Left Foot Forward's monthly economic update shows a recovery might be under way. Unemployment is slowing and manufacturing activity rebounded strongly.
Although official figures show the economy was still in recession in the third quarter of 2009, the latest monthly economic releases suggest a recovery might be under way. In particular, unemployment is increasing less rapidly than it was (and on one measure it appears to have stabilised) and manufacturing activity rebounded strongly in September, albeit after a sharp fall in August. Even so, the Monetary Policy Committee (MPC) is still worried enough about the outlook to have increased the size of its ‘quantitative easing’ policy (crudely the amount of liquidity it is pumping into the economy) from £175bn to £200bn.
The downbeat outlook for the economy is also reflected in economists’ forecasts. The consensus view of 24 economists, whose views were collected in November by HM Treasury, is that the economy will grow by just 1.1 per cent in 2010 and then by 2.0 per cent in 2011. Both these growth rates are below the economy’s presumed trend rate of growth of 2.5 per cent. It is hardy surprising, therefore, that the MPC is prepared to increase monetary policy support for the economy – or that the Government is being cautious about the pace at which it withdraws fiscal support (as we shall probably see when the Pre-Budget report is released on 9th December).
- The UK economy remains in recession. Real GDP contracted by 0.3 per cent in the third quarter of 2009 and was 5.8 per cent below its 2008Q1 peak. GDP has now fallen for six consecutive quarters – the longest decline since quarterly records began in 1955. The 0.3 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.
- Unemployment may be stabilising. The number of unemployed people in the UK, according to the Labour Force Survey, was 2.61 million in August, compared to 2.65 million in July and 2.70 million in June. The Office for National Statistics is wary about using monthly numbers (it prefers three-month averages) but it appears from these figures that unemployment in the UK might be stabilising. The alternative measure of unemployment – based on the number of people claiming Jobseekers’ Allowance – is still increasing, but less rapidly in recent months. It was up by 18,800 in October, the smallest increase since June last year.
- More people are working part-time. The level of employment has also stabilised in the last three months. The fall in employment over the last 18 months has been significantly less than feared by many economists, despite the depth of the recession. However, the number of people in full-time employment is still falling (although much less rapidly than earlier in the year), while part-time employment (less than 30 hours a week) is increasing. These trends could be interpreted as a benefit resulting from having a more flexible labour force. But, while it might be better to be in part-time employment than to have no job at all, much of the shift to part-time working is involuntary and many people in part-time work say they would prefer to have full-time jobs.
- Activity in manufacturing is stabilising. As the chart below shows, 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 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 increasing very slowly. Average earnings were up just 1.2 per cent over the year to September (and by 1.8 per cent if bonuses are excluded). These are the lowest increases on record. The Bank of England estimates that average earnings growth of about 4.5 per cent is consistent with the (price) inflation target of 2 per cent, so domestic inflation worries appear to be minimal. See below.
- Inflation has started to increase. As the chart below shows, the consumer price inflation, which is targeted by the Monetary Policy Committee, was 1.5 per cent in October – up from 1.1 per cent in September. Retail price inflation increased to -0.8 per cent, from -1.4 per cent. Inflation is increasing now largely because large falls in energy bills (and for retail price inflation mortgage interest payments) from a year ago are dropping out of the calculation. With domestic inflation pressures muted, any inflation concerns are likely to be the result of imported inflation due to the decline in sterling over the last two years and the recent increases in global commodity prices.
- The public sector’s fiscal deficit has soared. Public sector net borrowing was £87 billion in the first seven months of the 2009/10 fiscal year and is on track to equal or exceed 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 public 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.
- The Bank of England released it latest ‘Inflation Report‘. In it the Bank said, “the substantial stimulus from the past easing in monetary and fiscal policy and the depreciation of sterling should lead to a slow recovery in the level of economic activity.” The implication is that the negative shock to the economy was so great that all policy levers had to be pulled hard, just to generate a ‘slow recovery’ – and if policy had not been eased so much, even a slow recovery might not yet be in prospect.