Aurelia Butler

Ground handlers and refuelling staff at Heathrow airport are gearing up for strike action over the February school holiday. Three thousand Airbus workers could walk out in March. Bin lorry and bus drivers across the UK are demanding — and in some cases winning — big pay rises after watching wages shoot up for truckers with similar skills.After a pandemic-induced lull in industrial action, the current pay bargaining season is shaping up to be one of the most confrontational in years. It is being closely watched by policymakers at the Bank of England, who are acutely worried that a surge in inflation — initially caused by higher global prices for goods and energy — could become a lasting phenomenon if it gets baked into domestic wage settlements.Most forecasters expect the monetary policy committee to raise interest rates when it meets on Thursday, to avert the risk of a so-called wage-price spiral developing, when workers demand pay rises to match higher living costs and companies raise prices to protect their margins in a repeating, self-fulfilling process.This would be a radical reversal of the prevailing trend. Since the 2008 financial crisis, wages have barely risen in real terms, with workers being forced to swallow lower living standards in years when higher oil prices or the exchange rate effects of Brexit pushed up inflation.But as Catherine Mann, an external MPC member, warned last month, the current environment of higher price inflation and tighter labour markets could “herald a regime change”.“If the psychology of higher inflation is to take root, it will do so through wages and pay settlements,” said Neil Shearing, chief economist at consultancy Capital Economics, adding that even if unions’ power had waned over time, workers could still force up wages when they were in short supply and willing to quit for a better offer.That is the situation now in the UK, where for the first time on record there are almost as many vacancies as there are jobseekers.Kevin Rowan, head of organising at the Trades Union Congress, said the upturn in industrial action reflected the “zeitgeist” among workers who knew they were needed and were ready to “flex a bit of muscle”.Despite this, wage pressures have so far been concentrated in sectors with acute shortages. Advertised wage rates tracked by the job search site Indeed have climbed by more than 6 per cent over the past year for roles in hospitality, construction, manufacturing and logistics.But they have been flat or falling in other areas, including sales, management and the legal sector. Across all jobs advertised on Indeed, wage rates have risen by about 4 per cent — stronger, but not unduly so compared with pre-pandemic growth rates.The Office for National Statistics’ headline measure of pay growth showed average weekly earnings, excluding bonuses, were 3.8 per cent higher than a year earlier in the three months to November, similar to the nominal growth rate seen in the summer of 2019.This means that for most people, even if wages are rising, prices are rising faster. And while companies are worried about losing staff to competitors, they are also facing many other pressures.“Businesses have half a gazillion reasons to push back against wage increases as much as they can because all their other costs are increasing,” said Fabrice Montagné, chief UK economist at Barclays.Yet even if pay is lagging behind prices, it is still rising fast enough to keep inflation above target for longer than the BoE would find comfortable. And the pressures are building — not only in sectors such as hospitality or care that have become less attractive to work in since Covid. The BoE’s agents’ survey found in December that companies that had previously frozen pay were having to raise it mid-year to stop staff leaving, while some employers offered increases as high as 40 per cent to tempt staff from elsewhere.Data gathered by the research group XpertHR suggest pay settlements have become more generous even since the start of the year.Sheila Attwood, managing editor of XpertHR’s pay and HR practice, said early responses showed that pay awards agreed in January would be the highest since December 2008 (when they averaged 3.6 per cent), with pay freezes and low awards now a rarity.Most economists still do not expect wage growth to take off on any scale comparable with the 1970s, when the term “wage-price spiral” was coined. But Steffan Ball, chief UK economist at Goldman Sachs, said that with the labour market tighter than it had been for decades, wage growth would be “sharply above” the BoE’s November forecast and strong enough to justify continued monetary tightening during 2022.MPC members have signalled that they did not think it would be possible to keep inflation under control unless wage growth remains in check, even though this will mean falling living standards.Mann said last month that monetary policy needed to “temper the 2022 expectations for wage and price increases”, despite the painful implications for households.“I know that there has been a lot of talk already about the cost-of-living squeeze,” she said. “It is not my goal to make this worse than it already is — to the contrary, I aim to bring inflation back down to target such that workers can enjoy real wage gains from their labour.” More

The failure of the €4.3bn takeover of Munich-based Siltronic by GlobalWafers of Taiwan challenges stereotypes of German efficiency. The German government said it had not got around to reviewing the deal before the deadline expired. You do not need to be a conspiracy theorist to wonder who that failure suits. German politicians, perhaps, rather than the Chinese authorities whose foot-dragging they blamed?Intensifying east-west tensions mean big economies want greater security of chip supply. Geopolitical pundits claim China could invade Taiwan if a Russian invasion of Ukraine is weakly resisted. That possibility is thankfully remote for the moment. The west is heavily dependent on Taiwanese tech groups such as chipmaker TSMC and iPhone manufacturer Hon Hai. Germany might credibly want to keep one small wafer supplier.Fortunately, supplies of wafers are less imperilled by politics than microprocessor production. Japanese manufacturers Sumco and Shin-Etsu dominate the market. The EU would still like to do better. The imminent European Chips Act aims to double the home share of semiconductor manufacturing to 20 per cent by 2030. Superpower politics are not the only thing that has changed since GlobalWafer’s initial bid at the end of 2020. A semiconductor glut has switched to a shortage. The global chip market grew by more than a quarter last year and is expected to expand by almost one-tenth in 2022, thinks World Semiconductor Trade Statistics. Slack in the wafer market has disappeared, pushing up prices and profit margins. Siltronic has guided for 15 per cent sales growth over 2021 and ebitda margins of 32 per cent that would be back to 2019 levels. With output at capacity, price rises would offset higher energy and input costs. Consensus forecasts envisage margins rising to 44 per cent by 2024.A fresh bid from an acquirer closer to home is possible. GlobalWafers can be expected to sell its 14 per cent stake in Siltronic. Shares in Siltronic are trading at 11 times next year’s earnings, back at 2019 valuation levels. A fresh bid would offer a chance for opportunistic investors to benefit from the heightened geopolitical risk afflicting Taiwan. More

On November 22, US president Joe Biden renominated Jay Powell as chairman of the Federal Reserve. Eight days later, Powell told Congress that it was “probably a good time to retire that word and try to explain more clearly what we mean”. The magic word he was about to retire was “transitory”. That incantation had permitted the Fed to persist with an extremely expansionary monetary policy during a strong recovery accompanied by soaring inflation. A cynic might think there was something more than accidental about the timing of the word’s retirement. I could not possibly comment. Let us hope instead that the shift is not too late.In 1955, chairman William McChesney Martin remarked that the Fed “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up”. It was sound advice, as the monetary turmoil of some two decades later demonstrated. Losing control over inflation is politically and economically damaging: restoring control usually requires a deep recession. Yet the Fed has been running this risk lately, because it has not even started to remove a highly alcoholic punch bowl.Whether inflation is indeed transitory is not mainly determined by what is going on in markets for specific products. It depends more on the environment in which such shocks emerge. The risk is that in a highly supportive policy environment, such as today’s, a price shock can too easily ripple across the economy as workers and other producers struggle to recoup their losses.So we must start from the state of the economy. The Institute for International Finance notes that US real consumption has by now fully returned to its pre-pandemic trend. This never happened after the 2008 financial crisis. Business and residential investment is also extremely robust. The recovery is stronger than in the other big high-income countries. The main reason for this rude health, argues the IIF, has been fiscal stimulus. (See charts.)The labour market has also substantially healed and, on some measures, is hot. In a recent piece for the Peterson Institute for International Economics, Jason Furman and Wilson Powell show that the prime-age non-employment rate, unemployment rate, number of unemployed people per vacancy and quit rate are all stronger than the 2001-2018 average. The last two are at record levels. As Jay Powell himself noted in his press conference last week, “labour market conditions are consistent with maximum employment in the sense of the highest level of employment that is consistent with price stability”. In other words, the Fed has already fulfilled its jobs mandate.The strong labour market is also showing up in a rapid rise in nominal earnings, with total compensation for civilian workers above the pre-pandemic trend. Yet real compensation was 3.6 per cent below trend in December 2021. This was because annual consumer price inflation reached 7 per cent, the highest rate for four decades. Even core inflation (with volatile items such as energy and food stripped out) reached 5.5 per cent. Moreover, contrary to the belief that this is due to just a few items, the IIF shows that inflation is running at over 2 per cent on over 70 per cent of the weighted index. This price surge is no limited phenomenon.The rate of price increases on the scarcest items will slow and many prices will even fall. But that will not be enough. One reason is that affected businesses and workers will seek to recoup their losses, risking an inflationary spiral. Another is that policy is still aggressively loose, given the ongoing asset purchases and a Fed funds rate of 0.25 per cent. Whatever the supply disruptions, a central bank still has to calibrate policy to demand. Yet the Fed continues to ladle out the punch, even though the party is turning into an orgy.Given, in addition, the “long and variable lags” in the relationship between monetary policy, the economy and inflation, described by Milton Friedman, it is hard to believe the Fed is anywhere near where it needs to be today. The Fed itself agrees: tightening is on the way. But the question is whether it can still contain an inflationary spiral and keep expectations stable without having to inflict a recession. That is going to be extremely hard to pull off. Policymakers just do not know enough about the post-pandemic economy to calibrate the needed policy changes, especially as they are clearly too late.In this context, the Fed board’s December forecasts are bewildering. The median view is that core consumer price inflation will fall to 2.7 per cent this year and 2.3 per cent in 2023, as the unemployment rate stabilises at 3.5 per cent. Meanwhile, the forecast is for the Fed funds rate to be between 0.6 and 0.9 per cent this year, and 1.4 per cent and 1.9 per cent in 2023 (if we leave out the three highest and lowest). These forecasts are, we must note, below the Fed’s own estimate of the neutral rate of interest, which is 2.5 per cent. Moreover, the assumed real interest rates are also negative. Perhaps board members believe that aggressive asset sales will deliver the needed tightening via higher long-term rates. Alternatively, they have to believe that the economy and inflation will stabilise smoothly even though monetary policy stays expansionary throughout.This would be immaculate stabilisation. It is conceivable that the policy settings chosen during the worst of the Covid crisis still make sense today. It is conceivable too that the forecast tightening will deliver robust growth and smooth disinflation. Both are less unlikely than that the moon is made of green cheese. But likely? 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Unemployment in the eurozone fell to a record low of 7 per cent at the end of last year, underlining how the region’s labour market has bounced back faster than expected from the impact of the pandemic.The number of jobless people in the bloc dropped by 185,000 in the final month of 2021, taking the total number of unemployed people to 11.5mn, Eurostat announced on Tuesday. The 7 per cent unemployment rate in December fell from a downwardly revised 7.1 per cent in November — which itself matched the previous low of March 2020, just as the pandemic hit Europe. Growing numbers of businesses in countries such as Germany and France are reporting a shortage of workers as demand for goods and services increases. The improvement in the labour market was particularly strong among young people, as the jobless rate for those aged under 25 fell to a new all-time low of 14.9 per cent, down from 15.4 per cent the previous month. Youth unemployment has long been the scourge of the European labour market and peaked at 25 per cent during the region’s debt crisis in 2013. The biggest fall in youth unemployment over the past year was in Spain, where it dropped from 41 per cent in December 2020 to 30.6 per cent, although that only took it back to pre-pandemic levels. Among the bloc’s main economies, youth unemployment has fallen the furthest below pre-crisis levels in France, declining from 21 per cent in December 2019 to 17.6 per cent last month.“Some of the decline in unemployment appears to be down to people temporarily leaving the labour force as Covid restrictions were tightened to counter the Omicron variant,” said Jessica Hinds, senior Europe economist at Capital Economics, who estimated the bloc’s labour force shrank 0.2 per cent in December.“However, that is much less than in previous periods of tighter restrictions and should not detract too much from what has been a very full recovery that contrasts with developments in the US,” she added.The drop in Europe’s jobless rate came despite the end of most short-time work schemes introduced to mitigate the economic impact of coronavirus: the European Central Bank estimated only 1.8 per cent of workers were furloughed in October, versus 20 per cent in April 2020.Eurozone businesses are confronting unprecedented and widespread shortages of workers, according to the latest quarterly survey by the European Commission.About one-quarter of manufacturing and services businesses reported lack of workers as a factor limiting production in January, the highest proportion since data was first available in 1982.Eurozone wage growth remains subdued: two-year annualised growth in pay per employee was 1.8 per cent in the third quarter. However, the EU survey indicated that “the labour market is already tight and the remaining slack will diminish further by end-2022”, said Paul Hollingsworth, chief European economist at BNP Paribas, raising the chances of more substantial pay rises.“We expect wage growth to accelerate in the second half of 2022 and in 2023 due to the current spike in inflation, the increasingly tight labour market and more labour-oriented policies,” he added.Worker shortages are most acute in Germany, where they were reported by more than a third of businesses in the services and manufacturing sectors. In France, a record high 22 per cent of businesses lacked the staff they needed. In Italy’s and Spain’s services sectors, the proportion has risen to double-digits for the first time in history, the survey showed. Labour shortages were more common for businesses producing machinery, equipment and furniture, at about 30 per cent. But a quarter of companies in most industries, including cars, food production and textiles, struggled to find enough workers. More

LONDON (Reuters) -British labour union Unite said on Tuesday that 87% of its members at the Financial Conduct Authority (FCA) have voted in a non-binding ballot in favour of industrial action against proposed changes to pay packages.The labour dispute comes at a time of big internal change at the watchdog while it also faces pressure from lawmakers to crack down on a surge in online financial scams.”Unless a negotiated settlement is reached Unite can now proceed to a full industrial action ballot,” Unite said in a statement.The FCA, which employs around 4,000, said it has consulted with staff on proposals which would ensure the watchdog continues to provide “one of the best, if not the best” employment packages of any regulator or enforcement agency in Britain.Most staff would receive base salary rises of at least 5% this year and 4% in 2023, and around 800 of the lowest paid staff would receive an average pay rise of 3,800 pounds ($5,128.48) this year, the FCA said in a statement.The outcome of the FCA’s consultation is due by March.Sharon Graham (NYSE:GHM), Unite General Secretary, said FCA employees were telling the watchdog that the proposed changes were damaging and destroying any remaining goodwill the staff had.The regulator is stopping discretionary bonuses for underperforming staff as it seeks to change internal culture, and FCA CEO Nikhil Rathi told parliament in December that some employees will end up being paid less this year.Unite said the loss of such “routine payments misleadingly labelled bonuses” would cut overall pay by 10% to 12%.The union said it would negotiate with the regulator through the ACAS voluntary arbitration scheme as soon as the watchdog agreed to this, otherwise a formal ballot for industrial action would be held.It also said it could not disclose membership numbers among FCA staff while it was also in the process of a ballot on official recognition of the union at the authority.Sky News reported on Monday that the FCA would name Richard Lloyd, who led British consumer group Which? for five years, as interim chairman. Lloyd will replace Charles Randell, who announced he would be stepping down a year early.Rathi has revamped his executive team after an independent review said the watchdog botched the supervision of now collapsed investment company London Capital & Finance.($1 = 0.7410 pounds) More