Wage pressures to build as hard Brexit risks wane

After another eventful week in the UK, it now appears possible that we are moving gradually towards some semblance of a soft deal on the Brexit front, or at least the prospect of a cliff-edge Brexit is possibly waning.

March 13 will be a big day in that regard, but we can probably now afford to possess some sense of optimism than for some time.

Of course, such is the barminess of the UK political system at the moment, there is still potential for a shock, but the risks are declining due to the fact that some sane politicians who are committed to the greater good of the UK than their own selfish interests are at last starting to exert some muscle.

It took a while, but better late than never. However, it would be naive to under-estimate the skullduggery of the Brexiteers.

Hopefully, the avoidance of a hard-Brexit will give a significant boost to sterling and indeed to the UK economy.

Both of those outcomes would be good news for the Irish economy and particularly for the very important agri-food and tourism components of the indigenous economy.

Hopefully, not too much longer-term damage has been done to the UK economy by the lunacy that has characterised the country since June 2016.

Some manufacturing activity will have been permanently lost, but hopefully, other sectors will compensate. We need to be clear that a strong UK economy and a strong currency are undoubtedly in the best interests of the Irish economy.

The Irish labour market, in general, would benefit further from a stronger UK economy and from the boost to Irish exports that would result from a stronger UK currency, on both the services and the goods side of the export sector.

Such a boost to a labour market that is already performing very strongly could be a double-edged sword in the sense that it would serve to exacerbate the likelihood of labour shortages and retention and recruitment difficulties in both the public and private sectors of the economy.

However, this would still be a better outcome than the employment shock that would definitely result from the UK crashing out of the EU without a deal.

The latest labour market data relating to the final quarter of 2018 showed that employment increased by 50,500 or 2.3% in the year to December to reach 2.28 million, which is the highest level of employment ever recorded in the Irish economy.

The annual growth rate did slow from a rate of 3% in the previous quarter and 3.1% a year earlier, but rather than interpreting anything negative, this probably reflects a combination of Brexit induced caution and recruitment difficulties in a labour market that is definitely tightening.

Following the crash in 2008, few believed that the Irish labour market would rebound in the manner that it has.

The low point of the employment market was 2012, and in the six-year period to the final quarter of 2018, overall employment has increased by 387,700 or by 20.5%.

Over that six-year period, all sectors, with the exception of agriculture, recorded growth in employment.

The construction sector leads the way with an increase of 58,900, and the accommodation and food services sector came a close second, with an increase of 52,000.

The total at work in agriculture declined by 2,900, which is indicative of difficulty recruiting, difficult trading conditions for some components of the sector, particularly beef, and the automation of farming in general, and the dairy sector in particular.

All in all, it is a positive labour market story, but one that will undoubtedly present its own challenges over the next couple of years as wages rise and recruitment and retention challenges start to become more acute.

At the annual conference of central bankers in Jackson Hole in Wyoming in America last August, the main theme was the failure of virtual full employment in the US to translate into wage pressures.

According to the minutes of the last meeting of the ECB, a similar theme was explored in relation to the eurozone.

The breakdown in the transmission of employment growth into wage growth is puzzling central bankers.

Interestingly, in Ireland, the latest data show that average weekly earnings increased by 4.1% in the year to the final quarter of 2018.

Wage pressures are starting to build here and a soft-Brexit will likely exacerbate those pressures.

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