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News : Global Economy Last Updated: May 19, 2014 - 7:29 AM


Global growth fears rise as wages stagnate in Eurozone and elsewhere
By Michael Hennigan, Finfacts founder and editor
May 16, 2014 - 8:05 AM

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The OECD says that the share of top-income recipients in total gross income increased significantly in most countries over the past three decades. The rise was most spectacular in the United States, where the share of the richest 1% in all pre-tax income has more than doubled since 1980, reaching almost 20% in 2012. Top earners also fared very well in several other English-speaking countries including Australia, Canada, Ireland and the United Kingdom .

Following the issue on Thursday of a dismal GDP (gross domestic product) growth estimate of 0.2% in the Eurozone in the first quarter of this year, later in the day in Washington DC, the Federal Reserve reported that industrial production fell 0.6% in April and the Bureau of Labor Statistics (BLS) reported that real (inflation-adjusted) US average weekly earnings fell 0.1% over the month due to the decrease in real average hourly earnings combined with an unchanged average workweek.

The BLS said that real average hourly earnings rose 0.3%, seasonally adjusted, from April 2013 to April 2014. The increase in real average hourly earnings, combined with an unchanged average workweek, resulted in a 0.3% increase in real average weekly earnings over this period.     

In New York earlier in the week the Dow and the S&P 500 ended at record highs and with the top 5% of Americans responsible for almost 40% of consumer spending, the trickle down to the cash-strapped folk lower down the economic pyramid means that absent the opportunity for equity release from rising home values,  consumer spending accounting for up to 70% of the economy, is on a wobbly foundation.

The Financial Times reports that last week, Janet Yellen, the chairwoman of the US Federal Reserve, warned a risk that had seemed vanquished was once again menacing the economy. “The recent flattening out in housing activity,” she said in testimony to Congress, “could prove more protracted than currently expected.”

Existing home sales fell 7.5% on a year ago in March while new housing starts dipped 5.9% in the same month. However, home prices in major metropolitan areas are up 12.9% on a year ago, according to the Case-Shiller index.

In Japan strong consumer demand helped boost GDP to an annualised 5.9% in the January-March quarter. However, that rise mainly reflected spending in advance of a 3% sales tax hike to 8% that took effect from April 1

Adam Posen, president of the Peterson Institute for International Economics in Washington, predicted any pullback from the tax rise would be short-lived. "You're going to have shortfalls in consumption this next couple quarters. But it doesn't necessarily throw off the fundamental path of the economy. It's not that big of a deal," said Posen in an interview on a visit to Tokyo, according to The Wall Street Journal.

The Journal said that one short-term risk factor is whether wage increases can keep pace with inflation. In the first quarter, employee income in real terms was down 0.7% compared with year-earlier levels. While many retailers have said the falloff in consumer demand in April was within expectations, the tax rise could still crimp consumer spending over the medium term.

The spring wage negotiations did yield pay rises for the first time in a decade, an average of €7,697 ($76) per month at large firms. Labour cash earnings including wages and bonuses rose 0.7% year-on-year in March.

Yet those headline pay increases have limited impact. Only about 10% of Japanese workers are members of the unions participating in the negotiations, and pay rises are concentrated at exporting manufacturers.

About 35% of the Japanese workforce are temporary workers earning less than the Irish minimum wage of €8.65 (US$11.70).

On Wednesday, it was reported that the UK unemployment  rate fell to 6.8% in March and average earnings in the first quarter were up 1.7% from a year earlier - -  the growth rate in wages - which includes bonuses and was slightly above the inflation rate at 1.6% in March - it means earnings rose faster than inflation for the first time since 2010.

Trade was a negative for German GDP in Q1 and hourly wages having risen 2% in 2013 (1.4% in the Eurozone)  and on Thursday Destatis reported that collective bargaining negotiations since autumn has resulted in agreements for minimum pay rises of  3%.

Contractions in the economies of the Netherlands and Finland show the extent of the challenges, including falling demand in emerging economies (Russia is Finland's biggest export market) with government revenues in the later accounting for over 56% of GDP.

No only are earnings under pressure, there is evidence of an increase in jobs that do not provide stable income.

In the 12 months in March 2014, the number of employees increased by 351,000 to reach 25.63m; the number of self-employed people increased by 375,000 to reach 4.55m.

Last month we reported that from Q1 2008 to Q4 2013, all the net additional employment in Britain of 613,000 was in self-employment and part-time roles.

The Office for National Statistics reported last month  that UK wages have been falling ‘markedly’ since 2007, and by 2012 were 6.1% lower in real terms five years earlier.

Meanwhile, wages were 4% higher in Canada, 2.8% higher in France and 3.1% higher in Germany. Wages in the US were down 0.2% over the same period.

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