The attention of economic commentators over the last month has focused on the eurozone, particularly on Greece. Worries have emerged that a European sovereign debt crisis could tip the global economy back into recession. This increase in the risks to growth has led to a subtle change in the message from international bodies such as the IMF.
While they still recommend measures to reduce significantly budget deficits in the medium-term, they are increasingly making the case for some relaxation of policy to support demand in the short-term. This is being resisted in the UK by the Chancellor of the Exchequer, who, despite evidence it has contributed to falls in consumer and business confidence, still argues his deficit reduction programme is an essential element for restoring growth.
However, the Monetary Policy Committee announced a second round of quantitative easing, amounting to £75 billion, which it hopes will increase demand in the economy.
Here is a scorecard of different economic indicators over recent months:
Down 69,000 in last three months and up only 24,000 over the last year – big falls in public sector and slower growth in private sector
|Unemployment||(May-Jul)||Up 80,000 in last three months to 2.51 million – rate now 7.9%; claimant count higher for sixth consecutive month|
|Real GDP||(Q2)||0.1% increase in Q2; consumer spending down 0.8% – ONS thinks special factors could have held back growth by up to 0.5%|
|Manufacturing output||(Jul)||Up 0.1% in July and 1.9% over the last year; underlying trend in recent months is flat – slowdown has been broad-based|
|Exports||(Jul)||Volumes up 4% over the last year (imports also up 4%) – but down in latest quarter; world trade has slackened|
|Retail sales||(Aug)||Volume down 0.2% in latest month and unchanged on a year earlier – value up 4.7% over last year; inflation main cause of lack of volume growth|
|Consumer confidence||(Sep)||Slight increase in latest month but still at very low level – big worries about the general economy|
|Manufacturing confidence||(Sep)||Surprise increase in latest Purchasing Managers’ Index – but overall picture suggests flat output|
|Services confidence||(Sep)||Recovered unexpectedly in September – indicating moderate pace of growth in sector|
|Consumer price inflation||(Aug)||Increased to 4.5% (RPI up to 5.2%) – widely expected to go even higher in next few months as gas and electricity prices go up|
|Average earnings growth||(May-Jul)||Regular pay up 2.1% over the last year, total pay up 2.8% – well below inflation rate; real earnings falling|
|Public sector net borrowing||(Aug)||Higher than expected in August – first five months total £51.5bn, compared to £55.3bn in 2010/11|
|Bond yields||(Sep)||Close to record lows reflecting poor economic outlook and no prospect of early interest rate hike|
Strong, improving, positive for growth
Moderate, little changed
Weak, deteriorating, potentially negative for growth
Until this month, amidst all the increasingly gloomy economic news in the UK, there was one bright spot: employment growth. This is no longer the case.
The latest quarter saw a large drop in employment, a big increase in unemployment and the sixth consecutive increase in the number of people claiming Jobseeker’s Allowance. In part, this is the result of the government’s cuts in public sector employment. But, inevitably, the slowdown in economic growth that has been apparent for much of 2011 has caused companies in the private sector to be much more cautious about increasing the size of their workforces.
Meanwhile, growth in the global economy is slowing. The focus is on the euro zone, where leaders have yet to demonstrate that they have got to grips with the burgeoning sovereign debt crisis. But demand has also weakened in countries from the United States to China. Global leaders have taken to lecturing eurozone leaders about getting to grips with their problems but, despite speculation that the global economy could slide back into recession, the willingness to take concerted action that was evident in 2009 appears now to be lacking.
The Monetary Policy Committee announced a £75 billion increase in the scale of its asset purchase programme – better know as quantitative easing, or QE – in October, lifting it to £275 billion in total. It estimates that the initial £200 billion programme added 1½ to 2% to real GDP and ¾ to 1½% to inflation. Using these results as a rule of thumb, the additional purchases could lift GDP by 0.55 to 0.75%.
1. GDP increased by 0.1% in the second quarter: Revised figures show real GDP in the second quarter increased by just 0.1%, following an increase of 0.4% in the first quarter and a drop of 0.5% in the final quarter of 2010. As a result, output in the second quarter was no higher than in the third quarter of last year. Weak consumer spending – it fell by 0.8% in the second quarter and by 1.7% over the last year – has been the main factor behind this weakness.
2. Retail sales volumes are flat: The volume of retail sales was down 0.2% in August, reversing July’s increase. Over the last year, sales have not grown at all in volume terms. However, the value of sales is up 4.7% over the same period (despite regular earnings increasing by little more than 2% and very little employment growth). Households have increased their spending in nominal terms by a healthy amount but higher inflation means they are getting no more in volume terms than they were a year ago.
3. Consumer confidence is very low: Consumer confidence increased a little in September after three consecutive falls. However, it remains very low, with households worried about their own financial position and the general economic situation.
4. Business confidence improves unexpectedly: The purchasing managers’ survey of manufacturing showed a surprise increase in optimism in September, despite the generally gloomy backdrop. However, export orders contracted at their fastest rate for over two years. Confidence in the service sector also rebounded and is pointing to expansion at a moderate pace.
5. Manufacturing output has stopped expanding: Manufacturing output was up 0.1% in July and was 1.9% higher than a year earlier. However, output has not increased in the last six months, reflecting weaker demand at home and overseas. Worryingly, the slowdown is broad-based and not just due to the problems of one or two sub-sectors within manufacturing.
See Figure 1:
6. Employment is declining: Employment fell by 69,000 in the latest quarter (comparing May-July with February-April) and it is only 24,000 higher than a year ago. Between March and June, public sector employment contracted by 111,000 – the largest fall since records began in 1999. Private sector employment was up 41,000 over the same period.
As job losses have mounted in the public sector, private sector job growth has slowed, rather than accelerating to fill the gap as the government believed would happen.
See Figure 2:
7. Unemployment is increasing: The labour force survey (LFS) shows an 80,000 increase in unemployment between February-April and May-July. The total number looking for work is now 2.51 million, close to its recent high. The claimant count measure has increased for six consecutive months and is now 1.58 million.
8. Price inflation remains above 4%: Consumer price inflation was 4.5% in August, up from 4.4% the previous month (retail price inflation was also up, to 5.2%). Inflation has been more than 1 point above its target rate for 20 consecutive months. In the short-term, it will go even higher as previously announced increases in gas and electricity prices take effect.
See Figure 3:
9. Wages fail to keep up with prices: Average earnings – both total pay and regular pay – are increasing at an annual rate well below price inflation. This is squeezing households’ spending power, the worst such squeeze since the 1920s. Over the last year, regular pay is up 2.1% and total pay 2.8%.
10. Government borrowing is below last year’s path: Public sector net borrowing (excluding financial interventions) was £15.9 billion in August 2011 – the highest August figure on record. However, the path for borrowing in 2011/12 remains below that in 2010/11.
After the first five months of the current fiscal year, borrowing totalled £51.5 billion, compared to £55.3 billion in the previous one. After allowing for the one-off £3.5 billion of tax revenues received in April 2010 from the bank payroll tax, borrowing is even further below last year’s path.
11. Interest rates remain at 0.5%; QE increased to £275 billion: The Monetary Policy Committee left interest rates at 0.5% in October but increased the scale of quantitative easing by £75 billion to £275 billion. This was in response to the deterioration in the growth outlook which, the MPC believes, makes it more likely that inflation will be below its target rate in the medium-term.
12. Government bond yields reach new lows: The 10-year UK government bond yield fell to a new record low in September – at one point reaching 2.34%. This is clear evidence financial markets are extremely worried about the outlook for economic growth in the UK and do not expect the monetary policy committee to increase interest rates for a long time.
13. Sterling mixed in September: Sterling’s value against a basket of overseas currencies rose a little during September as gains against the euro were largely offset by a decline against the US dollar. But this increase was reversed in the immediate wake of the MPC’s decision to increase the scale of quantitative easing.
• One-Club Osborne drives economy further into the rough – William Bain MP, October 6th 2011
• Osborne: Speaking truth to wealth and power? Really? – Ann Pettifor. October 5th 2011
• UK growth down as IMF warn deficit reduction should not be at the expense of growth – Shamik Das, October 5th 2011
• Reducing job security won’t decrease unemployment – Sara Ibrahim, October 4th 2011
• Gideon’s grotesque attempt to blame workers’ rights for unemployment – Richard Exell, October 3rd 2011