Despite policy interventions in the form of fiscal stimulus, the injection of massive amounts of capital into banks, the lowest official interest rates on record and quantitative easing amounting to £175 billion, the UK economy remained in recession in the third quarter of the year. The credit crunch continues to have a massive negative impact on economic activity in the private sector but the recession would be much worse were it not for these interventions. Until there are signs the economy is recovering, it would be foolish in the extreme to remove any of them.
Unemployment has risen to its highest level in over 14 years as companies continue to shed jobs. Given the depth of the recession, the fall in employment has been surprisingly moderate so far, reflecting the increased flexibility of the UK labour market and measures taken by the Government to help create jobs. However, there are parts of the country, particularly in the West Midlands and Yorkshire and the Humber, where unemployment was relatively high before the recession began and it has risen by more than the average over the last 18 months. More help will be needed to ensure these areas do not get left behind when the economy starts to recover.
- The UK economy remains in recession. Real GDP contracted by 0.4 per cent in the third quarter of 2009 and was 5.9 per cent below its 2008Q1 peak. GDP has now fallen for six consecutive quarters – the longest decline since quarterly records began in 1955. The 0.4 per cent fall was, however, the smallest since the 0.1 per cent drop in the second quarter of 2008.
- Households are saving more. The economy is so weak because the private sector is spending less and saving more. In part, this is because the credit crunch has restricted the supply of credit, but households and companies are also choosing to reduce their debts and cut back on borrowing. This is most apparent in the sharp increase in the household saving rate from -0.5 per cent in the first quarter of 2008 to 5.6 per cent in the second quarter of 2009.
- Job losses continue but at a reduced pace. The number of unemployed people in the UK increased by 88,000 over the quarter to the three months ending in August. Unemployment now stands at 2.47 million and is up 867,000 from its recent low, in the final quarter of 2007. However, the 88,000 increase was the smallest in 13 months. The number of people claiming Jobseekers’ Allowance has also been increasing less rapidly in recent months.
- Unemployment is hitting deprived areas the hardest. The largest increases in unemployment since the recession began have tended to be in those areas where unemployment was already relatively high. The majority of these areas are found in the West Midlands and Yorkshire and the Humber and include Walsall, Wolverhampton, Dudley and Sandwell in the former and Kingston upon Hull, Barnsley, Doncaster and Rotherham in the latter.
- More people are working part-time. Total employment in the UK fell by 1.6 per cent over the last year. Full-time employment was down by 2.6 per cent, while part-time employment (less than 30 hours a week) increased by 1.3 per cent (and self-employed part-time working was up 5.6 per cent). It is likely that much of this shift to part-time working is involuntary.
- Manufacturing is being hit the hardest. Although the recession has its roots in the activities of the financial sector, manufacturing has been hit the hardest. Job losses have been concentrated in three broad sectors of the economy: manufacturing (269,000 jobs lost since March 2008, representing a decline of 8.5 per cent), finance and business services (260,000, 3.9 per cent) and distribution, hotels and restaurants (237,000, 3.4 per cent). Meanwhile the number of jobs in education, health and public administration has increased by 216,000 (2.7 per cent), helping to dampen the effects of the recession.
- Activity in manufacturing is stabilising. Manufacturing output increased by 1.7 per cent in September – the largest one month gain since July 2002 – although this follows a 2.0 per cent contraction in August. It is hard to draw any firm conclusions when the data are so erratic, but it is reasonable to say that output in the sector has been broadly flat since January. Data for individual sectors are even more erratic but the most significant rise in output comparing the third quarter with the second was the 3.1 per cent rise in the output of the transport equipment industries, where activity will have been boosted by the Government’s car scrappage scheme.
- Earnings are only increasing slowly. Average earnings were up 1.6 per cent over the year to August (and by 1.9 per cent if bonuses are excluded). In the private sector, earnings increased by 1.2 per cent; in the public sector by 3.2 per cent.
- Inflation is subdued. Retail prices fell by 1.4 per cent over the year to September, reflecting large falls in mortgage interest payments and energy bills (though the latter have not fallen as far as might have been expected given the drop in wholesale gas prices). Consumer prices, which are targeted by the Monetary Policy Committee, rose by just 1.1 per cent over the same period. Inflation on both measures is likely to increase over the next few months as falls in prices in the final quarter of 2008 drop out of the calculation.
- The public sector’s fiscal deficit has soared. Public sector net borrowing was £77 billion in the first half of the 2009/10 fiscal year and is on track for the Budget 2009 forecast of £175 billion (12½ per cent of GDP) for the full year. The deficit has widened because the recession has resulted in increased spending and reduced revenues and because the Government has taken discretionary measures, such as cutting the main rate of VAT to 15 per cent, to limit the extent of the decline in output. If the deficit had not been allowed to widen so much, the recession would have been much deeper.
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