How the Pound was Undercut by a Booming UK Population

The British pound exchange rate complex has come under pressure on the first day of trade in the new month.

As long as there are people willing to join a labour force for relatively little return in wages, the existing work force is unlikely to see their own pay packets increase.

The declines come off the back of the rally higher seen on Tuesday when the ONS reported that the UK economy grew an impressive 3% in the year to March.

It would appear that the problem for sterling lies with another set of data out from the ONS on Wednesday - that relating to the productivity of the workforce.

The Good News: Manufacturing Sector is Firing on all Cylinders

The first set of PMI numbers for the month of April are out - and it is good news.

UK manufacturing hit an 8 month high in March with a reading at 54.4; currency markets had priced sterling for a reading of 54.3.

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply says the manufacturing sector has provided further evidence that the UK economy is in “rude health” and manufacturers are faced with a glut of new orders.

Is it any wonder that 100 business bosses took the unprecedented step of saying they were backing a continuation of the current Conservative-Lib Dem approach to business?

The Bad News: Productivity Stalls as Our Population Expands

The reason that the British pound has failed to take full advantage of the strong manufacturing sector data lies with the other set of data released today.

It was reported that UK labour productivity, as measured by output per hour, fell by 0.2% in the fourth quarter of 2014 compared with the previous quarter.

More..

In 2014 as a whole, labour productivity was little changed from 2013, and slightly lower than in 2007, prior to the economic downturn.     

This is significant in that it tells us that the average UK worker is simply not becoming more productive.

There appears to be little economic justification for raising wages if output is not increasing.

And this is significant for the currency markets as the Bank of England is making the basis of an interest rate rise rest on productivity levels.

Essentially, a pro-GBP interest rate rise will not likely be made until productivity is seen to be racing ahead.

But, you may ask, why is productivity not growing if the economy and employment is growing?

It would appear that economic growth is being matched by an ever-increasing UK population.

If the population is expanding then the economic cake has to be shared between ever more people.

The economy has to grow at ever greater rates if everyone at the table wants a larger slice of cake.

It appears companies are able to increase productivity on the back of an ever-expanding and inexpensive labour force.

As long as there are people willing to join a labour force for relatively little return in wages, the existing work force is unlikely to see their own pay packets increase.

This is the key to the 'cost of living crisis' but it is an unspoken dynamic in the current political lexicon.

Only when a stable population encounters a growing economy will we see a truly meaningful increase in productivity and living standards.

Today’s data is significant for interest rates and the pound exchange rate complex - it would appear that the low productivity, combined with low inflation, gives the Bank of England little justification to move on policy