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.
Recent months have seen a disconnect between the performance of the labour market in the UK and developments in the rest of the economy. While private sector employment has been growing at a reasonably healthy pace and unemployment has fallen, GDP has been unchanged for two quarters.
In previous recovery phases, early estimates of GDP growth have often been revised up – because the statisticians are not very good at capturing the growth of new businesses – and it may be that the labour market data are telling us the economy is performing rather better than GDP data suggest. However, on balance, other economic indicators tend to support the view that economic activity is growing slowly at best.
Retail sales volumes are flat, the housing market remains weak, manufacturing output is increasing at a slower pace and business surveys suggest the outlook has deteriorated in recent months.
Here is a scorecard of different economic indicators over recent months:
Up 80,000 in last three months and 376,000 over the last year; strong growth in private sector employment; record numbers of part-time workers looking for full-time jobs
|Unemployment||(Feb-Apr)||Down 88,000 in last three months to 2.43 million – largest three-month fall since 2000; rate at 7.7% – but claimant count higher again in May|
|Real GDP||(Q1)||0.5% increase in Q1 only reversed Q4’s decline – all growth attributable to net exports and government spending|
|Manufacturing output||(Apr)||Down 1.5% in latest month, up only 1.3% over last year; weakness exaggerated by extra bank holiday and Japanese tsunami – but trend has slowed|
|Exports||(Apr)||Weak in April – likely due to special factors; volumes still up 13% over the last year (imports up 6%)|
|Retail sales||(May)||Volume down 1.4% in latest month and up just 0.2% in last year – anecdotal evidence supports weak picture|
|Consumer confidence||(Jun)||Down again in June though above record lows seen earlier this year|
|Manufacturing confidence||(Jun)||Dropped to a 21-month low – domestic and export orders lower, less hiring of new staff|
|Services confidence||(May)||Down after previous month’s jump – still consistent with moderate growth in sector|
|Consumer price inflation||(May)||4.5% (RPI 5.2%) – both unchanged from previous month; two MPC members voting for a rate hike but increase in QE looking more likely outcome|
|Average earnings growth||(Apr)||Stuck close to 2% – well below inflation rate so real earnings falling|
|Public sector net borrowing||(May)||First two months a bit higher than expected but hard to be certain about outlook for year at this stage|
|Bond yields||(Jun)||Very little change during month|
Strong, improving, positive for growth
Moderate, little changed
Weak, deteriorating, potentially negative for growth
Developments during the first half of the year suggest UK growth in 2011 will be less than forecast at the start of the year. Consumer spending remains flat in volume terms, largely as a result of higher inflation, and growth in the manufacturing sector looks to have slowed. The most likely outcome for 2011 is that real GDP will increase by between 1 and 1.5% – disappointing for the second year of recovery from the deepest recession in the UK since the Great Depression.
Higher inflation – particularly higher food and energy prices – have been the main reason for the UK’s disappointing economic performance. These have pushed inflation up to 4.5% (January’s VAT increase did not help) at a time when earnings are growing at just 2%. The result has been a severe squeeze on households’ spending power. Although the saving rate has declined, this has been sufficient only to prevent a fall in spending.
Meanwhile, there are signs that the boom in growth in the manufacturing sector may be coming to an end. Special factors – the extra bank holiday in April and the effect of the Japanese tsunami on global supply chains – make it hard to read the underlying trend, but confidence and orders have fallen suggesting that although output is still increasing, it is doing so at a less rapid pace than throughout the last year.
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 investment by 2.7%.
Total domestic spending was down 1.1% and it would have fallen by more but for a 0.6% increase in government spending. Net exports made a positive contribution to growth.
2. Households’ spending power is being severely squeezed: Real household disposable income contracted by 0.8% in the first quarter of 2011 and was 2.7% lower than a year earlier. This is the largest annual decline since 1977. Real disposable income is a measure of households’ ability to increase their spending without reducing their saving or increasing their borrowing. So it is no surprise that household spending also fell over the last year, by 0.5 per cent in real terms.
The fall would have been greater, but for the saving ratio declining from 6.2 to 4.6 per cent. Households have chosen to save less in an attempt to maintain their living standards.
See Figure 1:
3. Retail sales volumes are flat: The volume of retail sales increased by just 0.2% over the year to May. After allowing for normal monthly fluctuations, sales have been flat over the last year. Sales values increased by 3.8%, showing some willingness among consumers to increase their nominal spending – but higher inflation is the problem, causing this moderate increase in sales values to translate into flat volumes.
Surveys suggest there was little improvement in June, as the problems at High Street names such as Habitat, Jane Norman and Thornton’s clearly illustrate.
4. Consumer confidence is very low: Consumer confidence dropped back again in June. Although it was a little higher than the record lows recorded earlier in the year, it is lower than at any point in 2010. People are worried about their own personal finances and particularly about the general economic situation.
5. Business confidence falls again: The latest purchasing managers’ index (PMI) shows manufacturing expanded in June at its slowest pace since September 2009. New orders – from at home and overseas – fell and hiring of new staff was at its weakest level since September 2010. Confidence has also fallen in the service sector, suggesting the outlook is for anaemic growth at best in the summer months.
6. Manufacturing output is expanding at a slower pace: Manufacturing output fell by 1.5% in April and was just 1.3% higher than a year earlier. However, there were two special factors: dirst, the extra bank holiday on the day of the royal wedding; second, the Japanese tsunami, which disrupted global supply chains and meant manufacturers could not always get the inputs and intermediate goods they needed to maintain production.
7. Employment increasing: Employment increased by 80,000 over the three months to February-April 2011. It was down 24,000 in the public sector but up 104,000 in the private sector. Employment is 333,000 lower then at its pre-recession peak, meaning more than half the jobs lost in the recession have been recovered.
Employment has been much higher throughout the recession and recovery than might have been expected from past experience; in part, this is due to increased part-time working and there are now a record 1.21 million people working part-time because they cannot find a full-time job.
See Figure 2:
8. Unemployment declining (or not): The Labour Force Survey (LFS) shows an 88,000 decrease in unemployment between November-January and February-April – the largest three-month fall in over a decade. The total number looking for work is now 2.43 million. However, the claimant count measure increased by 19,600 in May – the third consecutive monthly increase.
There are now more women claiming Jobseekers Allowance than at any time since 1996.
9. Price inflation unchanged: Consumer price inflation was 4.5% in May, unchanged from April (and retail price inflation was also unchanged at 5.2%). Food price inflation was higher, but this was offset by lower inflation for air and sea travel and for household furnishings. Most forecasters, including the Bank of England, expect inflation to increase in the next few months – perhaps to a peak around 5%.
10. 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. Over the last year, regular pay is up 2.0% and total pay 1.8%.
11. Lower government borrowing in May: Public sector net borrowing (excluding financial interventions) was £17.4 billion in May 2011, compared to £18.5 billion in May 2010. Borrowing is running only slightly above a level consistent with the OBR’s Budget forecast for 2011/12, though it is early days.
12. 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 June.
Now that Andrew Sentance has been replaced on the committee, there are two members – Martin Weale and Spencer Dale – voting for an increase in interest rates, but Mervyn King has hinted rates could be at their current level for some time. Adam Posen was still alone in voting for an increase in QE by a further £50 billion but any further evidence of weaker economic activity might increase support for such a move.
13. Government bond yields unchanged: June was a relatively quiet month for bond markets and the 10-year UK government bond yield was little changed throughout.
14. Sterling weaker: Sterling’s value against a basket of overseas currencies fell more than 2% in June to its lowest level in 15 months; it was down against both the US dollar and the euro. This reflects concerns about the pace of recovery in the UK and the likelihood interest rate increases will be delayed until 2012.
See Figure 3:
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13. Oil price lower: Oil prices fell sharply mid-month after a surprise move by International Energy Agency members to release some of their reserves onto the market, ostensibly to replace lost Libyan output – but by the end of the month prices had reversed much of their losses.