Or this one: a Bank of England poised to put up interest rates next month – but no sign of price pressures – or of a feared rise in consumer borrowing. Indeed, the second quarter saw a fall in unsecured credit available to consumers, the sixth successive decline – and set to fall further.
For a generation of economy watchers, this makes no sense. A tight labour market, and reports of firms struggling to find staff, would have had the alarm bells ringing on an imminent burst of inflation – forced up by rising earnings, a jump in consumer spending and borrowing – and prices of goods and services forced higher by surging demand.
Not this time around. And nor can this puzzling coincidence of improbables be shrugged off as a one-month “blip”: this has been the picture for the post-financial crisis era.
In the period before that crisis, today’s strange paradox might well have been described as a “Goldilocks” scenario where the economic porridge is “just right”: employment at an all-time high, wage pressures subdued, inflation on both headline and “core” measures running below expectation, no runaway boom in unsecured lending, falling government borrowing and a firm but unexuberant stock market: what would previous chancellors of the Exchequer not have given for such a set of circumstances?
Yet today there is no “feel-good factor” but instead an economy marked by historically slow growth, retail spending in a state of convulsion, a raging political crisis and the survival of the government a matter of daily speculation.
Are the numbers all wrong? Are we caught in some freak historical bubble – a unique but temporary set of circumstances liable to be blown apart by some unpredictable catalyst?
Latest figures show the Consumer Price Index measure of inflation steady at 2.4 per cent in June – a downward surprise given the upward pressures from fuel prices and domestic energy bills. The overriding influence was a further softening in core inflation – at 1.9 per cent the weakest reading for 15 months. With core pressures so soft, headline inflation is likely to drop back further once the temporary effects of higher petrol prices recede. An interest rate rise still looks likely at next month’s meeting of the Monetary Policy Committee. But, says EY ITEM Club chief economist Howard Archer, the latest subdued readings on wage growth “continue to undermine the narrative around a tighter labour market driving up wages and prices”.
Meanwhile, UK labour market data for the three months to May showed another chunky increase in employment – up 137,000 on the previous three months – largely driven by falling inactivity, down by 84,000. The overall unemployment rate held steady at 4.2 per cent while vacancies have continued to climb, reaching a record high of 824,000 over the three months to June.
This, says Archer, echoes business surveys reporting a rise in skills shortages in recent months. Ordinarily, such a tight labour market – the vacancy ratio, ie the number of unemployed persons per vacancy, is now at a record low of just 1.7 – would boost wage growth. But there is little evidence of this. Both of the headline measures of pay growth, he adds, nudged down in the three months to May, to 2.5 per cent (total pay) and 2.7 per cent (regular pay).
Here in Scotland there was a slight 0.2 per cent rise in unemployment in the three months to the end May to 4.3 per cent. But numbers in work are 0.6 per cent higher at 75.7 per cent, as here too inactivity levels fell.
Much has been made of the impact of Brexit uncertainty on business confidence, hiring and investment. But the latest Quarterly Economic Activity Survey from the Scottish Chambers of Commerce is strikingly at odds with this portrayal.
It finds Scottish businesses got off to a strong and positive start this year with confidence and investment rising as firms seek to increase productivity. Only 15 per cent of firms across the sample reported declining optimism, suggesting resilient business confidence.
Some 48 per cent of firms reported increased overall revenue, with only 18 per cent reporting a decrease. And 89 per cent of firms have increased or maintained levels of investment relative to the previous quarter.
While expectations are weakening in retail and tourism, “recruitment challenges”, it notes, “have also been brought to the fore once again, as firms struggle to find the right skills. This links to recent ONS data which has seen vacancies rise to 824,000 across the UK, the highest level recorded since equivalent records began in 2001.”
The SCC survey, produced in collaboration with the University of Strathclyde’s Fraser of Allander Institute, found broadly improving business confidence and revenue indicators across most sectors.
But here in Scotland, too, there are signs of staff shortages. “Perhaps linked to persistent recruitment difficulties,” the SCC reports, “all sectors are being driven to increase pay levels for staff. Linked to inflationary pressures and broader, global competition for key raw materials, it is possible that future activity may be constrained. However, expectations are relatively stable across sectors for a positive third quarter”.
All this would suggest an economy with the potential to see a firm and sustained rise in earnings – providing business confidence is sustained. The decline in the numbers of those economically inactive is altogether to be welcomed though it is disconcerting that for all the money that has been hurled at “skills development” in recent years, it is the shortage of skilled labour that is still among the most vexing problems for Scots employers.
Scotland’s economy is capable of growing at a much faster pace, unhindered by inflation and with interest rates, even allowing for a modest rise next month, unlikely to have a major impact on business decisions. It is not low wage growth that is the core problem at the heart of the paradox – but a low rate of improvement in employment skills – a sad, and all too familiar lament.