The latest economic data released from the UK economy indicate that something is amiss. The problem is that real wages are plunging, while employment is at record highs. The UK economy is enjoying an imperious run of form with more people employed than ever before, with 32+ million people in the workforce. The jobless rate came in below forecasts at just 4.4%. This is the best reading for the UK economy in 42 years. However, real wage growth remains a problem in the UK, with a decline of 0.5%. In nominal terms, wages have increased by 2.1%. When inflation of 2.6% is considered, the real wage growth is negative.
Conventional wisdom states that high levels of employment should dovetail with rising real wages. However, the UK economy is in a unique situation. For starters, the Brexit has thrown the proverbial cat among the pigeons. The UK currency was trading at 1.48 to the dollar on June 23, 2016, and it plunged to a 31-year low within weeks thereafter. This was due to global concerns about the nature of a Brexit – a hard Brexit or a soft Brexit, and the extreme volatility that this would create in UK financial markets. Speculators wasted no time shorting the GBP en masse, throwing the British currency into uncertain waters.
By Thursday, 17 August 2017, the GBP/USD pair was trading at 1.2879. Consider that the 1-year trading range of the currency is 1.19952 on the low end and 1.34427 on the high-end. A weaker GBP is a boon and a bane to the UK economy. On the one hand, it facilitates a higher volume of exports since UK goods are relatively cheaper. On the other hand, it decreases the purchasing power of UK households by making imported goods relatively more expensive.
FTSE 100 Index Soars As GBP Dives
Trade-24 finance expert, Olden Limor believes that there is a silver lining on this cloud, ‘From an investor’s perspective, the FTSE 100 index has been thrown a lifeline. It broke through the critical 7000 level, and is soaring to multi-year highs. The reason for this inverse correlation between the FTSE 100 index and the strength of the GBP is clear: some 70% + of companies listed on the FTSE 100 index generate their earnings in foreign countries. When these revenues and profits are repatriated to the UK, they are worth significantly more. That’s why we see strong appreciation of UK stocks.’
Currently (August 17, 2017), the FTSE 100 index is trading at 7409.41 – close to its 52-week high of 7,599.00. On the 52-week low end, the FTSE 100 index reached 6,654.50. Stock markets have reacted negatively to statements made by the European Central Bank to the effect that monetary accommodation should be kept in place over the short-term. Accommodative policies include stimulus measures designed to pump more money into the economy. The ECB is not expected to hike rates anytime soon, and the Fed is also pushing back further rate hikes towards December 13, 2017.
The Perfect Picture: Rising Wages and Low Unemployment
From the UK economy’s perspective, job insecurity is one of the main drivers of sticky wages. Companies are concerned about the impact of a Brexit on the UK’s economic fortunes. As such, employees are not pushing for salary hikes – they are content to stay in their positions, simply to maintain employment. Another concern is falling memberships in trade unions. The collective bargaining power of trade unions helped to keep UK wages at enhanced levels. With less bargaining ability, workers are more likely to be engaged in self-employment activities than collective-style employment.
There are many possible reasons why real wages are not rising. Another theory is that productivity is not improving and employers are unable to make the necessary pay raises. Regardless, the UK economy is on track to improve, with 20,000 less people on zero hours between April and June 2017. Many more jobs are now full-time, indicating that the UK economy is absorbing much of the slack in the post-Brexit malaise.
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