Posts tagged ‘unemployment’
A speech to the G20 summit in Shanghai from the Governor of the Bank of England has drawn some media interest today. Mark Carney’s words of caution to his fellow central bankers on the subject of negative interest rates centred on the “zero sum game” of seeking export-led recovery. He noted, quite rightly, that “beggar-thy-neighbour” policies at the country level would do nothing to address the sluggishness of global demand. And only on Tuesday he told the Treasury Select Committee that Britain’s policy rate would not go negative.
He did, however, say that it might be cut.
Sterling hit a new trade-weighted low on Wednesday and has now fallen by more than 10% from its August peak to a level last seen two years ago. Now the downward trend started back in November and has also received a helping hand from David Cameron’s successful reform of the European Union last Friday. But Governor Carney’s words, and those of his colleagues on the MPC this week, do undermine the credibility of his Chinese lecture at least a little.
This is especially the case since the pound’s impact on inflation has long been singled out in the Bank’s quarterly reports on the subject. A bout of moderate currency weakness could give a nice boost to CPI, if only on a forecast basis, bringing it closer to the target rate of 2% per annum without the MPC having to resort to any further loosening of policy over the coming months. And the side effect of a positive impact on British exports is just something the Bank would, regrettably of course, have to live with.
Look at the last Inflation Report and the underlying data, however, and even sterling is a side-show. As so often over the past 18 months the big news is oil.
This blog wrote about the impact of energy prices on the Bank’s assumptions for inflation back in November. Since then the effect has grown. Oil price assumptions for this year and next are down by 34% and 29% respectively; forecasts for gas prices down by 24% and 21%. On the MPC’s arithmetic this is in the process of translating into added deflationary pressure in 2016 of 0.4% p.a. by way of petrol prices and gas bills alone, with additional effects via the pass through of lower production costs (this being more difficult to time as well as to quantify).
It is, then, unsurprising that it has been oil, not sterling, which has exerted the more powerful pressure on interest rate expectations. These were already very benign, with UK rates only expected to rise late this year or some time into next. Look at futures markets today, however, and they are not pricing in any chance of policy tightening until the second half of 2018, with the base rate remaining under 1% until at least the end of the following year. As with the pound this change has been quite rapid. The 3-month LIBOR future for December 2019, which now prices at 1.02%, was priced at 2% on New Year’s Eve.
While the press looks to the pound, therefore, the rates market has been looking at the oil price.
And yet even the February Inflation Report is rightly cautious on this subject. It notes that the drag from lower energy prices will unwind over time, and that its CPI forecast on a three year view is broadly unchanged. Elsewhere it further notes that the labour market has strengthened more rapidly than expected back in the autumn: in fact it now forecasts UK unemployment of 4.8% both this year and next, revised down from 5.2% and 5.0% respectively. This is nothing less than a prediction of full employment, if the history of the last forty years is any guide. And at the same time the ratio of vacancies to the total labour force has risen again. This measure averaged 1.5x over the period 2010-12, when the UK labour market stagnated around an 8% level. Then it rose to 1.7x in 2013 and 2.0x in 2014, a time of rapid jobs growth which saw unemployment reduce to 5.7%. For 2015 the ratio hit 2.3x and unemployment already stood as low as 5.1% come December.
Under normal circumstances this would ignite at least an amber warning of cost pressures by way of wage increases. At present, however, this pressure is contained by the current low level of headline CPI, as the Bank also notes. (What the Bank doesn’t note but is nonetheless equally material is that low inflation has a direct impact on wage settlements in the public sector – about one in every six jobs in Britain – together with pensions and other welfare payments.)
The UK is close to full employment, the deflationary impact of a strong pound has fallen away in short order and price pressures are being contained only by the continued weakness of a commodity whose average annual price change in either direction over the last ten calendar years has been 30%. Interest rate markets are expecting this happy circumstance to persist for at least the next two to three years. From some perspectives – that of the property market, for instance – it would be lovely if they were right. But the more prudent thing to do, surely, is to think about what might happen if they are not.
Let us leave the last word to the Bank of England:
“At its meeting ending on 3 February, the MPC judged it appropriate to leave the stance of monetary policy unchanged . . . All members agree that, given the likely persistence of the headwinds weighing on the economy, when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.“
The big economic news in the US of late has concerned jobs. Last Friday it was announced that the unemployment rate dropped to 7.8% in September from 8.1% the month before, the lowest level since January 2009. Some thought this was too good to be true. Jack Welch, legendary former chairman of GE, was suspicious that such positive news should come two days after a presidential debate which the incumbent was widely seen to have lost, accusing “the Chicago boys” of having “changed the numbers”.
Inevitably, Mr Welch was accused of cracking up. But it is true that governments do fiddle the figures, or perhaps just as worryingly, have to fight hard to make sure they’re not being exaggerated.
In Argentina for example, inflation was running at an uncomfortably high level a few years ago. The former president took decisive action.
In January 2007, key staff in the statistics office started to be replaced.
A year later, inflation had fallen from 9.7% to 8.2% – proof that the strategy worked. Except, that is, according to those who kept an unofficial eye on consumer prices and whispered that the true rate was nearer to 20%.
Sometimes it’s the statisticians who need policing. At around the same time as the former President Kirchner was improving the quality of Argentine price measurement, the Chinese government set about toughening the laws on falsifying data:
Data falsification has long been a problem among Chinese officials, who seek to meet government targets to qualify for promotions. In 2007, nearly 20,000 violations “were uncovered,” China Daily reported in April. In one case, the NPC [National People’s Congress] reportedly discovered that officials in Chongqing municipality added a zero to the production figure of an enterprise to boost its output data tenfold. In 2004, the NBS found that local economic reports exceeded the national GDP total by 3.9 percent …
Of course, in the West we have the rule of law, and self-advancement is not so dependent on flattering the targets of the state. Nonetheless, it is amusing to note that British officials are currently looking at ways to reduce the quoted rate of inflation here, something which would coincidentally cut the government’s cost of borrowing: it was the cost of servicing Argentina’s inflation-linked bonds that so irked the late President Kirchner half a decade ago.
But we must not be too cynical. Mr Welch – if not cracked, exactly – is very likely to be wrong.
US unemployment has stayed high for an unusually long time since the end of the recession. In the early 1980s it took less than two years for the peak in unemployment to fall back down to its pre-recessionary level. In the 1990s it took a little longer, as it did following the collapse of the stock market ten years later. Today we are exactly three years from the 10% high of October 2009 – and yet the rate has only fallen back to 7.8%. That’s still a long way from the 4.6% average seen in 2007. If anything, we should be surprised that the rate of job creation has taken so long to increase.
There has also been some corroborating evidence to support the release of the unemployment data since last week. Only yesterday, the number of weekly initial jobless claims was reported at 339,000 – the lowest level since January 2008. (And this is an actual number, unlike the labour market data which is based on business and household surveys.)
It is right to be sceptical of data, and folly to impart too much significance to an individual release. And it is an indisputable matter of record that politicians with the necessary degree of motivation and cojones (as they say in Argentina) can corrupt economic numbers if they so choose. Jack Welch’s incredulity is understandable, up to a point. But the best advice is surely to follow patterns of behaviour over time; to build up a big picture. Once we have that in mind, it becomes easier to spot what might genuinely be out of place.
One of the major themes of American politics in recent years has been the “jobless recovery”. In a nutshell, while real US GDP was reckoned to have recovered its 2007 peak during the third quarter of last year, the unemployment rate – which ended ’07 at 4.8% – stood at 9.1% in September. This represented a reduction of a mere 1% since the jobless rate peaked a full two years previously. It also represented a headache for the President and a gift for his opponents in the runup to an election year.
It has been easy to miss amid the misery of the European crisis, but this all changed over the last three months.
Unemployment is a textbook example of a “lagging indicator”: one which takes time to catch up with economic activity in both falling and rising environments for GDP. To expect the labour market to recover its pre-recessionary state of health after only a year or two was always unrealistic. Nonetheless, it was worrying that for the middle two quarters of last year, the rate of job creation slowed and the unemployment rate seemed stuck on an unpleasantly high plateau.
The number of those claiming unemployment insurance, a measure which had declined significantly into the beginning of 2011, also stalled over this period. And then, from the middle of October, it suddenly started to fall.
As we now know, this presaged strong payroll gains and a fall in the unemployment rate to 8.5% – not the stuff that dreams are made of exactly, but progress.
This progress has already had an impact on confidence. It will also assist recovery in the real estate market, and by extension the mortgage market and the banking system.
If last year taught us anything it is that we should be wary of getting ahead of ourselves in the current climate. But it is undeniably comforting that Uncle Sam is entering 2012 with a little more of a spring in his step.