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UK wages in focus after China data disappoints

Michael Hewson
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The Uk Minimum Wage Of GBP5.05
UK wages next focus for Bank of England (Source: Getty)

After seven weeks of gains European equity markets got off to a subdued start to the week, despite rising optimism that the US and China appear to be making progress on their protracted trade negotiations.

While US markets finished the day higher, markets in Europe finished the day lower after comments from Bank of France governor Villeroy de Galhau that an ECB rate rise would come soon after the asset purchase program has ended, prompting some profit taking, as well as helping push bond yields higher.

The Chinese economy appears to be giving off mixed signals after a soft start to the year with the latest industrial production and retail sales numbers for April coming in at 7 per cent and 9.4 per cent respectively. The retail sales numbers were particularly disappointing, matching a one year low as consumer spending slowed down after a strong February and March. Industrial production was better showing a strong rebound from 6 per cent to 7 per cent, however fixed asset investment year to date was also weaker, down from 7.5 per cent to 7 per cent, the lowest level since 1999.

On the data front the latest preliminary German Q1 GDP numbers are expected to show a modest slowdown to 0.4 per cent from 0.6 per cent in Q4.

Last week the Bank of England in its latest inflation report adjusted its inflation, growth and wages forecasts lower over the next 12 months. The growth forecast was lowered to 1.4 per cent from 1.7 per cent, while the wage growth outlook was cut from 3 per cent to 2.75 per cent. Policymakers also suggested that price pressure was subsiding and could well subside much faster than originally forecast in their February update.

It is true that CPI has fallen from 3.1 per cent to levels of 2.5 per cent in the latest March numbers, but it still seems rather early to predict that the recent upward pressure on prices is likely to ebb given that we in the April numbers alone we’ve seen council tax go up, pension contributions increase on an annualised basis, while petrol prices have risen from £1.20 a litre at the beginning of the year to about £1.25 now.

There are also a few utility price rises from the energy suppliers also scheduled to trickle down over the next few weeks and months. This makes it even more important that wages data can hold up in the comings weeks and months despite the Bank of England’s pessimism.

Most of the headlines in the past few months have been about job losses in retail as well as construction yet thus far the unemployment numbers have continued to come down, at 4.2 per cent last month, and it is expected to stay at this level in the latest March numbers.

On the wages front for the three months to March weekly earnings including bonuses are expected to rise to 2.9 per cent, however on the headline numbers we are expecting to see a fall to 2.6 per cent from 2.8 per cent.

This fall certainly doesn’t tie in with some of the employer business surveys we are seeing which suggests wages are rising on the back of a tightening labour market.

Up until recent retail sales growth in the US was subdued but we saw a nice rebound in the March numbers of 0.6% and some of this momentum is expected to carry over into the April numbers with a gain of 0.3 per cent expected. The rebound in consumer sentiment has been because wages are now starting to show signs of picking up, particularly with an unemployment rate now below 4 per cent.

This rather overlooks the fact that US gasoline prices are now around $3 a gallon, well above the levels they were at the beginning of the year, and US consumers tend to become much more price sensitive on discretionary spending when prices move through this psychological barrier, even more so at this time of year as US driving season begins in earnest.

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