Stronger earnings growth is critical to sustained UK economic recovery in 2014 and beyond – but how likely is this to happen? XpertHR’s economic commentary for January 2014 weighs up economic prospects for 2014 and beyond.
What a difference a year makes… but recovery remains ‘far from stable’
As 2014 begins, the UK economy appears significantly better placed for recovery than it did a year ago. The triple-dip recession that was feared at the start of 2013 never materialised, and the double-dip recession was revised away.
Economic growth picked up strongly over the course of last year, and the labour market would appear to be in rude health.
However, it is not yet plain sailing for the UK economy:
- “Growth is strong, but it is far from stable,” says the Work Foundation’s Charles Levy.
- “It is a recovery, but it’s a low wage, low productivity recovery,” says Stefan Stern.
Concerns remain as to the sustainability of the recovery and the ongoing weakness of pay awards.
Pay prospects for 2014: Another year of subdued pay awards?
The picture for whole-economy pay awards remains subdued as 2014 arrives:
- The median whole economy pay award remains unchanged at 2.0% over the three months to 30 November 2013, according to latest data from XpertHR.
- XpertHR pay specialist Sheila Attwood notes that this reflects ”the subdued nature of pay bargaining over 2013 as a whole.”
Looking ahead, another year of subdued pay awards would appear to be in prospect for 2014:
- Private-sector pay awards are expected to be worth 2.5% in the year to 31 August 2014, the the latest XpertHR Benchmarking survey of private-sector pay prospects.
- “For the time being, 1% is as far as the increase in public-sector pay is going to go, as the Government’s policy of keeping pay awards limited to an average 1% is set to last for a further two years,” notes Attwood.
Average earnings growth remains subdued
The subdued picture for whole-economy average earnings growth seen throughout 2013 continues in latest ONS data:
- Whole-economy total pay (average weekly earnings including bonuses) rose by 0.9% over the three months to October 2013.
- Total pay in the public sector (average weekly earnings including bonuses) fell by 0.3% when compared with a year earlier over the three months to October 2013.
- In contrast, total pay in the private sector rose by 1.3% over this period.
- Average weekly total pay in the public sector (at £489) remains higher than that in the private sector (at £473).
- Whole-economy regular pay (average weekly earnings excluding bonuses) rose by 0.8% between August and October 2013.
A revival in earnings growth is essential to sustainable recovery, says the Office for Budget Responsibility (OBR):
The unexpected strength of private consumption [in 2013] has largely come from lower saving, not higher income. Ultimately, productivity-driven growth in real earnings is necessary to sustain the recovery and raise living standards.
Average earnings outlook: ‘Terrible is the only word,’ says TUC
The outlook for average earnings growth over the next few years would appear to be getting worse, not better.
“Terrible is the only word that can describe the new average earning forecasts” from the OBR for 2014 and beyond, says the TUC’s Duncan Weldon.
The OBR has cut its forecasts for earnings growth for each year from 2014 to 2017. For example, the OBR has downgraded its earnings growth forecasts for 2014 from 2.8% to 2.6%, and for 2014 from 3.7% to 3.3%.
Consequently, “the cost of living crisis rumbles on and looks set to get worse,” says Weldon.
Economist David Blanchflower, meanwhile, argues that the OBR’s earnings growth forecasts are, if anything, “much too optimistic.”
CPI inflation falls, but ‘good news may not last too long’
- RPI inflation stood at 2.6% in November 2013, unchanged from October, according to latest inflation data from ONS.
- RPI (at 3.2%) is 1.2 percentage points above the headline pay award as measured by XpertHR (which stands at 2.0%).
- RPIJ was 2.0%, up from 1.9%.
- CPI inflation fell by one percentage point to 2.1% in November 2013, its lowest level in four years.
- CPIH was 1.9% (down from 2.0%).
However, “this good news [on CPI inflation] may not last too long” warns Jeremy Cook of World First.
Inflation is likely to rise once more in the first inflation data release of 2014 (due on Tuesday 14 January 2014), as the recent hikes in utility prices feed through.
Inflation outlook 2014
Here is XpertHR’s latest monthly round-up of inflation forecasts:
- The BCC expects RPI to average 2.9% in 2014, falling slightly to 2.8% in 2015. CPI is expected to run at 2.5% in 2014 and 2.3% in 2015.
- 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 to average 3.4% in 2014, and 3.1% in 2015.
- The OBR expects CPI to run at 2.3% in 2014, 2.1% in 2015, and 2.0% in 2016.
UK economy grew by 0.8% in Q3 2013
The current picture for UK economic growth is strong as 2014 arrives.
The UK economy grew by 0.8% in the third quarter of 2013, according to latest revised GDP growth estimates from ONS.
This month sees the publication of preliminary GDP estimates for Q4 2013, on Tuesday 28 January 2014. This will provide a crucial indicator as to whether recovery can be sustained.
There is disagreement among economic forecasters as to whether growth in Q4 might be as strong as that seen in Q3:
- The Bank of England expects “continued robust growth” of 0.9% in Q4 2013.
- The BCC predicts 0.8% GDP growth for Q4 2013.
- The CBI says growth will “soften” to 0.5% in Q4 2013.
- The Guardian’s Larry Elliott expects “Britain’s growth rate to [have] slow[ed] down” in 2013 Q4, due to a slowdown in the global economy and wage rises remaining below inflation.
GDP forecasts round-up January 2014: Brighter picture for growth in 2014
Overall, UK GDP growth is expected to continue to build throughout 2014, with all economic forecasters upgrading their 2014 GDP forecasts:
- The BCC has upgraded its forecast for UK GDP growth in 2014 to 2.7%, but has “slightly” downgraded its 2015 forecast from 2.5% to 2.4%. The downgrade for 2015 reflects an expectation that “household consumption [will] moderate due to high personal debt levels.”
- The CBI expects “growth of 1.4% in 2013, 2.4% in 2014 and 2.6% in 2015.”
- The European Commission forecasts UK GDP growth of 1.3% in 2013, 2.2% in 2014, and 2.4% in 2015.
- The OBR has made sharp upward revisions to its UK GDP growth forecasts. It expects GDP growth of 1.4% in 2013, rising to 2.4% in 2014 and 2.2% in 2015. However, the OBR cautions that without stronger earnings growth, sustained recovery will be hard to achieve.
- The OECD has raised its forecasts for UK GDP growth in 2013 to 1.4% and for 2014 to 2.4%.
UK labour market: Unemployment shows sharp drop
The final UK labour market data release of 2013 paints a “wonderful” picture, says economist John Philpott. Unemployment is falling rapidly, ONS reports:
- The number of unemployed people fell by 99,000 over the three months to October 2013, to 2.39 million.
- The headline unemployment rate (on the ILO definition) was 7.4%, down by 0.3 percentage points from the rate for the previous rolling quarter (7.7%).
- The total number of job vacancies rose by 22,000 to 562,000 over the three months to November 2013.
- The vacancy rate stood at 2.0 vacancies per 100 employee jobs over this period.
- Output per worker rose by 0.5% between the first and second quarters of 2013.
Labour market forecasts: Unemployment ‘to fall steadily over the coming years’
The trend for falling unemployment and a gradual strengthening of the UK labour market looks set to be sustained in 2014 and beyond, XpertHR’s latest round-up of labour market forecasts suggests:
- The BCC thinks unemployment will fall to 7.3% by Q3 2014 and to 7.0% by Q3 2-15. However, it cautions that “further-public sector job losses would limit the size of any decline” in unemployment. Further public-sector job cuts would appear inevitable, in light of additional cuts announced in the Autumn Statement 2013 (see below).
- The CBI expects unemployment “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.
- The OBR says unemployment will “fall steadily over the coming years,” averaging 7.1% in 2014, before dropping to 7.0% in 2015 (hitting the Bank of England’s 7% threshold “in mid-2015″), then continuing to fall to 6.6% in 2016, 6.1% in 2017, and 5.6% in 2018.
Interest rates: Will interest rates rise from 0.5% in 2014?
It is a racing certainty that UK interest rates will notch up five whole years at their record low of 0.5% in March 2014.
But there is conjecture as to how long (or how soon) after that point rates might rise.
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 fuelled speculation that interest rates could be raised sooner rather than later.
However, some economic commentators argue that – even if growth remains strong and unemployment falls back to 7% – any interest rate rise could be deferred until after the 2015 general election:
- “Interest rates will be on hold for many years, probably until 2020, primarily because of the sensitivity of the UK economy to an interest-rate rise, says David Blanchflower.
- “I would not be looking for any movement on interest rates for the next two years, and possibly quite a bit longer,” Sunday Times Economics Editor David Smith.
Indeed, Bank of England Governor Mark Carney stated last month that sustained low interest rates are necessary to boost growth.
Autumn Statement 2013: Osborne targets ‘responsible recovery’
Chancellor George Osborne delivered his Autumn Statement 2013 on Thursday 5 December 2013.
Referring to the improved economic outlook, Osborne said:
Britain’s economic plan is working. […] The hard work of the British people is paying off and we are not going to squander their efforts.
He stated that he is pursuing “a responsible recovery to allow the Government to live within its means.”
Key announcements in Osborne’s Autumn Statement 2013 include:
- an increase in state pension age to 68 in the mid-2030s and to 69 in the late-2040s;
- removal of NI contributions for workers aged under 21 from April 2015; and
- increased annual limits on the Share Incentive Plan.
Click here for XpertHR’s overview of the Autumn Statement 2013.
Not all commentators were convinced by Osborne’s claim that the current strength of economic growth vindicated his overall economic strategy. The Autumn Statement 2013 saw Osborne “tinkering” with economic policy, rather than setting out a clear narrative for achieving sustainable growth, argues the Work Foundation’s Charles Levy. Levy says:
[Osborne] was surprisingly quiet on the big issues facing our economy today. Half a decade on from the credit crunch our economy is far from recovery. Growth is strong, but it is far from stable. To date growth has been driven by household consumption, rather than business investment or exports; a mix which has proved unsustainable in the recent past.
No end in sight to age of austerity
The improving economic outlook does not mean that there is any end in sight to the age of austerity:
- The Autumn Statement 2013 was “fiscally neutral,” with an additional £1 billion cuts to public spending over each of the next three years to fund some of Osborne’s newly-announced measures.
- David Cameron stated in November 2013 that the Conservative party is focused on “building a leaner, more efficient state. We need to do more with less. Not just now, but permanently.”
Whatever the pace of economic recovery we see in 2014, it would seem that the age of perpetual austerity is upon us.