways’ could be possible in light of the brighter economic outlook.
For more on the above points, see: What can we expect from Osborne’s Autumn Statement 2013 on 5 December 2013?
The improving economic outlook could also mean the Autumn Statement 2013 takes a “triumphalist” tone, says the Independent’s Jim Armitage. He warns that putting too much stock in the recovery could be premature.
‘Too early to declare victory’ on economic recovery?
Full recovery is not yet assured for Europe, warns the European Commission’s Olli Rehn. Rehn’s comments are equally applicable to the UK:
There are increasing signs that the European economy has reached a turning point. [...] But it is too early to declare victory: unemployment remains at unacceptably high levels. That’s why we must continue working to modernise the European economy, for sustainable growth and job creation.
The glass may at last be half full as regards UK economic recovery, but full, sustainable recovery remains some way off.