The fundamental economic problem faced by the UK in the credit crunch era has been stagflation where the initial fall in economic output has been followed by an anaemic recovery combined with above target inflation. If we look at UK Gross Domestic Product we see that a number based at 100 in 2009 struggled to 103.2 at the end of the third quarter of 2012 and that was after the Olympics boost in that quarter which meant 0.9% growth was recorded in it alone. By comparison if we look at the official measure of inflation (Consumer Price Inflation or CPI) we see that over the same period it rose from 107.5 in 2009 to 123.5 at the end of the third quarter of 2012 for a rise of just under 15%. When the Governor of the Bank of England talked of “rebalancing” the UK economy I hope that he did not mean towards inflation and away from economic growth! Unfortunately that is what actually occurred.
How are we doing now?
Last week we received production figures which sadly showed further signs of trouble.
Production on a seasonally adjusted basis fell by 2.4% in November 2012 compared with November 2011.
Manufacturing on a seasonally adjusted basis fell by 2.1% in November 2012 compared with November 2011
So disappointing numbers and they were in spite of the fact that a recent drag on output had reversed.
the extraction of oil & gas, which increased by 11.3%,mainly due to a rise in crude oil production in November when compared with October
So we were spared “summer maintenance” going into winter as well as my financial lexicon at least! But the underlying picture for industrial production is expressed by it being 97.3 on a series based in 2009 at 100. So stagflation here has been replaced by actual falls in output,which is not quite the way we wanted to exit it.
Gross Domestic Product
In another example of Shakespeare’s sorrows come not in single spies but battalions the latest report from the NIESR (National Institute for Economic and Social Research) showed a fall as well.
Our monthly estimates of GDP suggest that output declined by 0.3 per cent in the three months ending in December after growth of 0.1 per cent in the three months ending in November 2012.
This meant that on their figures we flat-lined in 2012 as a whole.
These estimates suggest a growth rate of 0.0 per cent in 2012
And the future is not exactly bright either according to them.
We do not expect output to pass its peak in early 2008 until 2014.
Lloyds Bank has produced a business survey this morning for England which tells us this.
The latest reading of 50.1 in December is down from 51.0 in November, but remains just above the 50.0 no-change mark, indicating that there is still slow business activity growth across the country.
This also has a sadly depressing influence as the average for 2012 was 52.3. Also we saw this.
Input cost inflation picked up in majority of English regions
Interestingly Scotland and particularly Wales were doing better than this.
The overall purchasing managers report for manufacturing was hopeful at 51.4 in December but was then rather crunched by the much larger services sector reporting 48.9 or a contraction. The troubled construction sector rumbled on in its apparent decline recording 48.7.
What about UK inflation?
The Office for National Statistics has updated us this morning on this subject.
The Consumer Prices Index (CPI) annual inflation stands at 2.7% in December 2012, unchanged for the third month in a row
The Retail Prices Index (RPI – see background note 1) annual inflation stands at 3.1% in December 2012, up from 3.0% in November
Whilst I am reminded of why they wanted to “improve” the RPI by these numbers (for newer readers in my financial lexicon such “improvements” are called reductions although the reductions are in the measure and not reality) I am pleased that they failed as it continues to be nearer to what individuals feel inflation actually is when surveyed compared to the official measure.
The monthly figures for RPI and CPI were also quite strong.
The CPI rose by 0.5% between November and December 2012
The RPI numbers were hidden away in the far reaches of this report but also showed a 0.5% monthly rise.
The main reason for the rise this month drops nicely into my theme of institutional inflation in the UK as the main driver was gas and electricity price rises. The timing of Christmas this year also flattered the numbers as it impacts on air fares so we may have an upwards influence on January’s numbers from this. As air fares are a choice to a large degree and utility prices an essential I expect all those who told us that tuition fee rises should not be taken much note of to be reversing course this month although I am not holding my breath! After all many of them have inflation is falling fast and will fall further boasts from earlier in 2012 to reshuffle into oblivion too. After all from August UK monthly inflation has gone, 0.5%,0.4%,0.5%,0.2% and now 0.5% as “falling fast” enters my financial lexicon.
If we move to the underlying numbers we see that CPI is now at 125 where 2005=100 and if we consider our economic performance since then it is simply too high. Also when you read that it has been at 2.7% for three months in a row please do not forget that this means that the index has risen from 124.2 to 125 over this period.
Expectations of inflation
The Bank of England conducted a survey of what people though inflation was back in November and concluded it was 4.4%.This has been reinforced by a survey conducted by Markit which shows that over 2012 inflationary expectations for the year ahead have risen.
Real wages continue to fall
We are due an update on wages growth later this month but as of now the position is shown below.
Total pay (including bonuses) rose by 1.8 per cent compared with August to October 2011
So whichever of our annual inflation rates you use (2.7% and 3.1%) we see that real wages continue their fall and so they continue to be a downwards influence on the UK economy.
The inflation outlook for the UK economy continues to disappoint and it has now been over its official target for 37 months in a row. We do not have an official growth target but if we did sadly it would have been below target for a lot more than 37 months. Perhaps such a reality is behind the flurry of forecasts of a fall and in some cases collapse in the value of the pound sterling. Although the 2007/08 depreciation gave us yes you’ve guessed it higher inflation and disappointing economic growth! So a solution to our economic morass is unlikely to be found in that direction.
As I review the prospects for 2013 I see that we continue to have a monetary stimulus in the UK economy from low base rates, £375 billion of Quantitative Easing and the Funding for Lending Scheme. But I fear that much of this will yet again seep its way into price rises and inflation will continue to be out of phase with the underlying economy.
Quite near to me is something which seems to me to illustrate the situation quite well as I tweeted yesterday.
On one side of Battersea Park we have £6million flats selling like hot cakes on the other we close the adventure playground for children