This crisis has been averted but the debt clock is still ticking

 
Allister Heath

SO IT appears to be a case of crisis deferred: as I write, the US seems sure to avoid default, for the next few months anyway. A temporary deal has been cobbled together; the big losers, it appears, are the Republicans who didn’t get anything meaningful.

Yet the mad charade of the past few days and weeks will be repeated again the next time Republicans and Democrats decide to go to war. It’s all rather ridiculous, a gigantic injection of political risk into the system and yet another destabilising factor at a time when economies need the very opposite. The shenanigans in Washington have delayed the Fed’s much-needed tapering, have further weakened America’s creditworthiness in the eyes of the world, and angered the country’s biggest creditors, very gradually moving forward the time when the greenback and Treasury bonds cease to be the world’s currency and store of wealth. All in all, it’s not been a great week for the US – and none of this will stop until the US decides whether it wants to be a high-tax, high spending economy, or a low-tax, low-spending economy, and embraces either of those alternatives properly, rather than trying to have it both ways.

JOBS GROW BUT NOT WAGES
Britain’s great triumph since the recession has been its surprising ability to create jobs – employment is up another 279,000 over the past year. One key reason why is that real wages are slumping. This, of course, is a mixed blessing: workers are pricing themselves back into work but becoming poorer, in some cases horrifyingly so.

Nominal wages (including bonuses) are up just 0.7 per cent, compared with retail price inflation of 3.2 per cent. This massive 2.5 per cent pay cut partly reflects the collapse in GDP per capita since the crisis. A fresh reason is that George Osborne has finally managed to gain a grip on public sector wages. The big news in yesterday’s data is that public sector wages are down 0.5 per cent in nominal terms, the first fall since 2001. Until very recently, and contrary to what the coalition had decreed, pay was still going up in the public sector at a faster rate than in the private sector.

The stats are partly distorted by a collapse in pay at RBS and Lloyds; but even without them, public sector pay is up just 0.1 per cent. The pay freeze is finally happening and will save the Treasury a fortune. Of course, this is one reason why overall real wages are still falling; but private sector pay is only up by a miserable 1.1 per cent.

There were 541,000 job vacancies for July to September 2013, up 60,000 on a year ago. But while no economist predicted that the labour market would do this well – not even remotely – we shouldn’t forget that the employment rate, now back up to 71.7 per cent, remains lower than its March to May 2008 record of 73 per cent.

Those who forecast that job creation would stop and that the growth in GDP of the past couple of quarters would instead be shared among existing workers, with productivity going up, have largely been proved wrong. Extra growth has fuelled extra jobs or extra hours worked, and productivity is still stagnating. Hours worked are rising; forecasters believe that GDP is probably rising fractionally more, suggesting that GDP per hour has barely gone up, further reducing the possibility of any meaningful pay hikes any time soon.

The economy is undergoing complex changes, some of which are due to global forces for which politicians bear no responsibility. But the coalition does share a major part of the blame for falling real wages: its strategy to allow UK inflation to be the highest of any country in the EU and keep monetary policy loose may have helped rekindle the housing market and aspects of economic activity – but it is also exacerbating the collapse in living standards originally caused by the crisis and the fall in output per worker. Unless nominal pay starts to rise soon in the private sector, the government could be in trouble come 2015.

allister.heath@cityam.com
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