There has been no growth in the UK economy over the last five quarters. Real GDP in the final quarter of 2011 was at the same level as in the third quarter of 2010.
Although throughout this period the economy has avoided a recession (in the sense of experiencing two consecutive quarters of declining real GDP), this is only due to the bad weather of December 2010.
Adjusting for its effects on economic activity shows underlying output did in fact decline in the first two quarters of 2011.
There are further distortions ahead – to be caused by the extra bank holiday for the Queen’s Jubilee and the Olympics – but looking through these economists expect only a modest improvement throughout 2012.
By the fourth quarter, the Office for Budget Responsibility (OBR) predicts annual growth will have increased to just 1.2 per cent.
Even with a pick-up in growth during 2013, it will not be until the first quarter of 2014 that real GDP will, according to the OBR, return to its previous peak level. As that was reached in Q1 2008, by then the economy will not have grown in six years.
Here is a scorecard of different economic indicators over recent months:
The UK economy is lagging behind the other G7 economies, bar Italy. In the United States, Germany and Canada, output has already exceeded the peak level experienced in early 2008, just before the global recession; and in France, output is back at its peak level.
In Japan, output is down 4 per cent from its previous peak, but is expected to grow rapidly over the next two quarters. Only in Italy has the experience of the last four years been worse than in the UK.
See Figure 1:
Adam Posen, one of the external members of the Bank of England’s Monetary Policy Committee, has looked into the reasons for the UK’s underperformance relative to the US economy. His conclusion is that one of the main reasons for the gap is the pace of fiscal consolidation.
In the US, where there has been very little by way of tax increases or public spending cuts, consumer spending has grown at a healthy pace and this has supported investment spending.
In contrast, in the UK, the more aggressive fiscal tightening has led to weak consumer spending, which in turn has affected business confidence.
• Economic Update – February 2012: Double dipped 7 Feb 2012
• Economic update – January 2012: Outlook not all bad 9 Jan 2012
• Economic Update – November 2011 11 Nov 2011
When it came to power, the coalition argued it had no choice but to increase taxes and make substantial cuts in public spending to eliminate the fiscal deficit over the course of four years (a timetable that was extended last autumn to six years). It also argued private sector activity would expand to fill the gap left by the public sector.
The first proposition is still open to debate – and without a counterfactual we will never know for sure whether the government was right or not. But the second proposition has been shown to be false. The economic recovery in the UK has been hugely disappointing since the coalition took office.
Rather than stimulate activity in the private sector, austerity in the public sector has made it less willing to invest and recruit. Fiscal tightening has been bad for growth.
GDP declined by 0.3% in the fourth quarter:
Revised figures show real GDP shrank by 0.3% in the final quarter of 2011 (revised down from a provisional drop of 0.2%). Consumer spending increased for the first time in five quarters (thanks to lower inflation pressures) but companies did far less stock building.
Over the last five quarters, since the government announced its tough public spending plans, there has been no growth in the UK economy. Real household disposable incomes (RHDI) fell by 0.2% in the final quarter of 2011 and have now fallen in four of the last five quarters.
In 2011 as a whole RHDI was down 1.2% – the biggest annual decline for 35 years. The savings rate has stabilised over the last three quarters at just under 8%. Although saving can be volatile from quarter to quarter, it is likely that swings in disposable income will be the most important determinant of consumer spending in the couple of years.
Stronger consumer spending will, therefore, require a pick-up in employment and earnings growth and a fall in price inflation.
See Figure 2:
Employment is increasing – but at a disappointing pace:
Employment in the latest three months, to January 2012, was 9,000 higher than in the previous three months but 44,000 lower than a year earlier. The coalition hoped that rapid growth in employment in the private sector would comfortably offset its cuts in jobs in the public sector.
But the latest figures show the increase in private sector employment over the last quarter, at 45,000, only just outstripped the fall of 37,000 in employment in the public sector. And over the last year, the rise in private sector employment, at 226,000, was well below the fall in public sector employment of 270,000.
Unemployment is at a 17-year high:
On the Labour Force Survey (LFS) measure, unemployment is now 2.67 million, or 8.4% of the labour force. The rate of unemployment has not been higher since 1995. Over the last quarter unemployment increased by 28,000 – less than in recent months.
The claimant count measure has gone up for 12 consecutive months and in February it increased by 7,200 to 1,611,900.
Retail sales volumes fall but trend is better:
The volume of retail sales fell by 0.8% in February but sales were up 0.7% in the latest three months compared to the previous three; and by 1.7% over the last year.
Assuming the latest month’s number is just the result of volatility in the data, it appears lower inflation pressures have eased the squeeze on households’ spending power and brought an up-tick in demand on the High Street.
Consumer confidence falls again:
Consumer confidence fell in February to a three-month low. The details of the survey suggest people have become more worried about the outlook for their own personal financial situation – perhaps as a result of record petrol and diesel prices.
Manufacturing output remains flat:
Manufacturing output was up 0.1% in January. It was also up 0.1% comparing the latest three months with the previous three and with the same three months a year earlier. It is therefore reasonably safe to say the underlying trend in manufacturing is flat, as it was for most of 2011.
Business survey confidence was higher in March:
The CIPS purchasing managers’ survey shows confidence in the manufacturing sector was at its highest level for ten months in March as domestic and overseas orders increased. Confidence in the service sector also increased, as it did in the construction sector.
Taking the evidence of all three surveys over the last three months together suggests the economy grew by around 0.3% in the first quarter, and that momentum at the end of the quarter was rather stronger (perhaps consistent with quarterly growth of around 0.5%).
Price inflation eased to 3.4%:
Consumer price inflation fell back from 3.6% in January to 3.4% in February (and from 3.9% to 3.7% on the retail price measure). Last year’s increases in energy prices are beginning to drop out of the annual inflation calculation – but the drop in inflation was not as large as forecasters expected.
The Bank of England forecasts consumer price inflation will be close to its 2% target rate by the end of the year but it may have to rethink if inflation continues to disappoint, particularly if the oil price remains near its record high. Measures announced in the budget will add 0.2% to inflation from April.
Earnings inflation is below 2%:
Average earnings increased by just 1.4% in the year to the three months ending in January and regular earnings were only up 1.7% over the same period. Earnings growth dropped across all sectors. However, the fall may prove temporary.
Latest figures from Income Data Services, which monitors pay deals in the UK, show the typical pay increase in the three months to February was 3 per cent – up from the 2.5 per cent level that prevailed during much of 2011.
See Figure 3:
Export growth has slowed:
Export volumes (excluding oil and erratic items) were up 3% in the year to the three months ending in January.
Exports to Europe fell by 2%, with the weakness concentrated in recent months, suggesting the eurozone crisis is now having an effect on the UK economy; exports to the rest of the world were up a healthy 8%.
Government borrowing higher in February:
Public sector net borrowing (excluding financial interventions) was £15.2 billion in February and £110.0 billion in the first 11 months of the 2011/12 fiscal year. After a few months of borrowing coming in less than expected, February’s figure was much higher than widely forecast.
As a result, borrowing for the whole year is set to come in around £125 to £130 billion. This would be lower than in 2010/11 (£137 billion). The OBR’s latest forecast, published with the budget, is for borrowing of £126 billion.
Interest rates remain at 0.5%; QE at £325 billion:
The Monetary Policy Committee left interest rates at 0.5% in March and the scale of quantitative easing at £325 billion.
Financial markets quiet:
The UK equity market ended the month a little lower, having apparently run out of steam after two months of good gains. The 10-year UK government bond yield increased to around 2.5% in the middle of the month but then fell back to 2.25%, roughly where it had started the month. And sterling was little changed against the US dollar or the euro.