Falling wages could hold back growth in the US and UK
Deteriorating retail conditions on both sides of the Atlantic threaten to curtail the economic recovery in the UK and the US.
Falling real wages appear largely to blame and, combined with low productivity growth, point to a difficult period for households. Unless that changes, both economies are currently on an unsustainable path.
The recovery in both these countries has shown tentative signs of easing in recent months. At this stage, both countries are growing at a solid pace -- and at a rate that would warrant jealousy among the rest of Europe -- but the household sector does not appear to be enjoying the fruits of a prolonged period of strong employment growth.
As it stands, the UK and the US are relying disproportionately on employment growth (or population growth) to drive retail growth. That's fine in the short term, owing to significant spare capacity, but it isn't a long-term plan for success.
Retail sales volumes in the UK fell by 0.3 per cent in September, missing expectations, to be 2.7 per cent higher over the year. Annual growth has been strong, but the pace of growth has slowed significantly in recent months.
The volume of retail trade rose by 0.3 per cent in the September quarter and points to a relatively modest contribution from household consumption in the September quarter national accounts.
A key part of the household story is that real wages continue to decline. This isn't an isolated phenomenon: real average weekly wages in the UK have been declining continuously since the beginning of the global financial crisis.
Productivity growth continues to weigh on wage growth and there remains some spare capacity in the labour market even as the unemployment rate hits 6 per cent. Wage cuts that were initially difficult to push through at the time of the crisis are much easier to incorporate into new employment deals.
As a consequence, we have to wonder whether the recent surge in household spending is sustainable. Sure, employment will continue to grow, but without the support of higher wages, it appears as though retail trade growth of 3 per cent year-on-year is only possible in the near-term.
The same can be said of the US economy (A stronger US dollar is a double-edged sword, October 16). Much like the UK, the US has experienced strong employment growth during 2014 and its economy has performed much better than other recovering economies.
Nevertheless, there is cause to be optimistic about both economies. I find myself quite bullish: strong employment growth should eventually flow through to rising wage demands; productivity remains a problem but not one that is insurmountable.
Strong currencies will support household spending by increasing the purchasing power of the pound and dollar respectively. However, a high currency will weigh on exports and potentially employment throughout trade-exposed industries.
The toughest challenge to overcome may come in the form of diminished global demand. The global outlook has deteriorated during 2014, particularly in Europe, and that may have significant implications for growth going forward. The ongoing moderation in China may also have an effect, although its continued rebalancing away from infrastructure investment could cushion the blow for countries such as the US and UK.
Conditions in the household sector remains mixed in the US and the UK. Rising employment has improved conditions, particularly for those experiencing a prolonged period of unemployment, but most of the gains have been in low-wage part-time work. As a result, neither economy is getting the boost from rising employment that many might expect.
The recent period of employment growth will inevitably slow and unless wage growth increases and begins to rise against inflation, then household spending will inevitably follow suit. With consumption accounting for a significant proportion of economy, particularly in the US, that could have significant consequences for growth moving forward.