View from City Road: Recovery set fair by cracking pay problem
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Your support makes all the difference.The surprise is not that yesterday's economic figures look sour, but that the previous run of indicators had been so strong for such a long time. Economic series rarely proceed in a straight line, and if there is a steady monthly increase in manufacturing output or retail sales, the odds are that the expansion is proceeding at an unhealthily rapid rate.
Manufacturing output fell back sharply in June, but it had risen so strongly in May that the rise in the quarter as a whole is still a dazzling 1.4 per cent following a 2 per cent rise in the first quarter. This is strong stuff, particularly since our European markets are so depressed. During the last recovery, manufacturing output rose at a snail's pace after its trough in the first quarter of 1981. By the fourth quarter of 1982, the total rise was still just 0.3 per cent.
The increase of 200 in the seasonally adjusted unemployment count must also be seen against the background of the exceptional falls in the previous five months. We could easily be looking at a statistical blip, explained by a larger influx of students. Other labour market evidence suggests that demand is continuing to rise. Vacancies are up and overtime is falling, which suggests that employers think the recovery will be durable. Indeed, manufacturing employment has risen for two quarters, the first such increase since the 1988 boom.
The figures for activity do not, therefore, make a case for another interest-rate cut. So far, the recovery is doing just fine. The only respectable economic argument for the further easing in monetary policy that a politically-beleaguered government will want in any case comes from weaker inflationary pressure.
It is particularly good news that average earnings are continuing to slow. Although the drop in the overall growth rate to 31 2 per cent owes much to the probably temporary restraint of public sector pay, the 5 per cent figure for manufacturing could be a lot worse. Pay drift - the bonuses and extras above the basic - is often particularly high at a time of rapid improvements in productivity. The CBI pay databank and one group of labour market watchers believe the slowdown in basic pay is continuing.
This moderation in pay - quite outside the experience of the last recovery, when overall earnings growth never slowed below 71 2 per cent - is one of the most encouraging aspects of our economic situation. The main weakness of our economy over the post-war period has been the repeated attempt to pay ourselves more than the economy is capable of delivering. If we have solved that problem, the recovery really is set fair.
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