Eurocrat poker faces and pay puzzles

Morning all,

It’s been quite a week for new leadership! And not the first time my CV seems to coincide with world events. My first day as the Treasury’s fiscal director was Liz Truss’s first day as Prime Minister, and my first day in the Treasury’s financial stability team was the Monday after Lehman Brother’s collapse. So, that all bodes well for living standards in the next few years?

Superstitions aside, I’m thrilled to be making the coveted transition from a Top of the Charts reader, to its writer. In fact, to mark the occasion, I thought I’d shake things up a bit. I’ve issued only one radical executive order this week – check out our new TOTC logo! Plus, as well as looking back, from now on I wanted to make space to consider the week ahead. More on that below…

But we won’t be skimping on the fascinating reads – from the body language of ECB honchos to the puzzle of growing pay packets.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

Testing tariffs. Things are getting tense, trade-wise. In week one, Trump went for Canada, Mexico and China. What might happen when the UK is in his sights? This helpful LSE blog weighs up the potential consequences of tit-for-tat tariffs. The upshot: A) it would be unlikely to trigger sustained inflation, and B) handbrakes on growth would most likely be limited to vulnerable sectors like car manufacturing, pharmaceuticals, electronics, and other advanced manufacturing sectors that rest on rigid (read: rickety) supply chains. Those risks matter – but we’re all for silver linings and with services exports mattering more than goods exports for our economy, it could be worse.

Countenance crunching. How good is your poker face? This paper scrutinises facial expressions made by ECB presidents Mario Draghi and Christine Lagarde at press conferences. The researchers found that facial and vocal expressions were indeed market movers. Under President Draghi, happier expressions had a positive market effect, while higher levels of vocal arousal were associated with increased bond yields and falls in stock prices. Under President Lagarde it was the degree of hawkishness conveyed (new emotion just dropped) that had a negative effect on asset prices. Facial expressions also relayed information on inflation – when inflation increased, expressions were angrier. Turns out it’s not just what you say, but how you convey it. Give us a smile Andrew, we need all the help we can get….

Measuring metropolises. The Centre for Cities’ outlook for 2025 delves into the stark wage differences between Britain’s cities and towns. Wages in London are 68 per cent higher than in Burnley, the place with the lowest pay nationally. Only 15 of the 63 cities/towns they look at have wages above the national average, and only 7 of those are outside the South East. That’s one skewed distribution. So how do we boost wages? By boosting productivity of course! And it looks as though lots of the regional variation in productivity is determined by the level of exporting activities. So (still with me?) concentrating on the exporting sector of local areas is a sensible way to try to influence local wages.

Productivity puzzle. A question for our age – why isn’t the UK more productive? This paper breaks down the sources of productivity-driving innovation in the UK in search of an answer. Pre-financial crisis, existing firms getting better at producing existing stuff accounted for over 80 per cent of (total factor) productivity growth. After the crisis this shifted considerably – accounting for under half of the (much) lower productivity growth. Instead, new firms producing new stuff has become more important. Looking forward, initial data hints to an incoming wave of creative destruction (i.e. innovation replacing other firms’ products) in the post-Covid period. If that turns out to be the case, effective policies should focus on smoothing reallocation of factors across firms and sectors. We covered this as part of the Economy 2030 inquiry if you want to learn more.

Something for the Weekend? | Happy birthday Brexit!

Next Friday marks five years since the UK left the EU – clink your flutes/drown your sorrows as appropriate. As the Government pursues its EU reset this year, it’s possible trade frictions might ease with small tweaks like joining the PEM Convention, a customs scheme, or regulatory alignment. In any case, expect loads of chat next week around the impact of Brexit, so here’s my cheat sheet to get you ahead.

Let’s start with an exhausting timeline of the last nine years. The upshot? Years of post-referendum uncertainty saw sterling depreciate, and business investment flat-line. So what’s happened since the Trade and Cooperation Agreement (TCA) was implemented in January 2021?

This paper uses firm-level data to show that smaller businesses struggled to trade with the EU after the TCA, causing a 13.2 per cent fall in goods exports to the EU by the end of 2022. A second paper compares the UK’s trade performance with similar countries before and after the TCA, finding a 27 per cent drop in UK goods exports to the EU by the end of 2023. On the other hand, our paper last December found that our powerhouse services sector is still going gangbusters – something to leverage in the Government’s nascent trade and industrial strategies.

Chart of the week

For my inaugural Chart of the Week, I’ve gone for an RF classic – real pay growth over the 21st century – now incorporating ONS statistics from earlier this week. The chart perfectly encapsulates Britain’s economic woes. Pre-2008, life was simple – prices rose, pay rose faster, and everyone earned more. Post-2008 crisis we’ve had three periods of falling real pay and some bounce-back, leaving us some £278 a week worse off than we would have been if the pre-crises trend had continued. But 2024 is looking good – we’re on track for the best year for real wage growth since 2005. All good, right? Not quite… It’s a welcome relief for workers after the cost-of-living crisis and higher earnings is good news for government tax receipts too. But in the absence of productivity growth, strong pay growth will either fizzle out or push up inflation. It’s this latter risk that concerns monetary policy makers, who will have to weigh it against the falling employment data when setting interest rates. We’ll attempt to untangle this dilemma at an event next week. Come along!