This depression is the longest in modern history, so why is the economy still creating jobs?

With today's GDP figures confirming this is the longest depression in modern UK history, IPPR's Spencer Thompson asks why the economy is still creating jobs.

Spencer Thompson is an economic analyst at the Institute for Public Policy Research (IPPR)

After today’s GDP figures (pdf) for the final quarter of 2012 showed the economy contracted by 0.3 per cent, all the talk is once again of a triple-dip. Economists define a recession as a period of two or more consecutive quarters of falling GDP, so if GDP shrinks again in the first quarter of 2013, the economy will be experiencing its third recession in the space of five years.

This would be an extremely unusual development that would leave George Osborne with some explaining to do. His claims earlier this week the economy is on the right path already sound hollow – but that will be even more the case if he has presided over two recessions during his first three years as chancellor.

However, it is important not to get too carried away with the quarterly growth (or rather contraction) numbers, not least because they are frequently revised. More important are the longer term trends and these are truly depressing. Real GDP remains more than 3 per cent below its peak level, now five years in the past in the first quarter of 2008, and has not increased at all over the last year.

This is now by some way the slowest economic recovery in the last 60 years, as the graph below shows:

But, despite the UK’s abysmal economic performance, uncertainty abroad and the impotence of ‘Plan A’, our economy still appears to be creating jobs. Employment growth in the year to November 2012 was the fastest since 1989, with half a million more people in work.

How and why is this happening?

The Economist has put forth some suggestions in today’s issue, but I think there is another plausible explanation. Much of the GDP fall over the last year or so occurred in sectors like manufacturing, which contracted by -1.8%, and mining and quarrying, which fell by an astonishing 11%. These industries are enormously important to the UK economy, driving exports and investment, but relatively speaking they do not employ large numbers of people.

Mining and quarrying, for example, accounts for less than 1% of UK jobs.

This is in contrast to UK services, which have been holding up pretty well over the last year in terms of economic output. Retail, wholesale and hospitality managed 0.7% growth in 2012; business services and finance 1.3%. These sectors have also been creating jobs at a fair clip. Retail employed 70,000 more people in Q3 2012 than the same quarter a year earlier; hospitality 130,000.

So far so good. But the worrying implication of this is that were the service economy to begin contracting, it would start to seriously affect employment. One of the biggest business stories over the past month or so has been the succession of big name high-street brands that have gone into administration, starting with HMV.

On their own these businesses don’t account for enormous numbers of employees, but added together, and combined with the long-tail of smaller retailers who are finding it enormously difficult at the moment, the potential effect could be serious. If this is a reflection of the rest of the UK’s service economy, it could be catastrophic for employment.

This needs to be considered by policymakers: they cannot afford to be complacent when it comes to jobs. As long as employment is growing and unemployment is falling, some of the edge is taken off negative growth figures, including the ones published today – but we need to be alert to the very real possibility that in the coming months what is happening in the economy will start to be reflected in the labour market.

We need a plan in place for when that happens, starting with a jobs guarantee and increased capital spending, that is able to both minimise the long-term impact of a jobs crisis, and start to return the UK economy on a path of economic growth.

See also:

GDP down 0.3% – economy flatlines through 2012January 25th, 2013

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