The global economy: weak household incomes constrain outlook

In real disposable terms, US household real income growth is currently running at 1.8%, a moderate but still unimpressive rate that is clearly somewhat slower than that which persisted at this point in 2016. In the UK, household real incomes are falling, as they are in Australia and potentially in Japan. In headline terms, New Zealand is showing respectable real income growth but the data looks rather less impressive in per capita terms. In Germany, household real income growth is proceeding at its now seemingly customary 1.8% rate, which is more than twice the rates being achieved in Italy and Switzerland. Real incomes in France are apparently stationary, while income growth in Canada remains modest and households in aggregate are operating at a profoundly cash-flow negative status. As a consequence, it seems that many of the world’s household sectors may have fallen prey to the curse of much of the British aristocracy in that they are asset rich but cash-flow poor. 

This relative lack of income growth has certainly made its presence felt in many recent national elections – the success of "outsiders" in gaining power, or in coming close to gaining power, may have much to do with this weakness in incomes. Moreover, we can assume that this basic lack of consumer “firepower” will continue to act as a dampener on the prospects for the type of sustained global economic acceleration that financial markets appear to be discounting.

We believe that there are probably two (if not entirely unrelated) factors behind the persistent weakness that is occurring within household income trends. The first is simply the lack of aggregate productivity growth. It would seem that a combination of distorted supply-sides within many of the world’s economies, simple bad luck and an excess concentration on financial rather than ‘real world’ engineering by companies has resulted in weak rates of productivity growth. However, we also believe that in the modern era, a company will not wish to raise the real wages of its staff unless they provide at least an equivalent lift in their level of output per employee.

Secondly, and in a distinct break with the past, the corporate sectors of the US, UK, Japan and Germany now seem obsessed with creating and maintaining financial surpluses so that they can either buy-back their own equity (in the Anglo-Saxon economies) or discharge their existing debts. We well remember a former CIO with whom we worked in the mid-1990s who, when attempting to modernize the Asian offices investment processes, employed a picture showing an ‘Attila the Hun’ type boss who was apparently screaming that “we make money not steel”….