Tony Dolphin, of the Institute for Public Policy Research (ippr), looks at the state of the economy as we enter the new year.
Real GDP in the UK increased by 0.7 per cent in the third quarter of 2010, down from 1.1 per cent growth in the previous quarter. Meanwhile, the surge in employment that occurred over the summer months came to an end and employment is now contracting and unemployment increasing.
The manufacturing sector is powering ahead, boosted by strong overseas demand, but the prospects for the service sector are deteriorating due to weaker consumer demand and cuts in public spending.
Here is a scorecard of different economic indicators over recent months:
Down 33,000 in last three months – bigger fall in full-time working – record number of involuntary part-time workers
|Unemployment||(Aug-Oct)||Up 35,000 in last three months – small falls in claimant count in Oct and Nov|
|Real GDP||(Q3)||0.7% growth in Q3 – weaker than in Q2 but still better than expected at the start of year and a little above trend|
|Manufacturing output||(Oct)||Up 5.8% over last year and in each of last six months – though still 10% below peak in Jan/Feb 2008|
|Exports||(Oct)||Volumes up more than 10% over the last year (though imports increasing at similar pace)|
|Retail sales||(Nov)||Up just 0.5% over last year and 0.2% over last quarter|
|Consumer confidence||(Dec)||Falling – at lowest level since March 2009 according to Nationwide; GfK/NOP survey also weak|
|Manufacturing confidence||(Dec)||CBI and CIPS surveys point to continued strong growth – led by export demand and optimism on employment|
|Services confidence||(Dec)||Weakening on fears about slower consumer demand growth and public spending cuts – above levels consistent with double dip|
|Consumer price inflation||(Nov)||3.3% – more than 1 percentage point above target level and expected to go higher in 2011 – makes more QE harder to justify|
|Average earnings growth||(Oct)||Stuck around 2% – implies falling real earnings wage freeze in public sector|
|Public sector net borrowing||(Nov)||On track to overshoot official forecast after unexpectedly large deficit in November|
|Bond yields||(Dec)||Up significantly from October lows but still at historically low levels|
Strong, improving, positive for growth
Moderate, little changed
Weak, deteriorating, potentially negative for growth
There are signs that the UK is developing a two-speed economy.
The latest data on exports and output show the manufacturing sector is expanding at a rapid pace and business surveys suggest this rapid growth will be maintained in the early months of 2011. But developments in the service sector are less positive; here, growth has weakened since the summer months and the outlook is uncertain.
Consumer confidence has already declined and an increase in the main rate of VAT to 20 per cent, higher national insurance contributions, public spending cuts, modest wage increases and a weaker housing market all make any rebound in 2011 appear unlikely.
1. GDP growth boosted by construction and manufacturing: The final release of GDP data for the third quarter shows that the economy grew by 0.7% from the previous quarter. Growth was led by the construction and manufacturing sectors, where output increased by 3.9% and 1.1% respectively. Services output was up 0.5% – but output in the business services and finance sectors was unchanged. When analysed by expenditure, the main sources of growth were investment spending and the rebuilding of inventories.
2. Households are saving more: The household saving rate increased from 3.5% to 5.0% in the third quarter. This is still some way below its long-run average level but above the levels seen in the years prior to the financial collapse in 2008. See Figure 1.
3. Retail sales remain weak: The volume of retail sales increased by just 0.2% taking the latest three months (to November) and comparing them to the previous three months, while they were up only 0.5% over their level in the same three months of 2009. Sales are being held back by reduced spending power (because wages are failing to keep up with price inflation) and increased caution, as reflected in the rise in the saving ratio.
4. Manufacturing output still strong: Manufacturing output increased by 0.5% in October and was 5.8% higher than a year earlier. The underlying trend is strong and various surveys of confidence in the sector suggest output will continue to expand at a rapid pace in the first quarter of 2011 – led mainly by demand from overseas.
5. Employment growth falters: Following several months of large increases, employment dropped by 33,000 over the three months to August–October 2010. Employment in the public sector fell and the private sector failed to create any jobs to offset this decline. Meanwhile, full-time employment is contracting more rapidly and the number of people working part-time because they cannot find full-time work is at its highest level since records began.
6. Little change in unemployment: The Labour Force Survey (LFS) shows a 35,000 increase in unemployment between May–July and August-October, lifting the total number looking for work above 2.5 million. The unemployment rate is now 7.9% of the workforce. However, the claimant count measure of unemployment fell by 1,200 in November, having fallen by 5,200 in October. See Figure 2.
7. Price inflation edged higher in November: Consumer price inflation edged up to 3.3% in November, from 3.2% a month earlier. There were record increases, for the month of November, in food prices and in clothing and footwear prices. These will hit low-income families, who spend proportionately more of their disposable income on such essentials, particularly hard. Some forecasters now believe inflation will reach 4% in the first half of 2011.
8. Wages fail to keep up with prices: Average earnings – both total pay and regular pay – are increasing at an annual rate just above 2 per cent. Wage inflation improved a little in the private sector during 2010, but fell in the public sector. Over the last two years, wages have failed to keep up with prices. This squeezes households’ spending power and helps to explain the recent weakness in retail sales.
9. Government borrowing is turning out higher than expected: Public sector net borrowing (excluding the temporary effects of financial interventions) was £23.3 billion in November – well above expectations and its level in November 2009. In the first eight months of the 2010/11 fiscal year, borrowing has totalled £104.4 billion, little different from the £105.1 billion borrowed in the same period of 2009/10. The Office for Budget Responsibility forecasts borrowing in 2010/11 will be £148.5 billion, compared to £156.3 billion in 2009/10. See Figure 3.
10. Interest rates remain at 0.5%; QE at £200 billion: The Monetary Policy Committee left interest rates at 0.5% and the amount of quantitative easing at £200 billion in December. One member voted to increase the Bank rate from 0.5% to 0.75%, but another voted to increase QE by a further £50 billion.
11. Government bond yields increase: Bond yields increased further in December and the 10-year yield ended the year at 3.65% – up from a low of 2.94% in early October. This was mainly a reflection of a trend to higher yields in other major economies, including the United States and Germany.
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