Two stories about the UK economy

Depending on which data sets you’re looking at, the UK economy could either be in trouble or doing just fine.

President Harry Truman is said to have grown tired of his economic advisers.

At one point, while he was listening to his counsellors, he’s supposed to have said:

“Please bring me a one-handed economist. All my economists say ‘on the one hand…’ then ‘but on the other…’”

Unfortunately for Mr Truman, economists tend to be born with two hands. Just like there are usually two sides to every coin.

Frustrating though it may be, two hands are needed to explain the state of the UK economy at the moment.

One the one hand, official figures give cause for optimism. Wages are growing at their fastest rate since 2008, the economy is doing better than the forecasts, and inflation is kept in check.

On the other hand, the UK’s underlying fundamentals may be less rosy than they seem. Productivity is still a problem, rising interest rates could put indebted households under water and Brexit could haunt the economy for a while longer.

Today, let’s examine those two “hands” of the UK economy a bit further.

Wages, inflation, growth

Let’s start with the positives.

The latest labour market figures from the Office for National Statistics (ONS) show that UK wages have risen at their fastest rate in a decade.

Wage growth hit 3.2% in the last quarter. The quarter before wages had grown by 3.1%. With inflation falling to 2.4%, real earnings have finally picked up.

It’s a nice change of pace. In the past few years UK workers had seen inflation pick up while their wages lagged behind, which had the effect of a wage cut in real terms.

Now the UK’s Consumer Price Index (CPI), the official measure of inflation of consumer prices in the UK, is decelerating.

CPI has fallen to 2.4%. Real wage growth is at its strongest for a long time, which is good for the economy in general and retail in particular.

More good news is that the UK recorded its fastest calendar quarter of economic growth in almost two years. Gross domestic product (GDP) went up by 0.6% in the third quarter, the most since the last quarter of 2016.

The Bank of England reckons the economy is now basically operating at full capacity as the number of people in employment rose by 23,000 compared to the previous quarter.

Bloomberg’s economics team has adjusted its growth forecast for the UK economy upwards. They now think the economy will expand 1.6% next year, up from their earlier forecast of 1.3%.

Forecasts about the global economy are even more upbeat in spite of trade wars, Brexit, Italy fighting the EU, US sanctions on Iran, China’s debt woes, and emerging market problems that we keep reading about.

The International Monetary Fund (IMF) says the global economy is on track to grow 3.7% this year. Last year it also grew by 3.7% and the IMF’s forecast for 2019 is, again, a growth of 3.7%. Like clockwork.

“It’s a plateau, all right, but a high plateau — call it the Altiplano of economics,” as Bloomberg’s Peter Coy puts it.

Debt, productivity, Brexit

On the other hand (because there always is the other hand), there’s cause for concern about the UK economy.

For starters, HSBC Global Research came out with a report about debt, which is now incidentally at 320% of global GDP.

That is in itself not very reassuring. If a debt bomb explodes in one part of the world (like China, the US or emerging markets), contagion might sweep through global markets.

But what’s particularly worrying for the UK is the level of household debt. People in the UK owed £1.6 trillion at the end of June. About 8.3 million UK citizens are unable to pay off debts.

If the Bank of England raises interest rates, which it is planning to do, it would make financial conditions worse for borrowers.

Households currently spend about 9% of their income on debt servicing. If interest rates were to rise by 1%, households would have to spend over 12.5% of their income servicing debt.

It’s not just private debt that’s an issue. If we look at government assets compared to debt, most countries in HSBC’s study are in the clear.

But there is an exception…

“A shortage of assets and large pension liabilities mean that the UK is the only country in the sample … where the level of net worth is worse than the simple government debt statistic implies.”

Then there’s the mother of all problems: productivity. Output per hour fell 0.4% in the three months to September.

It’s a headache, nay migraine, for the UK economy and it still seems like we’re not getting any closer to the productivity puzzle being solved.

Finally, Brexit is now reduced to two scenarios, neither of which seems particularly helpful for the economy.

There’s the script where Prime Minister Theresa May convinces a divided cabinet, a divided Conservative Party, and a divided parliament of the merits of her deal with Brussels.

That’s no mean task. As one diplomat commented, “We shouldn’t confuse white smoke with fog over the Thames”.

If May succeeds nonetheless, the UK will enter a transition period until December 2020 during which a Future Economic Partnership has to be fleshed out.

Uncertainty is likely to continue for another two years or so. And the Bank of England is expected to hike interest rates further upon the “good news” of a deal with the EU.

The alternative is the UK leaving the EU without a deal, which would translate into tariffs, custom checks, and some kind of border between Northern Ireland and Ireland.

That’s a recipe for some considerable economic pain, at least in the short to medium term.

The pound would probably fall sharply in a no deal situation, though that could just as easily be a boon to UK businesses (exporters) and the FTSE 100.

So there you have it…

The UK economy is doing just fine or could be in big trouble depending on which data you choose to look at.

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