Ignore Osborne’s spin; a jobs recession is inevitable


The UK economy grew by 0.5% in the third quarter of 2011 according to preliminary real GDP figures released by the Office for National Statistics today.

Over the last year output was up 0.5% – a significant slowdown from the 2.6% growth recorded in the previous four quarters; 0.5% is the lowest annual growth rate recorded in the UK since the final quarter of 2009. In the last four quarters growth has been -0.5%, +0.4%, +0.1% and +0.5%.

Chart 1:

Real-GDP-growth-quarterly-percentage-change
But the quarterly pattern has been distorted by last December’s bad weather, the extra bank holiday in April and the effect of the Japanese tsunami on global supply lines. Our best guess is that the underlying growth picture over the last four quarters is 0.0%, -0.1%, +0.5%, +0.1%.

On economists’ now widely accepted definition that a recession is two consecutive quarters of negative growth, therefore, the UK has so far avoided a return to recession.

But it has been a very close run thing and growth has fallen well short of what the government hoped for when it argued a year ago that cuts in activity in the public sector would be more than offset by a surge in activity in the private sector.

One consequence of today’s data is the Office for Budget Responsibility (OBR) will have to make substantial cuts to its growth forecast for 2011 when it publishes new projections alongside the Autumn Statement on November 29th. The OBR has already cut its forecast from 2.3% at the time of last June’s budget, to 1.7% in March.

Its new forecast is likely to be about 1.0%.

The OBR will also be revising down its forecast for 2012 (currently 2.5%) because the outlook for the next few months remains grim. Household and business confidence – the best short-term indicators of economic activity – remain at very depressed levels. Just today the latest survey of purchasing managers showed the manufacturing sector contracted in October at its fastest pace since June 2009, when the UK was still in recession.

Meanwhile, the continuing crisis in the eurozone, which the OECD now expects to grow by just 0.3% in 2012, will be a drag on UK exports.

In the last few weeks, the prime minister and chancellor have been keen to blame all the UK’s economic woes on the developments in the eurozone.

The unfortunate reality is that we are only just beginning to see its effect here. The near stagnation of economic activity in the UK began in the fourth quarter of last year – well before the eurozone crisis reaching boiling point.

The slowdown in the UK is the result of a mix of domestic factors, particularly the chancellor’s tough fiscal stance (which has knocked confidence in the private sector about future levels of demand), and global factors such as higher oil and food prices.

In terms of employment, a recession now looks inevitable. The International Labour Organization warned yesterday the world economy was on the verge of a new and deeper jobs recession. In the latest three months (to August), employment in the UK was 178,000 lower than in the previous three months.

With the outlook for output growth deteriorating, it is hard to see how the UK can avoid falls in employment in the third and fourth quarters of this year – a jobs recession.

See also:

Fast spending cuts push UK economy from fastest growth for a decade towards zeroCormac Hollingsworth, November 1st 2011

Unprecedented growth of 1.3 per cent needed for OBR to meet its projectionWill Straw, October 31st 2011

Cameron’s “failed experiment” leads to yet another economic downgradeAlex Hern, October 17th 2011

MPs give voice to the “real human tragedies” behind today’s unemployment statsShamik Das, October 12th 2011

Forget Grayling’s excuses: Record joblessness is solely the fault of this governmentRichard Exell, October 12th 2011

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  • Mark Stevo

    Employment fell in 2009 as well, who’s fault was that?

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  • http://mrnonnymouse.blogspot.com/ nonny mouse

    >>0.5% is the lowest annual growth rate recorded in the UK since the final quarter of 2009.

    You are talking about the annual growth, not the latest quarter. The economy has been speeding up and grew 0.5% in one quarter. At an annual rate that is >2% per year.

    Is 0.5% quarterly growth bad? Historically, the average quarterly growth for the period 1967-2011 is 0.55%.

    >>The slowdown in the UK is the result of a mix of domestic factors, particularly the chancellor’s tough fiscal stance (which has knocked confidence in the private sector about future levels of demand), and global factors such as higher oil and food prices.

    Does cutting spending automaticaly lead to a collapse in growth? We keep on being told that we need a Plan B and more spending, not cuts.

    Lets look at the evidence. Chancellor Ken Clarke cut spending almost as fast as Osborne is planning to do. Chancellor Gordon Brown (pre 2007 credit crunch) pushed up spending. Neither had a true recession to deal with. Which had faster growth for their time as Chancellor?

    Clarke average growth per quarter 0.83%
    Brown average growth per quarter 0.73%

    So your Iron Chancellor could not managed to get growth as fast as he inherited from Clarke, and that ignores the damage done in the credit crunch and the big recession that followed.

    Spending slowed down growth by starving the private sector of management talent as well as money (through high taxation).

    Lets compare the two more recent chancellors:

    Darling average growth per quarter -0.29%
    Osborne average growth per quarter 0.28%

    Poor old Darling had to deal with Brown’s banking regulation mistakes. Osborne has to deal with Darlings spending mistakes and implosion of the Euro area.

    Osbourne’s figure is low, but chances are he has some good growth ahead of him before he leaves office. Darling will never get another try to repair his record.

    More here:

    http://mrnonnymouse.blogspot.com/2011/11/perspective-on-growth.html

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  • Leon Wolfson

    @ nonny mouse – Given we’re supposed to be recovering from a recession, below-average is a disaster.

    And your “evidence” shows what? That GDP is the holy grail of all? Great for your 1%!

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