As the credit crunch started to crunch, one big consolation
(for those in debt to mainstream lenders only), was the decision to pull bank
rate down to what, after inflation, was and have remained negative levels. For the
indebted this was and remains a clear financial boon given pay growth also fell
to and remains at negligible levels; I know I’ve personally saved more on my
mortgage than I’ve got in pay rises these past few years. Recent chat about the
squeeze in take home pay easing tends to ignore this other side of the coin (or
any other side for that matter).
Except, the supposed “easing” of recent months is due to
inflation slowing down (CPI was 1.7% in Feb 2014 compared to 2.8% the year
before) not pay growth picking up (average weekly total pay grew 1.4% in Jan
2014 compared to 1.3% a year earlier). So the “easing” being referred to is no
more than the rate of real terms decline slowing for the time being.
Whoop-de-do.
That aside, low interest rates are one obvious indicator of
limited demand in the economy (see chat on weak pay growth above) and yet there
are still fools continuing to argue for rates to rise sooner rather than later;
the why not being especially clear given rates are set in relation to a 2% CPI
inflation target. Be that as it may, interest rates do appear set to rise in
due course even if the why is currently beyond me given things like the
historic Japanese example, the Eurozone currently appearing to be heading
towards deflation, the scope for China – and associated inflation boosting
global demand for stuff – to go phut, etc., but hey ho.
And rising interest rates, via higher mortgage costs, would
of course adversely affect the finances of those in debt. So lots of folks are
set for a lovely situation wherein pay might start incrementally rising in real
terms (as unemployment continues to fall), but not by anything even remotely enough
to make up for the lost real earnings of the last however many years. Moreover,
even if pay growth does pick up, rising interest rates will cancel out any real
terms pay gains.
Here are some illustrative numbers as to why – average pay
in Britain is currently £26,500 and the average mortgage is £96,000 – so if
interest rates go up just 1% as many are
forecasting they will have by 2016 (with another 0.75% on top during 2017), pay
will need to go up 3.6% to make up for the £960 p.a. increase in mortgage
costs. And then there’s inflation on top of that (as well as any other debts
people have – though better savings rates will presumably temper this give or
take no many people under 65 have anywhere near as much in savings as they do
debt).
So if you were an average punter wanting to know when you’ll
finally start feeling a bit less squeezed the answer is roughly sometime
during/mebbe after 2017/18 if you’re fortunate enough to start getting and can
sustain 4-6% per annum pay rises from now until then.
I reckon this is the context for the ConDem’s fullemployment chat. Like you say “My pay’s worth less than it was” they say “yes,
but we have the highest employment rate in the Western world”, you say “that’s
lovely, but I earn less now than I did 5,6, 7, 8 years ago and have to work
harder to get it”, they say “Yes, but we have the highest employment rate* in
the Western world (repeat ad infinitum)”.
* Goodhart’s law could well apply here in spades and even if
it doesn’t its worth remembering Osborne used to use Britain’s AAA credit
rating as a benchmark for his “success” up until the downgrades kicked in.
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