The agony and ecstasy of UK recovery

Man looking depressed in tunnel, with bright light at end of tunnel Image copyright Thinkstock
Image caption Andy Haldane is feeling gloomier

Full marks to the Bank of England's chief economist, Andy Haldane, for clarity on an issue normally shrouded in mist, namely what the Bank plans for interest rates.

Here is what he said:

"Put in plain English, I am gloomier...This implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target".

So when will interest rates go up?

Well certainly not this autumn, which seemed possible only a few months ago. And, barring something extraordinary, not this side of May's general election.

The Bank's policy rate will almost certainly stay at 0.5% till next autumn.

Not the moment

Hang on, you may be shouting at me, but Haldane is only one member of the Bank's Monetary Policy Committee; he could surely be out-voted - so interest rates could rise earlier than he would like.

All true.

But I think we have to assume that his view is that of the governor. I do assume that.

And it would be highly unlikely for both the governor and the Bank's chief economist to be on the losing side of an interest-rate vote - especially since Haldane and his well-resourced team are preparing an Inflation Report for publication next month that will reinforce his view that this is not the moment to increase the cost of money.

So some relief for those of you whose big debts are the great nagging anxiety of your lives; disappointment for savers.

Another issue

Of course the reasons why interest rates won't rise for months is stuff you've been reading about here for weeks: the inability of the eurozone to break free of stagnation; the risk of a sharp and sustained fall in China's growth rate; the fall in UK inflation to well below the target rate; the failure of wages in Britain to rise faster than inflation; the growing risk that the rich west in general is entering a long grinding period of static prosperity.

Enough already.

As it happens, Haldane, in the perhaps unlikely setting of the Kenilworth Chamber of Trade Business Breakfast, made a big noise on another issue of some economic and political significance - something I've been boring on about for some time, which is that a very strong economic recovery is leaving millions of people worse off.

Here is what Haldane said:

"The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery."

Haldane's analysis is probably the best explanation yet for why UKIP is so popular, and why the economic recovery has not translated into an opinion poll lead for the Tories.

Weak wages

For those with medium levels of skills, the long term trends have been pernicious. Employment opportunities were shrinking even before the 2008-9 debacle and unemployment rates for this group have risen by far more since the crisis than for those with high skills.

Also during this phase of economic recovery, there have been proportionately fewer new mid-skilled jobs created than for other categories of employment.

So wages of the mid-skills have significantly lagged inflation. And many mid-skilled people have been forced to look for low skilled jobs.

Which is one reason why at the bottom end of the skills spectrum, wage growth has been so very weak.

And there are two other factors bearing down on wages for the lowest skilled and lowest paid.

More women and older people have been looking for jobs, because of "the abolition of the default retirement age, concerns about the adequacy of pension and saving income and changes to the benefits regime".

Also, as you don't need telling, immigration has significantly boosted labour supply. Haldane cites research by Christian Dustmann and colleagues to the effect that each 1% increase in the share of migrants in the working age population leads to a 0.6% decline in the wages of the 5% lowest-paid workers.

Long flatness

So Haldane sees an economy writhing in both agony and ecstasy (his metaphor).

On the one hand, growth here and in the US right now is faster than in other big rich economies, And a big contributor to that growth is business investment - so our growth is not as unbalanced and dependent on unsustainable household consumption as some fear.

That's the ecstasy. And it is pretty potent ecstasy, by historical standards.

The agony is that real wages are falling, productivity or output per hour worked has not risen for six years. and what households earn on savings adjusted for consumer price inflation is more-or-less zero.

In fact Haldane says that since 1800, we have almost never endured such a long period of flatness in wages, savings rates and productivity. So this is genuine agony.

Haldane captures what for the Tory and LibDem government is something of a tragedy.

They can claim credit for the ecstasy of the economic recovery. So why aren't their parties doing better in the polls?

Well, in Haldane's resonant language, it is because for millions of people the recovery has not ended their personal agony.