UK Economy Update: More Jobs, Growth – and Fear

The UK is still growing and creating more jobs. But the Brexit drag on market valuations is being intensified by increased political uncertainty, writes Victor Hill.

Unemployment: lowest ever

On Tuesday (14 May), the Office of National Statistics (ONS) released the latest jobs market data. Overall, unemployment fell from just under 4 percent in Q4 2018 to 3.8 percent at the end of March which some reports described as the lowest level since 1974. Actually, it is the lowest ever since the current method of estimating unemployment was instigated in 1975.

Employment grew by 99,000 over Q1 2019 – up by 354,000 over the last 12 months. The total number of people in work rose to 34 million – another record. This is obviously very positive news for national finances since there are more people paying income taxes and fewer claiming Jobseekers’ Allowance. The number of people in the latter category fell to 1.3 million.

In the tight labour market there is continued upward pressure on wages which are growing at an annualised rate of 3.2 percent – well ahead of prices which are growing at 1.9 percent. However, the rate of increase in earnings is slowing.

Productivity actually fell because workers put in longer hours without a corresponding increase in output. Output (GDP) per hour worked fell by 0.2 percent as compared with Q1 2018. I have argued in these pages before why output per hour worked is a misleading measure of productivity. It has an inverse relationship with unemployment: so countries with higher unemployment than the UK tend to have higher levels of “productivity” on this basis.

The average full-time worker clocked up a 37.5 hour working week – up from 37.1 hour the year before, an increase of 2 percent, against a rise in GDP of 1.8 percent. Business investment has fallen over the last four consecutive quarters – undoubtedly part of the Brexit effect as companies postpone purchases of new capital equipment until they know the post-Brexit trade dispensation. Obviously, the lower the level of investment, the lower the growth in productivity is likely to be – at least in the manufacturing sector. Though remember that 80 percent of our economy is services – even though, in absolute terms, manufacturing output has never been so high. (Admittedly, output is falling in the automotive sector for reasons I shall discuss soon.)

The slow-down in productivity growth is not unique to Britain. In the most advanced economies growth in output per hour worked has roughly halved from an average annual rate of 2.3 percent over 2000-2007 to just 1.2 percent over 2010-2017. Last year, it slowed to just 0.8 percent, according to Conference Board, a US think-tank.

Brexodus? You must be joking!

The number of LinkedIn (owned by Microsoft (NASDAQ:MSFT)) members moving from other EU countries to the UK has fallen by an estimated 30 percent since the Brexit referendum. These are largely well educated, professional types. This has prompted employers to compete for British professional employees by offering better salaries and benefits and more flexibility.

In late April Alok Sharma MP, the Employment Minister, claimed that British nationals have filled nearly all new jobs created in the UK since the 2016 referendum[i]. Between 2014 and 2016 EU nationals accounted for 45 percent of all new jobs created. Since the referendum, however, 90 percent of all new jobs were taken by British nationals, many of whom were returners – that is, people who have left the labour market perhaps for childcare or health reasons and who are now back in work. Or even pensioners who decide that life has more to offer than watching the Jeremy Kyle Show (now mercifully euthanized).


For all that, the ONS figures this week showed that the overall number of EU nationals working in the UK hit a record high in March. Nearly 2.4 million citizens of other EU countries work in the UK – up by 100,000 since December. So the “Brexodus” of EU workers predicted by Remainers has simply not happened. Additionally, there are 1.3 million non-EU foreign nationals working in the UK, a number that is also increasing. If the issue of immigration was a major factor in the Brexit vote of June 2016, nothing has happened since then to restrict it.

Britain will continue to be a magnet for foreign workers whatever happens in the Brexit pantomime because of its allure and its incomparably flexible labour market, which has no equivalent anywhere else in the EU. Moreover, there does not seem to be any political will in the Conservative Party to tighten immigration controls – and none whatsoever in the other parties. Since the Windrush Affair (in which the UK state was accused of racism because a small number of immigrants had failed to regularise their immigration status despite having had years to do so) the number of deportations of illegals has fallen.

Maybe a good showing in the European elections (23 May) by Mr Farage’s Brexit Party will bring the issue of immigration and how to manage it back to centre stage. Or maybe not. At the present rate of immigration the total British population will hit 70 million within five years, putting further strain on housing supply and menacing the green belt.

Growth

We are now told that the Brexit effect actually stimulated economic growth as companies re-stocked. Last Friday (10 May) we learnt that the British economy expanded by 0.5 percent in Q1 – well above the previous quarter’s anaemic 0.2 percent and ahead of the 0.4 percent achieved by the eurozone. To the extent that this growth spurt was achieved by re-stocking we might expect a fall in GDP growth in Q2.

That said household consumption is still holding up despite Brexit showing sustained consumer confidence against a backdrop of political confusion and uncertainty. Part of this confidence is surely due to people feeling more secure in their jobs – people who think they are going to lose their jobs stop spending. Continued low interest rates also means that fewer people are in mortgage arrears and, thanks to buoyant house prices (except at the very top end), still fewer are in negative equity.

In the eurozone, France, which has been convulsed by protests since last autumn, is growing much faster than Italy or Germany. But overall the world’s largest economies are slowing and according to the OECD 2019 could turn out to be the worst year for global growth since 2009. The OECD growth index fell to 99.0 in March – the lowest since September 2009. Six months ago Morgan Stanley cut its global growth prediction for 2019 from 3.6 percent to 3.4 percent.

Market outlook

The base rate in the UK remains historically extraordinarily low at 0.75 percent, with little prospect that it will edge up soon. The economy, as we have seen, is fundamentally sound. Despite these facts, the prevailing Brexit uncertainty (Mrs May’s attempts to forge a deal with Labour have come to naught – why would Labour bail her out?) has made domestic-focussed British companies look cheap. If the UK ends up leaving the EU without a deal on 31 October (quite probable) they might look even cheaper.

Uncertainty is intensified by an impending change of leadership. We now know that Mrs May will be forced to step down sooner than expected, perhaps within weeks of the European elections which are expected to be disastrous for the Tories (and will not be much better for Labour). Under the Tory Party election rules two candidates will be selected by the 312 Conservative MPs (or is it 310? – they keep losing people like Mr Boles and Mr Mercer) and the membership at large will decide between them.


If the parliamentary party puts forward a no-dealer (Mr Johnson?) versus a proponent of the Withdrawal Agreement (Mr Stewart?) the supposition is that the party’s 150,000 or so members will favour the no-dealer. (Though many Tories like this writer will prefer the candidate most likely to restore Britain’s reputation abroad – which is not Mr Johnson.) This means that the three to five weeks required to conclude the process over June-July could be a period of retrenchment in the markets. By the time the new leader walks into Downing Street the pound and the markets will look harried.

But that would not be the end of the matter. Any new Tory leader and thus Prime Minister would be under intense pressure to put this unhappy parliament out of its misery and to go to the country, possibly as early as September.

That general election would, with tedious inevitability, be dominated by Brexit. It’s quite possible the election could be the second referendum cum people’s vote cum confirmatory plebiscite by other means. The new Tory leader might argue that a Tory win would give him (or her) the mandate to yank the UK out of the EU with no deal on 31 October. Labour would effectively run as the party of a super-soft Brexit with a permanent customs union – but with an option to Remain if there is sufficient evidence that opinion had tilted in that direction. As usual, their policy will be fudge-prone.

Who would win such an election? The polls have been edging Labour’s way and the popular wisdom is that the Tories are a spent force, abandoned by their own activists who have clambered en masse onto Mr Farage’s bandwagon. It is by no means certain that Brexit Party supporters will snap back to the Tories at a general election. The litmus test of that will be the Peterborough by-election on 06 June. But there remains a strong possibility that a September election would produce another hung parliament – quite possibly with Labour as the largest party.

It is no coincidence that Labour has been frantically crafting a manifesto of sorts these last two weeks with detailed policy statements about how the energy industry would be re-nationalised and how many solar panels they are going to install on council house rooves…

Investors therefore have to contend with the very significant downside probability that there will be a Corbyn government in Whitehall in just four months from now. Unlike previous Labour leadership teams, this one has virtually no friends in the City and the CBI – despite recent overtures.

Wars of the future

In an interesting speech on Monday (13 May), UK Foreign Secretary Jeremy Hunt warned that the wars of the future could start with a cyber-attack but then escalate into precision strikes by hyper-sonic missiles followed by swarms of killer drones. Not a nice thought on a pleasant May morning: but an insight into what the military men are thinking.

Mr Hunt apparently believes that, given current dangers in the world, the UK should raise its military expenditure from two percent of GDP to four percent, like the Americans. Mr Hunt, whose father was an Admiral in the Royal Navy, was signalling a massive change of spending priorities – as well as his own leadership ambitions. Such a massive increase in military expenditure could only be financed either by scaling down other spending departments (DfID?) or by raising taxes.


This leads us to the other major strategic change that could emerge after Mrs May’s departure, apart from Brexit. It’s likely that whoever wins the Tory leadership will promise an end to austerity. The May government has already ramped up spending on the NHS; its successor government will probably want to ramp up spending on defence, cybersecurity and the police (given the knife crime epidemic and the fact that PC Plod doesn’t even investigate burglaries any more, but just issues a crime number with a sigh).

There is also growing momentum to reallocate much of the HS2 budget to infrastructure projects in the north. Ten years after the project was first mooted, HS2 has become an icon of London-centrism. Far from being a project to boost George Osborne’s Northern Powerhouse (remember that) it is seen as a means by which metropolitans can get back from a ghastly day in Birmingham 15 minutes quicker. And it will encourage more people in the Midlands to commute to London, thus leaving large areas as outer dormitory suburbs. Even when (if) HS2 is extended to Manchester it will still take nearly 50 minutes to travel the 30 miles from there to Liverpool. And Liverpudlians will still endure a 90 minute journey to get to Derby.

In the last 10 years the way we work has been transformed. So long as there is a decent internet connection people can work on trains – so the saving of 15 to 20 minute on a journey is not commensurate with the enormous cost of building an entirely new line. (For this reason even the French are cutting back on the roll out of the TGV network in Fast Train Utopia.) The train operators (who will all be toast anyway if Mr Corbyn gets in) have let us down here. Virgin Trains offers talking toilets but very limited connectivity in economy class.

Whoever is leading the country by the end of this year will have inherited dramatically improved government finances. Ten years after the financial crisis the deficit has finally been mastered and the UK’s debt-to-GDP ratio is falling. A perfect moment to go on a spending spree.

And, of course, without Mrs May there will be no Mr Hammond. Although I have occasionally been rude about Mr Hammond in these pages I think that, overall, he has done well by concentrating on the expenditure side of his brief rather than the revenue (taxation) side. He hasn’t added volumes to the tax code as Mr Osborne did: vide his over-complicated reforms of capital gains tax and stamp duty. And Mr Hammond has (with a fair wind behind him) navigated the country out of fiscal choppy water.

Boris Johnson – who announced his candidature for PM yesterday – has, it is reported, done a deal with Ms Rudd to make her Chancellor in return for delivering the Ruddites to his cause – thus giving me another reason to vote against Mr Johnson!

Externalities

The main downside risks to the UK economy – quite apart from the risk that the country might be run by a bunch of Marxists who believe that the global economic benchmark is Venezuela – remain beyond our shores and beyond our control. The trade war between the USA and China has intensified this week and the rhetoric has become shriller – especially on the Chinese side.

Hu Xijin, the editor of the Chinese-government-controlled Global Times, tweeted on Monday that China “may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China.” So far, so predictable. But then he dropped the bomb:

Many Chinese scholars are studying the possibility of dumping US Treasuries and how to do it specifically.

Now that is momentous – Richter Scale 8.0 – for reasons I shall explain next week.

***

I’ve got a new book out this week. You see, the brilliant publisher, Paul Davies (the man behind Bite-Sized Books), was audacious enough to ask me to contribute to a book about the future of the Tory Party to which luminaries like Lord Heseltine, Damian Green and Peter Hitchens had already submitted. (Mr Hitchens is never going to vote Tory again – but I wonder whom he would vote for as he is so excoriating about everyone.)

And then Paul commissioned me to write a book about the future of democracy. (That sounds boring, I know – I’ll explain why it isn’t soon.) While we were having lunch, Paul revealed to me that as well as being a well-known writer of business books (I recommend The Naked Human) he is also a novelist…Hey, I replied, I’m a creative writer too…

The result of that conversation is now available on Amazon.

[i]See UK nationals fill 90pc of new jobs since referendum, figures show by Jack Maidment, Daily Telegraph, 22 April 2019.