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Analysts at RBS suggest that despite strong investment, record employment and (finally) real pay growth, weak spending is slowing the UK economy.

Key Quotes

“The UK’s well-oiled jobs machine continues to produce the goods. Another month, another record high in employment and the employment rate. The number of people in work rose by 197k in Q1, taking the total to 32.34 million and the largest quarterly gain since Q4 2015. While self-employment dipped, employee numbers posted their largest quarterly gain on record (+271k). Encouragingly three-quarters of these were full-timers. UK nationals are driving the jobs growth. Meanwhile workers from the eight East European countries that joined the EU in 2004 fell by 91k y/y. This is the largest annual fall to date. A booming Polish economy becomes harder to leave.”

“UK workers enjoyed the fastest rise in earnings since the summer of 2015. During the first three months of the year, regular pay (excluding bonuses), increased by 2.9% y/y. Note, this outpaced CPI inflation.  Yet a 0.2%y/y rise in real earnings isn’t much to get excited about. That said, public sector workers and those in receipt of working-age benefits would happily swap their pay caps and benefits freezes for a modest real terms increase in income. Yet only productivity really provides the path to prosperity. And that front is decidedly chilly. Output per hour worked fell by 0.5% in the first quarter. A rise in hours worked was not matched by output. We may be working harder but not smarter.”

“It’s funny. We wait years for the UK economy to rebalance away from consumer spending towards investment yet when it happens, we worry. The Bank of England survey of business conditions reconfirm the pitiful state of consumer spending and there’s no doubt non-online retailing is struggling. But manufacturing, especially exporters, remain reasonably chipper. This despite labour costs now the highest since the crisis. Indeed manufacturing is fast reaching maximum capacity. This suggests investment should hold up well and firms currently have deep cash reserves. Credit demand for M&A remains strong, as take-overs remain ‘on trend’ for 2018.”