Ian Stewart is Deloitte’s Chief Economist in the UK. This is his Monday Briefing, a succinct and eclectic weekly take on economics and finance.
Why is the UK is an exception when it comes to rising global inequality?
Inequality in incomes is a hot topic across the industrial world. Although the global recovery is in its eighth year in most rich countries the gap between higher and low incomes has widened.
A conspicuous exception is the UK. I was surprised to learn that take-home incomes for those in the bottom 20% of incomes have risen faster than for those in the top 20% in the last ten years.
This runs contrary to the dominant narrative of rising inequality. Three little-noticed things have gone right in the UK.
First, the UK has been exceptionally successful in creating new jobs and increasing the female participation rate. The result has been a big decline in the proportion of households with no one in work.
Second, pensioner incomes have seen good growth as a result of rising income from private pensions and inflation-protected state benefits. Pensioners tend to have low incomes so their improved position has contributed significantly to reducing levels of inequality.
Third, the tax and benefit system has become more redistributive and has increasingly shifted income from higher to lower earners. Tax credits boosted in-work incomes for those on low pay and tax rises instituted since 2008 have borne disproportionately on higher income households.
So why do we hear so much about inequality and so little about the things that have gone right?
Sadly the flip side of these successes is new problems in other areas. The UK has a strong record on job creation, but a significant number of the new jobs have been in self-employment, part time, temporary or are relatively low paid. A job rich recovery has also been a low productivity recovery in which earnings have seen only modest growth. The middle fifth of UK households have seen real incomes rise by just 0.5% a year since the financial crisis.
Rising pensioner incomes have alleviated one of the most persistent sources of poverty, among older people. And the employment rate among working age women has risen from 42% in 1971 to 70% today. These profound changes have bolstered household incomes.
But a new source of concern is the way in which incomes for lower skilled workers, especially men, have come under pressure. Men are working fewer hours. Male employment rates have fallen since the 1970s and today almost a third of working age men are classed as economically inactive, a category which includes the unemployed, sick and disabled, early retirees as well as students.
More men are also working part time. This partly reflects changing preferences, with more sharing of child care in young families and older men staying on in work on reduced hours. But another aspect is the replacement of skilled, full time manual work, particularly in manufacturing, with unskilled temporary, or zero hours work in the service sector.
25 years ago I worked as a Special Adviser on social policy in government. At that time reducing high levels of worklessness – whether though unemployment, a lack of training or skills, illness or disability – was a central aim of policy. Things have gone well on this front. Today UK labour force participation is close to an all-time high and is above that in the US, a country with historically high employment rates.
The problem today is less one of worklessness and more to do with sluggish income growth for those in the middle or at the bottom. Inequality may have declined, but you get a sense of the problem if you consider that the real income of the average working age family today is lower than it was in 2007. One set of problems diminishes and others rises.
But we should not be downcast. The last quarter of a century shows that it is possible to alleviate seemingly intractable social ills. Pensioner poverty and worklessness are lesser problems than they were in the 1980s. Female workforce participation have risen sharply. The tax and benefit system are performing as they should in redistributing income and alleviating poverty.
The broad challenge today, one that is sharpened by Brexit, is to tackle the UK’s poor record on productivity. Within this it is the skills and prospects of lower paid, lower skilled workers, which are most in need to help.
PS – Two weeks ago we wrote about the rise of euro sceptic political parties in Europe. Michael Penn, the Chief Strategist and Economist at investment managers Cohen & Steers in New York, dropped us a line noting that popular support for the EU has actually risen in the last year. The Eurobarometer survey shows more voters across the EU think Europe is “heading in the right direction” though concern about the EU is rife in core members Germany, France and Italy. Still, this survey offers some much-needed good news for the EU. Michael also pointed out that EU voters had become very much more pessimistic about the direction the US is taking since the US election. The only European country in which voters have not become more pessimistic on the US is Russia.
Markets & News
The FTSE 100 ended the week up 0.3%.
Here’s our take on what we think are the big economics stories of the week. All eyes have been on Mr Trump’s second week in office. But almost unnoticed Euro area economic data have been coming in on the strong side of expectations, bolstering hopes of a another year of growth in the currency area:
Global economics and politics
* French business activity rose to a five year high.
* Hiring by euro area businesses hit a nine year high in January.
* Consumer confidence across the euro area reached an 18 month high.
* The Bundesbank forecasts Germany’s inflation rate will rise to 2.0% in January, a turnaround from the near deflation of recent years.
* US GDP growth slowed in the fourth quarter on weaker exports.
* US manufacturing new orders rose at the fastest pace in more than 2 years in January.
* President Trump’s insistence on Mexico paying for the new border wall led to the cancellation of a state visit by Mexico’s President.
* President Trump floated the idea of a 20% tax on Mexican imports to pay for the border wall.
* After President Donald Trump issued an order restricting immigration from seven mainly Muslim nations a judge blocked the US from deporting Muslim migrants detained at US airports.
* President Trump ordered a hiring freeze for the federal government.
* The UK shrugged off Brexit effects in the second half of 2016 and for the year as a whole grew by 2.0%, the fastest rate of any G7 economy.
* UK car production hit a 17 year peak in 2016, rising 8.5% on 2015.
* The UK government borrowed less than expected at the end of 2016 suggesting that deficit reduction is on track.
* Optimism in the UK’s financial services industry fell sharply according to the CBI.
* The Resolution Foundation says that slowing growth and rising inflation have ended a “mini boom” in UK living standards.
* Tesco agreed a £3.7bn takeover of food wholesaler Booker, in a deal to create “the UK’s leading food business” and deliver significant cost savings.
* A sale of 40-year British government debt attracted strong demand from overseas investors taking advantage of a weak pound.
* A Japanese government white paper on the largely taboo issue of “death by overwork” (karoshi) showed a fifth of firms reported their full-time staff work dangerously long hours and 12% having staff working at least 100 hours of overtime a month.
* The FT reports that African, European and South American countries will join the China-led Asian Infrastructure Investment Bank underscoring Beijing’s determination to push a global agenda.
* The Guardian newspaper is reportedly considering shifting to a tabloid format to cut losses.
* Heineken and Carlsberg became the latest brewers to raise beer prices on the back of a weak pound.
* This week watch out for Apple Q2 results on Tuesday and the key US payroll or jobs report on Friday.
Brexit and European politics
* The UK government is to hold “extensive informal consultations” with the 163 members of the World Trade Organisation.
* A meeting between Prime Minister Theresa May and President Trump concluded with an agreement on talks paving the way for a post Brexit US/UK trade deal.
* President Trump will make a state visit to the UK in June.
* The European Investment Bank, which last year backed £5.5bn of infrastructure investment in the UK, said it may consult members on allowing the UK to remain a shareholder after Brexit.
* Recruitment agency SThree warned of stalling job growth in financial services because of Brexit uncertainty.
* Spain’s foreign minister struck a conciliatory tone on Brexit negotiations saying the EU has no plan to impose a “punitive” Brexit agreement.
* In a surprise move the former president of the European parliament, Martin Schulz, will the candidate for Germany’s centre-left Social Democrats against Angela Merkel in September’s elections.
* A ruling by Italy’s constitutional court increases the likelihood of a new election taking place in June of this year rather in 2018.
* The right-wing French presidential candidate, Francois Fillon, faces investigation into the state payments to his wife for research and administrative work.
* Britain’s car plants face “death by a thousand cuts” if tariffs are imposed on trade with the EU, according to the head of the UK’s motor industry body.
* Investment in the UK automotive sector fell last year on uncertainties around the Brexit vote.
* Barclays reiterated that it will keep its global headquarters in London regardless of the outcome of Brexit negotiations.
* The UK’s hospitality, agriculture, construction and manufacturing industries will have to compete for a smaller pool of low-skilled migrants after Brexit according to the Oxford University Migration Observatory.
* The president of trade group techUK revealed that 45% of recent vacancies in digitally intensive industries in the UK were filled by foreign-born workers.
* The EMEA chief executive of Citi said the bank had held talks with regulators in Ireland, Italy, France, Spain, Germany and the Netherlands about new operations there after Brexit.
* Whirlpool Corp said a factory in the UK will focus on making dryers for that country and Ireland and it would consolidate dryer production for non-UK customers in Poland.
* An Australian games programmer who finds normal exercise “boring” has become the first person to ‘cycle’ the length of Britain in virtual reality; completing the 900-mile journey in 85-hours using an exercise bike connected to Google Street View – virtual wheelity.
Ian Stewart is Deloitte’s Chief Economist in the UK. His Monday Briefing can be subscribed to here.