Last week, I attended an interesting presentation by Martin Weale, one of the Monetary Policy Committee members (yes, one of the 8 economists that meet each month and decide what the interest rate should be).
His message is that businesses in the UK are operating at close to full capacity.
Well yes, but what does this mean? OK: it is good news for people and also good news for companies.
For companies, it means that trade has picked up, and although they still have underutilised resources (whether it is people or office space or computers, machinery etc), Martin Weale and his MPC colleagues reckon there is now only 1-1.25% under capacity in companies across the economy, which means that it will not take much of an increase in economic growth before full capacity is reached.
For people, it means job prospects are looking up. When companies get close to or reach full capacity, they will start hiring additional staff. The unemployed will have a better chance of getting a job. For those people who work part-time and want to work more hours, there will be more opportunity to do so; and for those in permanent jobs who want to progress their careers, there will be more opportunity to do that too (in downturns, people who have a job tend to stick where they are for fear of taking a risk and moving to a new job, hence career development will stall). So, those who want to work more can do so, which means an increase in living standards.
One of the characteristics of this downturn is that companies have not reacted to reduction in trade by sacking lots of their staff (as has been the case in previous downturns) and instead there has been a tendency to hold on to staff, with a view that they do not want to lose skilled people, and have the problem of trying to hire again when the market picks up. As a result, many staff are on short time working or are not fully utilised. When these resources are fully utilised, company’s profitability improves.
Will companies be able to invest in people and jobs? There is no doubt that there is lots of spare cash sloshing around looking for an investment home – companies have been hoarding a record amount of cash reserves. What is needed is the current increase in business confidence to continue and the economy will really start motoring (in theory).
The “wrong sort of jobs”. There has been a lot of commentary in the media about employment growing, but concern about the “wrong sort of jobs”. This is certainly borne out by the statistics (and Martin Weale had lots of them). Interestingly, for those that have held onto a permanent job throughout the downturn, overall they have done pretty well. But for those that have lost their jobs, or young people that have entered the job market, it has been a different story. Many of the ones that have found a new job have had to accept much lower rates of pay and lower hours. Plus many youngsters have struggled to make their first step on the job ladder.
So when will full capacity be reached? Martin Weale said that his MPC colleagues reckon that with the current rate of economic growth, it will take 1 to 1.5 years before full capacity is reached.
Does that mean it will take 1 to 1.5 years before salaries and wages go up? Not quite. The good news is that they are already on the way up. Wage growth is currently running at around 2%. However, inflation is higher than wage growth (Consumer Prices Index is currently 1.95 and Retail Price Index is 2.7%), so the real standard of living is still declining. However, it is going in the right direction.