Member Article

Talk of UK triple dip is so last year

As we noted earlier this week, a recent report from Markit/KPMG/REC showed that demand for permanent staff in the UK is at its highest level since 1998 – a far cry from the fears of a triple-dip recession when the year began. Meanwhile, the availability of permanent staff is at levels associated with the latter stages of a recovery, when employers struggle to find staff and are willing to pay higher salaries.

Beware the wrong kind of wage growth

With the current unemployment rate about 3 percentage points above its recent trough, we think it’s too early to call this an overheating labour market. Still, these surveys do imply that wage growth could accelerate significantly in the medium term if structural factors like a shortage of skilled labour were to combine with continued strong growth and loose monetary conditions. This would put pressure on the Bank of England (BoE) to raise rates earlier than its forward guidance currently suggests.

Nevertheless, BoE Governor Mark Carney painted a different picture of the UK economy in a speech he gave earlier this week in New York. He recognised that growth has accelerated, but suggested that monetary conditions should remain very loose for a long time. Carney noted that the “equilibrium” real interest rate – the rate (less inflation) that would allow the economy to grow at its full potential without stoking long-term inflation – was probably negative. This means that even if the economy grows at its potential and unemployment falls to the equilibrium rate, the BoE intends to keep its policy rate below inflation.

We will be watching closely for any signs of inflationary pressures, such as tightness in the labour market, but we believe the strong growth environment in the UK still benefits equities and corporate bonds over gilts.

This was posted in Bdaily's Members' News section by Georgios Tsapouris .