Economic update – May 2011

The ippr's senior economist Tony Dolphin looks at the key economic indicators and reviews the state of the UK economy in his latest economic update for Left Foot Forward.

On the standard definition of two consecutive quarters of declining real GDP, the UK economy has just come as close as it is possible to come to a recession without actually being in one.

Once the effects of last December’s appalling weather are taken into account, real GDP was unchanged in the final quarter of 2010 and unchanged again in the first quarter of 2011. Manufacturing output continues to grow at a healthy pace but higher food and petrol prices and worries about tax increases and public spending cuts are taking their toll on household confidence. As a result, the trend in retail sales volumes has been flat for the last eight months.

Here is a scorecard of different economic indicators over recent months:


Indicator

Latest

Comment

Employment

(Dec-Feb)

Up 143,000 in last three months; reflects big increase in number of full-time employees, record number of part-time workers wanting to be full-time
Unemployment (Dec-Feb) Down 17,000 in last three months to 2.48 million – essentially stuck at around 2½ million; rate at 7.8%, little change in claimant count in March
Real GDP (Q1) 0.5% increase in Q1 (no change for second consecutive quarter excluding snow effects); construction very weak, manufacturing strong
Manufacturing output (Feb) Up 4.9% over last year, though unchanged compared to January – most sub-sectors strong
Exports (Feb) Volumes booming – up 16% over the last year, imports up 9%; strong sales to EU and to non-EU
Retail sales (Mar) Volume up only 1.3% over last year and essentially flat since July – value up 4.5% over last year; high food and petrol prices hitting volume growth
Consumer confidence (Apr) Dropped to levels only seen previously in recessions – fears about own personal financial situation high
Manufacturing confidence (Apr) Output expectations and orders weaker in latest surveys but overall still at high level
Services confidence (Mar) Surprise jump in March to level consistent with stronger growth in sector
Consumer price inflation (Mar) Fell to 4.0% (RPI 5.3%) – expected to go higher in next few months; three MPC members voting for a rate hike
Average earnings growth (Feb) Stuck close to 2%; real earnings falling – wage freeze in much of public sector
Public sector net borrowing (Mar) Lower than expected for March and for full year (£141.1bn versus OBR forecast of £145.9bn)
Bond yields (Apr) Stuck in a range from 3.5 to 4.0% – a historically low level

Key:

Strong, improving, positive for growth

Moderate, little changed

Weak, deteriorating, potentially negative for growth

The chancellor has said he will not be deflected from the fiscal retrenchment path he set out last year, despite the news that the economy did not grow at all in the final quarter of 2010 or in the first quarter of 2011 (after allowing for the effects of December’s bad weather).

All the talk of austerity, combined with higher food and petrol prices, seems to have severely dented consumer confidence. As a result, retail spending has not increased in volume terms for the last eight months. Construction output has also collapsed.

The manufacturing sector continues to do much better – helped by exceptionally strong export demand – though even here the latest surveys suggest output expectations and orders are a little weaker. The latest data releases make the dilemma facing the Monetary Policy Committee (MPC) even more acute. Inflation, at 4.0%, is well above its target rate and expected to increase further in coming months. For three members of the committee, this is enough to make them want to increase interest rates now. But a majority appear to be giving more weight to the signs of weak economic activity.

Financial markets now think the first rate hike will be in August at the earliest.

1. GDP was unchanged over the last two quarters: Preliminary figures show real GDP increased by 0.5% in the first quarter of 2011, reversing the 0.5% fall in the final quarter of 2010. After taking out the effects of the bad weather in December, real GDP was unchanged in both quarters. Over the last two quarters construction output fell 6.9%, service output was up 0.3% and production output rose 1.1%. See Figure 1.

Real-GDP-growth-05-11
2. Retail sales volumes are flat: The volume of retail sales increased by 0.2% in March and was only 1.3% higher than in March 2010. After allowing for the normal monthly fluctuations, sales volumes have been flat for the last eight months, since July 2010. Things could have been even worse.

The value of sales is up 4.5% over the last year – well above income growth. Households must be cutting other spending or borrowing more and saving less to increase spending at this rate. Anecdotal evidence from major stores on the High Street suggests April could have been another poor month for sales. See Figure 2.

Retail-sales-volumes-05-11
3. Consumer confidence has collapsed: Consumer confidence fell sharply in April and is now at a level only previously seen during the last 37 years in the recession of the early 2000s and in mid-2008. The biggest falls were in people’s confidence about their own personal finances, but optimism about the general economic situation has also deteriorated. This drop in confidence is almost certainly the result of inflation running ahead of wage increases, combined with general worries about the effect of the government’s spending and tax policies.

The idea that greater clarity about the fiscal situation would boost confidence – which always seemed fanciful – has been comprehensively disproved.

4. Manufacturing output still strong: Manufacturing output was unchanged in February, but growth over the last year was 4.9%. The sector remains partially insulated from developments in the UK by strong overseas demand, but there are signs in the very latest surveys to suggest that weakening domestic demand could be resulting in a slight drop in orders and in output expectations.

5. Employment increasing: Employment increased by 143,000 over the three months to December-February 2011 – a slightly puzzling outturn give that output has been essentially flat. The number of full-time employees increased by 198,000, but part-time working fell by 58,000. There are still 1.17 million people who say they are working part-time because they cannot obtain full-time work.

6. Unemployment declining: The Labour Force Survey (LFS) shows a 17,000 decrease in unemployment between September-November and December-February. The total number looking for work is now 2.48 million. Youth unemployment (up to age 24) is now 963,000, which equates to an unemployment rate of more than a fifth. And long-term unemployment (12 months and over) is 847,000. Meanwhile, the less comprehensive claimant count measure of unemployment increased by 700 between February and March.

7. Surprise fall in price inflation: With most commentators expecting an increase, consumer price inflation fell to 4.0% in March, from 4.4% a month earlier. This was mainly the result of lower food prices (though food price inflation remains high on an annual basis). Petrol prices are still one of the principal causes of high inflation. Most forecasters expect inflation to increase in the next few months – perhaps to a peak of around 5%.

8. Wages fail to keep up with prices: Average earnings – both total pay and regular pay – are increasing at an annual rate well below the rate of price inflation. This is squeezing households’ spending power – the worst such squeeze since the 1920s according to Mervyn King. Over the last year, regular pay is up 2.2% and total pay 2.0%..

9. Government borrowing fell short of forecast level: Public sector net borrowing (excluding financial interventions) was £18.6 billion in March 2011, below expectations. The first estimate of borrowing for the whole of the 2010/11 fiscal year totalled £141.1 billion, down from the £156.5 billion borrowed in 2009/10. The OBR had forecast that borrowing would be £145.9 billion in 2010/11, falling to £122 billion in 2011/12. See Figure 3.

Public-sector-net-borrowing-05-11
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 April. One member – Andrew Sentance – called for an immediate increase in the Bank Rate from 0.5% to 1%; two – Martin Weale and Spencer Dale – voted for an increase to 0.75%; five voted for no change; and one – Adam Posen – wanted to increase QE by a further £50 billion.

11. Government bond yields little changed: The 10-year government bond yield rose in the first half of April before falling back again to end the month close to the middle of the 3.5 to 4.0% range within which it has moved for most of 2011. Short-term yields on index-linked bonds remain negative – meaning investors accept they will receive a return below inflation.

12. Sterling little changed in April: Sterling’s value against a basket of overseas currencies was little changed in April. It was up against the US dollar, but fell a little relative to the euro.

13. Oil price reaches new highs: The Brent crude oil price increased by a further 5% in US dollar terms during April. Although the oil price has not yet reached its previous peak in US dollars, in sterling terms it has never been higher.

12 Responses to “Economic update – May 2011”

  1. Shlomo Pines

    RT @leftfootfwd: Economic update – May 2011: //bit.ly/jglL9Z by @ippr's Tony Dolphin

  2. Anon E Mouse

    Why isn’t unemployment falling a Green Arrow?

  3. Robert

    The manufacturing sector continues to do much better

    So what was that in the media yesterday about a down turn, and a big one at that.

  4. Ash

    Two related questions I would love to see answered by an economist:

    1 – if borrowing is lower than expected *even through growth has also been lower than expected* – and spending cuts/tax rises no higher than expected – doesn’t that suggest that the structural deficit is lower than we’ve been assuming? (Presumably estimates of the size of the structural deficit are based on assumptions about the amount of deficit reduction we can expect to see for every 1% of growth – and it looks as if we can expect more than we thought, doesn’t it? Which presumably means the scale of cuts and/or tax rises necessary to close the deficit may have been exaggerated.)

    2 – the structural deficit is supposed to be there largely because the economy pre-financial crisis was so reliant on a sector that suffered irreparable damage as a result of that crisis – financial services. (I think?) But isn’t it now starting to look as if manufacturing is more able to fill that vacuum than we’d previously thought – meaning the economy has more capacity to make up for lost ground than we thought, and hence that a higher proportion of the deficit is cyclical than we thought?

    …point being, this seems to suggest that the need for spending cuts has been exaggerated; we could close the deficit further and faster than we thought just by focusing on growth.

  5. Tom White

    Why don’t you read before posting, Anon E Troll?

  6. Anon E Mouse

    Tom Shite – Er: “Down 17,000 in last three months” isn’t good???

    The Labour champagne socialists should really start welcoming good news. These are really people’s jobs Tom not just some statistic on a spread sheet…

    (Because as he explains later the stats are “less comprehensive” in point 6)

  7. Tom White

    Lol – stop pretending you actually care. It states the facts perfectly reasonably – you’re the one moaning about one arrow, idiot…

    And wtf are you doing on a Left blog all day long anyway? Trolling, trolling, trolling…

  8. Alan L

    Surely GDP rising is an up arrow. If you are consistently measuring over a rolling 6 month window, then it is flat (and last quarter should thus have had an up arrow).

  9. Anon E Mouse

    Tom Shite – Since I’ve voted Labour my whole life until Blair was ditched I have every right to comment here. Being called a troll from a man like yourself who voted for Gordon Brown is really not an insult.

    Please read point 6. Labour is losing every debate they engage in. The coalition hasn’t come to an end. There hasn’t been a “Double Dip Recession”. Labour’s lead in the polls is a disaster. Miliband is less popular than Nick Clegg and Cameron and the activists here remain in La La Land.

    And will be there until they get a grip and posting the usual negative articles, especially when they run down positive aspects in the country will cost them big time.

    Does no one have a single positive thing to say about Labour on this blog?

  10. Tony

    The up, sideways and down arrows are my subjective take on whether the indicator suggests the economy is growing at a healthy pace or not. Real GDP is a down arrow because, excluding the snow effect, it was unchanged in 2010Q4 and 2011Q1. Retail sales is also a down arrow because although volumes are up 1.3% over the last year, that is less than is consistent with trend output growth and there has been no growth in the last 8 months. And unemployment is a sideways arrow because, while it is good news that it suggests there are 17,000 fewer unemployed people (and importantly the other data suggest they have gone into employment not left the labour force), it is based on a survey and 17,000 is well within the margin of error. Looking at the last few months, unemployment has been close to, but generally just under 2.5 million. When it shows a downward trend or falls by larger amounts, then it will get a down arrow.

  11. Anon E Mouse

    Tony – On the unemployment instead of just telling the truth with your arrows you are deliberately twisting things to suit your case. As for the sample being within the margin of error is that how it was measured under Labour or not?

    Define “just under” because if it has fallen by 17k and that is how it was always measured, the the remark is meaningless and smacks of tribal and petty sour grapes.

    As for Retail Sales either they are up or not. If you are not prepared to qualify the fact you are setting certain “standards” to indicate an improvement means this article is just a vanity exercise and has no factual basis which kind of makes it pointless…

  12. Tony

    Anon – There would be little point in having my assessment if we just judged the data on whether the latest reading was positive or negative. Anyone can see that for themselves. I try to look at the latest number in the context of what went before to see if there is a positive or negative trends, taking into account the known volatility of the series. I also set a higher standard than just any positive number getting an up arrow since, for example, I would not regard a 0.1% increase in GDP as positive.
    Here are the last 6 unemployment readings – 2448, 2502, 2498, 2492, 2529, 2480. The fact that the latest number is lower than the previous four is a positive but would you bet that a downward trend is yet established given the way the numbers bounce around from month to month? Was 2529 an anomoly, or was 2480? I don’t know – hence the sideways arrow.
    Similarly, although retail sales are up over the last year, all that increase occured in the first four months; sales have been flat for the last eight months. That is negative because sales should normally be increasing.
    Before you accuse me of ‘tribal and petty sour grapes’ you should also note that manufacturing output was flat on the latest reading and the most recent surveys have drawn negative headlines in the media because they show confidence has fallen. But I marked both output and manufacturing confidence as positive because output has been strong over the last year and I do not want to give too much weight to one month’s data and because the level of confidence, while lower, is still in my judgement consistent with strong growth in the sector. If output does not increase in the next two months or if confidence continues to fall, then I’ll make a change, but not before. If I was twisting things to suit a particular case, wouldn’t I have marked output with a sideways arrow and confidence with a down one already?
    Economics is not a science. All economic commentaries require judgements. At times you may not agree with mine and that is fair enough. But don’t think I make them to back up some supposed ‘case’; I don’t.

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