This depression is the longest in modern history, so why is the economy still creating jobs?

With today's GDP figures confirming this is the longest depression in modern UK history, IPPR's Spencer Thompson asks why the economy is still creating jobs.

Graph 1: UK recoveries, comparing the 1974, 1981, 1992 and 2009 recessions

Spencer Thompson is an economic analyst at the Institute for Public Policy Research (IPPR)

After today’s GDP figures (pdf) for the final quarter of 2012 showed the economy contracted by 0.3 per cent, all the talk is once again of a triple-dip. Economists define a recession as a period of two or more consecutive quarters of falling GDP, so if GDP shrinks again in the first quarter of 2013, the economy will be experiencing its third recession in the space of five years.

This would be an extremely unusual development that would leave George Osborne with some explaining to do. His claims earlier this week the economy is on the right path already sound hollow – but that will be even more the case if he has presided over two recessions during his first three years as chancellor.

However, it is important not to get too carried away with the quarterly growth (or rather contraction) numbers, not least because they are frequently revised. More important are the longer term trends and these are truly depressing. Real GDP remains more than 3 per cent below its peak level, now five years in the past in the first quarter of 2008, and has not increased at all over the last year.

This is now by some way the slowest economic recovery in the last 60 years, as the graph below shows:

But, despite the UK’s abysmal economic performance, uncertainty abroad and the impotence of ‘Plan A’, our economy still appears to be creating jobs. Employment growth in the year to November 2012 was the fastest since 1989, with half a million more people in work.

How and why is this happening?

The Economist has put forth some suggestions in today’s issue, but I think there is another plausible explanation. Much of the GDP fall over the last year or so occurred in sectors like manufacturing, which contracted by -1.8%, and mining and quarrying, which fell by an astonishing 11%. These industries are enormously important to the UK economy, driving exports and investment, but relatively speaking they do not employ large numbers of people.

Mining and quarrying, for example, accounts for less than 1% of UK jobs.

This is in contrast to UK services, which have been holding up pretty well over the last year in terms of economic output. Retail, wholesale and hospitality managed 0.7% growth in 2012; business services and finance 1.3%. These sectors have also been creating jobs at a fair clip. Retail employed 70,000 more people in Q3 2012 than the same quarter a year earlier; hospitality 130,000.

So far so good. But the worrying implication of this is that were the service economy to begin contracting, it would start to seriously affect employment. One of the biggest business stories over the past month or so has been the succession of big name high-street brands that have gone into administration, starting with HMV.

On their own these businesses don’t account for enormous numbers of employees, but added together, and combined with the long-tail of smaller retailers who are finding it enormously difficult at the moment, the potential effect could be serious. If this is a reflection of the rest of the UK’s service economy, it could be catastrophic for employment.

This needs to be considered by policymakers: they cannot afford to be complacent when it comes to jobs. As long as employment is growing and unemployment is falling, some of the edge is taken off negative growth figures, including the ones published today – but we need to be alert to the very real possibility that in the coming months what is happening in the economy will start to be reflected in the labour market.

We need a plan in place for when that happens, starting with a jobs guarantee and increased capital spending, that is able to both minimise the long-term impact of a jobs crisis, and start to return the UK economy on a path of economic growth.

See also:

GDP down 0.3% – economy flatlines through 2012January 25th, 2013

  • LB

    But Berlin remains highly sceptical of the Tories’ tactics and is likely to fight hard against any attempt by Cameron to give Britain a major competitive advantage in the single market.

    Think it through. If the UK gets a advantage by getting out of parts of EU legislation, that legislation is making the EU uncompetitive. We live in a world bigger than the EU, and here’s the admission that the EU is causing damage.

    Merkel has it wrong. They should be looking at giving all EU countries an advantage, rather than causing damage.

    Just shows you what the EU and Governments get up to which is destroy jobs.

  • Ash

    “Much of the GDP fall over the last year or so occurred in sectors like manufacturing, which contracted by -1.8%, and mining and quarrying, which fell by an astonishing 11%… This is in contrast to UK services, which have been holding up pretty well over the last year in terms of economic output. Retail, wholesale and hospitality managed 0.7% growth in 2012; business services and finance 1.3%.”

    Two things strike me about this:

    1 – so much for ‘rebalancing’ the economy away from financial services and towards manufacturing.

    2 – if the financial services sector is more able to bounce back from the banking crisis than we thought, have we overestimated the size of the structural deficit? (Wasn’t the belief that there’s a large structural deficit based on the assumption that the financial services sector in particular had seen a permanent loss of capacity?)

  • Redshift1

    There are two other massive points:-

    1) The increase in part-time work, employing greater numbers of people but for less hours.
    2) People on aspects of the work programme not being included in unemployment figures.

  • Newsbot9

    No, because it is getting it from falling wages in the rest of the economy.

  • Newsbot9

    Nope, stop confusing your plans with the Governments.

    “Competition” which reduces GDP and lowers wages is bad. But you won’t admit that. You’re determined to do more damage, so your shares will go up slightly quicker!

  • Roy Boffy

    One other issue is how far these additional jobs are subsidised by the State via Working Tax Credit – which they likely are if they are minimum wage and/ or part-time. It would be truly, and deliciously, ironic if the increase in employment was concurrently increasing the deficit!

  • Ash

    For that to happen, though, the amount newly employed workers were receiving in Tax Credits would have to exceed the amount they had been receiving in out-of-work benefits *plus* the amount of extra revenue they were paying to the government through all forms of taxation (direct and indirect) *plus* the amount of extra revenue generated by knock-on effects of their employment such as their employer making more money, them spending more in local shops, etc. So it’s not a very likely scenario.

  • Newsbot9

    They’re still generating a fraction of the revenue for the government. That is, someone working 0.5 time is generating perhaps 0.2 of the revenue of a full job. Maybe.

  • David Lindsay

    All aboard the Triple Dip. Whereas there was no recession at all in the United Kingdom on the day of the 2010 General Election. The IMF is knocking at the door of the worst Chancellor ever. Ever, ever, ever.

    But hope is at hand. Ed Balls on The World at One sounded like Peter Shore, joining with the unions to exhort the listeners to “Buy British”.

    If there were a conservative, Tory party, then it would be saying the same thing. Perhaps there is? There is certainly a party for which conservative, Tory people can, should, and in huge numbers increasingly do vote.

    One Nation, indeed.

  • LabanTall

    Zero hour contracts. Several hundred thousand people now on them, McDonalds workers, supermarket staff, care workers, factory hands.

    People on them are “employed” even if they only do 3 hours a week.