Unemployment, earnings growth, retail sales, and construction output feature in UK economic week starting 9 November

British Retail Consortium retail sales monitor for October

The British Retail Consortium (BRC) retail sales monitor (out overnight on Monday/Tuesday) will likely indicate slower but reasonable retail sales growth in October after a particularly strong September. Hard data for September from the Office for National Statistics show retail sales volumes jumped 1.9% month on month (m/m) and 6.5% year on year (y/y) in September (helped by the inclusion of the late August bank holiday sales). The BRC’s retail sales monitor showed sales values rose 3.9% y/y in September—5.8% y/y in volume terms, given that the BRC also reported that shop process fell 1.9% y/y in September. The BRC also reported that retail sales values increased 2.6% y/y in September on a like-for-like basis (which strips out the effect of additional floor space).

It may be that consumers took a little bit of a breather in October to gear up for Christmas after splashing out in September. The Confederation of British Industry (CBI) has already released its distributive trades survey for October, which showed the balance of retailers reporting a y/y increase in sales volumes dipped to a six-month low of +19% in October after jumping to +49% in September from +24% in August. Nevertheless, the CBI reported a balance of +24% of retailers reported that October’s sales volumes were strong for the time of the year. Most sectors saw y/y sales growth in October, albeit less than in September.

The prospects for retail sales and consumer spending look largely bright for the fourth quarter, given households’ current very healthy purchasing power; this was highlighted by a 0.1% y/y fall in consumer prices in September and earnings growth of 3.0% in the three months to August. In addition, employment rose by 140,000 in the three months to August to reach a record high of 31.122 million. Furthermore, very low interest rates and an improving housing market also support consumer spending. Admittedly, consumer confidence has come off its highs, but it is still at a historically high level, which should support consumer spending.

The fourth quarter is of vital importance to retailers, and it will be interesting to see how aggressive they are in their discounting this year in the run-up to Christmas. In particular, will UK retailers match or even surpass the substantial discounting on Black Friday at the end of November 2014? Or will retailers decide that less aggressive discounts are needed this year because of consumers’ improved purchasing power and relatively high confidence?

Unemployment and employment

Data out on Wednesday are expected to show the labor market improving decently. There was overall improvement in the last set of figures after the labor market had gone through a softer patch.

Even so, the rate of improvement in the labor market will likely be slower than in the early months of 2015 and much of 2014. This is likely the consequence of a number of factors, including more erratic growth in 2015 (including a slowdown in the third quarter), increased business uncertainty, and some companies increasingly struggling to get the qualified/skilled workers they need. Increased business uncertainty was first fueled by May’s general election, then by the heightened Greek crisis, and now by global growth concerns centered on China.

It also appears that with earnings growth recently picking up and the new UK minimum wage being introduced starting in April 2016, UK companies have stepped up their efforts to lift productivity by getting more out of their existing workers. This is a very welcome development for the UK economy, since persistently weak productivity since the 2008–09 slowdown has raised serious concerns about the longer-term growth outlook. Notably, there was a marked pickup in UK productivity in the second quarter, with data from the Office for National Statistics showing output per hour worked increased 0.9% quarter on quarter (q/q). This lifted the year-on-year (y/y) increase to 1.3% in the second quarter from 0.5% in the first quarter and 0.2% in the fourth quarter of 2014. Meanwhile, a number of recent surveys and reports have indicated some companies are scaling back their employment plans owing to the introduction of the national living wage (set at GBP7.20 for workers older than 25) starting in April 2016.

Employment is expected to have increased by 120,000 in the three months to September to stand at a record 31.155 million. Employment moved up to a new peak of 31.122 million in the three months to August after relapsing to a low of 30.982 million in the three months to May from the previous all-time high of 31.098 million in the three months to March.

The number of unemployed on the Labour Force Survey/International Labour Organization measure is seen dipping by 90,000 in the three months to October to stand at 1.762 million, which would be the lowest since mid-2008. Latest data show it had come back down to 1.774 million in the three months to August after rising back to 1.852 million in the three months to June from the previous low of 1.813 million in the three months to April.

The unemployment rate is seen remaining at 5.4% in the three months to September, after falling to this level in the three months to August from 5.5% in the three months to July and 5.6% in the three months to June.

Finally, we expect the number of claimant-count jobless to have edged down by 3,000 in November after small increases of 4,600 in September and 1,200 in August. This was the first time since mid-2012 that claimant-count unemployment had risen for two months running and took the total up to 796,200 in September from a record low of 790,500 in July.

We expect the number of jobless to trend down gradually during the coming months, taking the unemployment rate down to 5.3% by the end of 2015 and to 5.0% by the end of 2016. We expect relatively solid GDP growth to support the labor market during the coming months (GDP growth is seen around 2.5% in 2016, similar to the likely 2015 outturn).

However, employment growth is likely to be increasingly limited by improving labor productivity, as many companies look to make greater use of the workers they already have. Strengthening earnings growth is increasing companies’ incentive to invest to save labor. Consistent with this view, the Bank of England’s regional agents’ third-quarter survey of business conditions revealed that “employment intentions had edged down marginally, but remained consistent with modest headcount growth. The use of new technology and automation were said to be contributing to productivity growth and had softened the employment outlook across all sectors.”

Survey evidence and reports are also indicating some companies are scaling back their employment plans owing to the introduction of the national living wage in April 2016. For example, the October jobs report from the Recruitment and Employment Confederation and KPMG observed that “the planned introduction of the national living wage is causing businesses to consider alternatives to hiring more staff, and this could lead to greater automation in some sectors. This might have a positive impact on UK productivity, but it could also put the brakes on employment growth.”

In some sectors, a number of companies are now finding it harder to get the skilled and experienced workers they need. The Bank of England’s agents reported in their survey that “recruitment difficulties had increased over the past three months and were above normal…Recruitment difficulties had spread further to skilled and semiskilled positions across sectors.” The fall in unemployment could also be limited by a further rise in the number of older people continuing to work, partly owing to financial necessity. Meanwhile, cuts to welfare benefits are putting increased pressure on people to work.

Earnings growth in September

Earnings growth is expected to have sustained its recent firmer performance in September. Specifically, we forecast total annual weekly earnings growth to have edged up to 3.2% year on year (y/y) in September after dipping to 3.1% in August from 3.6% in July. This would result in annual earnings growth of 3.2% in the three months to September, which would be up from 3.0% in the three months to August and only fractionally below 3.3% in the three months to May (a five-year high). Meanwhile, underlying annual average earnings growth (which excludes bonus payments) is expected to have moved back up to 2.9% in September after dipping to 2.5% in August from 2.9% in July. This would result in annual earnings growth of 2.8% in the three months to September, which would be unchanged from the three months to August. It has been largely around 2.8% since March.

We expect earnings growth to trend up further during the coming months as narrowing slack in the labor market amid relatively decent economic growth causes employers to lift pay. With earnings growth likely to strengthen further and consumer price inflation remaining extremely low, workers should enjoy ongoing healthy purchasing power, which bodes well for consumer spending.

How earnings develop during the coming months will play a crucial role in just when the Bank of England starts to raise interest rates. Should earnings growth pick up markedly during the coming months, it would increase the possibility the Bank of England could raise interest rates before mid-2016. Alternatively, if earnings growth levels out, it would increase the likelihood the Bank of England would not tighten monetary policy before the latter months of 2017.

Construction output in September

Construction output is particularly hard to call at the moment, since recent data have been surprisingly weak and markedly at odds with largely healthy survey evidence. This discrepancy continues to fuel considerable doubts about the accuracy of the construction data, despite recent adjustments made by the Office for National Statistics. Our best bet is that construction output likely rebounded 1.5% month on month (m/m) in September after nosediving 4.3% m/m in August and also dropping 1.0% in July. Even so, this would still result in construction output contracting 2.2% quarter on quarter (q/q) in the third quarter (in line with preliminary national-accounts data) and being down 0.8% year on year (y/y).

Latest surveys point to current robust construction activity. The purchasing managers reported that construction activity reached a seven-month high in September and held up well in October. Specifically, the purchasing managers’ construction business activity index only dipped to 58.8 in October after reaching 59.9 in September. The index averaged 58.1 in the third quarter. All these readings are substantially above the 50.0 level meant to indicate flat activity. In addition to the healthy purchasing managers’ index for October and for the third quarter overall, the Bank of England’s regional agents reported in their October survey of business conditions that “construction output growth had increased further, reflecting strengthening commercial development and infrastructure activity.”

The prospects for construction seem largely decent, and we expect it to see clear expansion in the fourth quarter, thereby contributing to GDP growth.

On the demand side, the conditions for house building seem robust. Housing-market activity has picked up and should be supported by relatively decent fundamentals during the coming months. Furthermore, given the United Kingdom’s acute housing shortage, the government has announced measures aimed at reducing the obstacles to building new houses. These include planning permission being granted automatically to housing developments on brownfield sites. Additionally, the government will gain powers to impose a housing plan on local authorities that fail to produce one. The government would also be able to impose penalties on local councils that fail to quickly process planning applications. However, there have been concerns about the construction sector’s ability to build significantly more houses. In their July report, the purchasing managers cited “long lead-in times for new projects, scarce supplier capacity, skill shortages, and stretched subcontractor availability.”

Outside the housing sector, the prospects look largely decent for the construction sector. Economic growth is expected to be reasonably healthy during the coming months, which should support commercial construction activity and civil engineering. Additionally, the Bank of England’s regional agents revealed in their October survey that infrastructure activity is increasing.

By Howard Archer