The performance of the UK economy over the last year has been remarkable. Output has increased by over 3 per cent. The unemployment rate, which had previously been stuck at just under 8 per cent for a long time, has fallen dramatically and now stands at 6 per cent. The benefits of this fall have been felt by people across the country and in all demographic groups.
There nevertheless remains a curious sense of unease about the performance of the labour market. Productivity has continued to stagnate, and this has meant that increases in wages have not been able to keep pace with price rises. People in work might wonder why they don't feel better off than a while back - and the simple answer is: it's because they aren't.
Over the last few months, however, there has been a dramatic turnaround in the level of business investment. The latest figures suggest a year on year increase of more than 10 per cent. This should mean that workers have better equipment with which to work. Whether or not they do, of course, depends on what lies beneath the aggregate figures. But if they do, then we should, within the next year, start to see productivity grow once more. That would at last bring about a renewed increase in real wages.
Increased investment should also serve to ease capacity constraints, hence allowing further growth. While a low unemployment rate might ordinarily indicate that there are capacity constraints arising also from a limited workforce, that is unlikely to be the case at present. Underemployment - where many people are working fewer hours than they would like - and a high incidence of (what appears to be involuntary) self-employment both suggest that there is room for further growth in the number of hours worked. To be sure, in some sectors - particularly advanced manufacturing - there are emerging signs of skills shortages and rising real wages, but this is very much the exception rather than the rule. There remains considerable slack in the labour market, and, this being the case, there is no sign yet of inflationary pressure. A reasonable estimate of the ‘natural rate’ of unemployment on the basis of recent years’ data suggests that unemployment could fall to as low as, or even slightly below, 4 per cent before inflation kicks in.
The remarkable growth that we have seen in recent months should not, however, blind us to the fact that it is remarkable. Looking forward to 2015, it would be surprising if output were to continue to grow at the present rate. Growth in our major export economies remains sluggish, and exchange rate movements over the last year are not helpful. As the EEF has recently cautioned, the outlook for demand is less certain now than it has been for while. Indeed, the latest data on industrial production suggests that – in the production industries – growth has stalled. The economy overall should continue to grow next year, but at a slower pace than we have seen in recent months.
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