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.
The Economist said recently that “[the government] spending less when households are in no shape to pick up the slack seems a sure fire way to keep an anaemic recovery off-colour…” This was in the context of the US economy, but there is a 100 per cent read across to the UK economy.
Worries about higher taxes, increases in food and petrol prices and a reluctance to take on more debt mean that UK household spending stopped growing even before cuts in public spending started to bite in April. Now that government spending is being cut, in real terms, confidence in manufacturing and service industries has fallen sharply. The economy was flat between the third quarter of 2010 and the first quarter of 2011 and the signs are that the recovery will remain ‘anaemic’ throughout the rest of the year.
Here is a scorecard of different economic indicators over recent months:
Up 118,000 in last three months – big increase in number of full-time employees; part-time working looks to have peaked
|Unemployment||(Jan-Mar)||Down 36,000 in last three months to 2.46 million – may be start of downward trend but too early to say; rate at 7.7% – claimant count higher in April|
|Real GDP||(Q1)||0.5% increase in Q1 only reversed Q4’s decline – all growth attributable to net exports and government spending|
|Manufacturing output||(Mar)||Up 2.7% over last year, 0.2% in latest month – still increasing at healthy pace, though trend may have slowed|
|Exports||(Mar)||Volumes booming – up 16% over the last year, imports up 9%; strong sales to EU and to non-EU|
|Retail sales||(Apr)||Volume up 1.1% in latest month and 2.8% in last year – anecdotal evidence suggests may be due to holidays and that sales were weaker again in May|
|Consumer confidence||(May)||Recovered a little from near record lows – still at very low level|
|Manufacturing confidence||(May)||Fell to 20-month low but still consistent with expansion in manufacturing|
|Services confidence||(May)||Down after previous month’s jump – still consistent with moderate growth in sector|
|Consumer price inflation||(Apr)||Up to 4.5% (RPI 5.2%) – expected to go higher in next few months; three MPC members voting for a rate hike|
|Average earnings growth||(Mar)||Stuck close to 2% – well below inflation rate so real earnings falling|
|Public sector net borrowing||(Apr)||Largest ever April figure – but erratic from month to month so too soon to say anything about direction|
|Bond yields||(May)||Edged lower in May – in line with international markets reflecting fears of weaker growth|
Strong, improving, positive for growth
Moderate, little changed
Weak, deteriorating, potentially negative for growth
Sharp falls in business confidence in manufacturing and services during May – as picked up by the purchasing managers’ indices – have led to renewed fears about economic growth in the UK. In fact, confidence is now close to a level that is consistent with the recent anaemic growth seen in the UK and there is probably little new to worry about in the latest data.
That said, the economy did not grow at all between the third quarter of 2010 and the first quarter of 2011 and the outlook appears to be for moderate growth at best in the next few quarters. As a result, forecasters have been downgrading their growth estimates for 2011. For example, the IMF now thinks GDP will increase by 1.5% and the OECD is going for 1.4%.
Households’ spending power has been squeezed by higher taxes and food and energy prices and they are reluctant to take on more debt. As a result, consumer spending has stopped increasing. This has led to a fall-off in domestic orders to manufacturing. Meanwhile export orders, which had been growing very rapidly, are still increasing but at a more moderate pace.
Inflation at 4.5% is well above its target rate but the majority on the Monetary Policy Committee remain content to leave interest rates at their record low level of 0.5% while growth is so weak. Meanwhile, the chancellor continues to refuse to consider any change in fiscal policy.
1. GDP was unchanged over the last two quarters: Real GDP increased by 0.5% in the first quarter of 2011, reversing the 0.5% fall in the final quarter of 2010. But after taking out the effects of the bad weather in December, it was unchanged in both quarters. Over the last two quarters, consumer spending fell by 0.8% and business investment by 6.2%.
Total domestic spending was down 1.3% and it would have fallen by more but for a 1.4% increase in government spending. Net exports made a positive contribution to growth.
2. Trend in retail sales volumes is probably flat: The volume of retail sales increased by 1.1% in April and was 2.8% higher than in April 2010. However, anecdotal evidence suggests sales were boosted temporarily by the combination of good weather and the extra bank holiday and have fallen back again in May. The underlying trend in sales is still broadly flat – the result of the squeeze on households’ spending power from high inflation and moderate wage increases.
3. Consumer confidence is very low: Consumer confidence recovered a little in May but remains close to its record low level. People’s worries about their own personal finances and the general economic situation reflect a combination of factors, including high inflation, low wage increases, tax increases and the unknown effects of the government’s spending cuts.
4. Business confidence falls sharply: The latest purchasing managers’ indices (PMIs) showed significant falls in confidence in both the manufacturing and service sectors in May. These have been interpreted as pointing to a further decline in growth. In fact, confidence is now at a level that is consistent with moderate expansion – and has come into line with the official growth data.
Unless this is the start of a downward trend in confidence, the outlook is for anaemic growth in the summer months, but this is nothing new.
5. Manufacturing output still reasonably robust: Manufacturing output increased by 0.2% in March and growth over the last year was 2.7%. Although growth remains reasonably healthy, it has slowed a little in recent months. Growth is also less widespread across manufacturing, with only eight of the 13 sub-sectors seeing an increase in output over the last year. See Figure 1:
6. Employment increasing: Employment increased by 118,000 over the three months to January-March 2011 and the number of full-time employees increased by 146,000. This is much stronger than might have been expected given that output did not increase at all between the third quarter of 2010 and the first quarter of 2011.
One possibility is that the official data are under-recording output growth, though the employment data can be erratic so more evidence is required before it is possible to be confident in making such an assertion. See Figure 2:
7. Unemployment declining (or not): The Labour Force Survey (LFS) shows a 36,000 decrease in unemployment between October-December and January-March. The total number looking for work is now 2.46 million. This looks to be good news, though, as with the employment data, the unemployment numbers can jump around from month to month so it is perhaps a little too soon to assume that unemployment has peaked for this cycle.
This is particularly true given the 12,400 increase in the claimant count measure in April. Meanwhile, long-term unemployment – at 850,000 – has reached its highest level since 1997.
8. Price inflation up again: Consumer price inflation rose to 4.5% in April, from 4.0% a month earlier. This was partly the result of the timing of Easter, which led to higher fares for air and sea travel, but much higher food and petrol prices remain the principal causes of high inflation. Most forecasters, including the Bank of England, expect inflation to increase in the next few months – perhaps to a peak around 5%.
9. 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; it is the worst such squeeze since the 1920s. Over the last year, regular pay is up 2.1% and total pay 2.3%. See Figure 3:
10. Record government borrowing in April: Public sector net borrowing (excluding financial interventions) was £10.0 billion in April 2011, compared to £7.3 billion in April 2010. However, the tax on bankers’ bonuses led to extra receipts of £3.5 billion in April 2010. After adjusting for this one-off effect, the underlying level of borrowing looks to have fallen a little.
11. 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 May. One member – Andrew Sentance (at his last meeting) – called for an immediate increase in 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.
12. Government bond yields edged lower: The 10-year government bond yield fell during May and dropped below the 3.5 to 4.0% range within which it has moved for most of 2011. This reflected the trend in international markets for lower yields as a result of downgrades to growth expectations and the likelihood that increases in interest rates will be postponed.
13. Sterling little changed: Sterling’s value against a basket of overseas currencies was little changed in May. In a reversal of the pattern in April, it was down against the US dollar, but rose a little relative to the euro.
14. Oil price close to high in sterling terms: Oil prices fell sharply at the beginning of May but have since reversed some of their decline. The Brent crude oil price is now around $115 a barrel and within 10% of its all-time high in sterling terms.
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