Raising wages, raising growth?

Workers on shop floor Image copyright Reuters

We have the first indications of where economic growth is headed in the second quarter for major economies, such as the UK.

And, the initial signs are worrying as to whether there will be a growth pick-up.

Today's UK PMI releases paint a weak global picture for April.

PMIs are surveys of purchasing managers which reveal whether their businesses are expanding or contracting. The manufacturing sector isn't looking particularly rosy in the latest figures.

Britain's PMI reading was 51.9, which was a big drop from March's 54, and the lowest in seven months.

PMI was expected to remain at around 54, so it was a surprise to markets that manufacturing fell at the sharpest pace in two years.

Doldrums

Coming on the back of surprisingly weak growth in the first three months of the year of just 0.3%, it's not a great start for those looking for signs of a pick-up in the second quarter.

Recall that the US economy has come nearly to a standstill in Q1, growing by just 0.2% on an annualised basis, so it's not just Brits looking for indications of stronger growth.

This reinforces the doldrums that many already feel that the recovery just lacks momentum. A stronger pound as well as US dollar played their parts by affecting exports.

But, a key reason is likely due to tepid consumption since consumers aren't buying like they used to. After all, consumption comprises over two thirds of GDP. There's likely to be a number of reasons for that, but one of the main reasons is likely to be weak wage growth.

Skewed

Real wages have fallen every year since the 2009 recession and median pay is still some 10% below what it was before the crash. It's an issue in America too where pay also hasn't recovered, and there have been massive protests over the minimum wage across US cities that I've written about before.

It's one of the reasons why GDP per head still hasn't recovered even as aggregate GDP finally has to pre-crisis levels. It's worth noting that not all of the components of GDP have either.

Services output is now above 2008 levels, but production, construction and agriculture remain below. So, it's also a skewed recovery.

Struggle

Focusing on wages, what would it take for pay to rise?

Higher output per worker, which goes to the productivity puzzle in the UK, which I have written about.

Greater demand for products, which for the UK also depends on global sales, don't look too healthy either. I've already mentioned the US, the world's biggest economy. Today's PMI figures also show that China barely came in above 50 and Japan fell just below it, so the second and third largest economies are also not growing that well. The eurozone continues to struggle.

So, global demand isn't looking too rosy. That leaves domestic demand; in other words, consumers. That brings us back to the positive impact of higher wages and thus higher disposable incomes.

It's an issue not just for Britain, but also the US and other major economies.

Tepid

Raising productivity and wages has the potential to create a virtuous circle of higher demand that feeds into more exports, so that there's positive spillover among the biggest economies. Right now, unfortunately, it's weakness that's spilling over, making for a tepid start to the second quarter. That raises doubts as to whether the UK and US will achieve their forecasted growth rates for this year.

It's not the only factor that will impact whether growth will gain a stable footing this year.

But, it does mean that addressing lagging wages could help ensure that economic growth picks up in the rest of the year.

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