What is really happening in the UK economy? What do today’s employment numbers tell us?

The UK economy is something of an enigma at the moment as diferent measures of it appear to be giving us different signals. By the conventional route of just looking at Gross Domestic Product numbers she is firmly in recession as the last three quarterly readings have gone -0.4%,-0.3% and then -0.5%. However the unemployment and employment numbers have presented themselves in a more optimistic fashion. We have certainly seen a very different picture to when the economist David Blanchflower told us that the UK would have a peak level of unemployment “much higher” than three million.

So which is right or neither? Sadly we can never be absolutely sure as economic statistics are not as reliable as some would have you believe but we can learn from looking at the overall picture and get a much better idea of the state of play. My contention has been that the UK is in more of a depression where economic growth flatlines for a considerable period rather than in a recession where it is falling quickly. This has received some supporting evidence over the past few days.

Monthly GDP analysis

On Friday we received the latest data on monthly GDP from the National Institute for Economic and Social Research.

Our monthly estimates of GDP suggest that output grew by 0.2 per cent in the three months ending in August after growth of 0.3 per cent in the three months ending in July 2012.

So hardly a surge but it is better and it is at least some growth which the NIESR expects to continue.

While we expect the economy to continue to expand, it will take more robust rates of growth than we have recently seen to close the UK’s large negative output gap.

What they mean by “output gap” is that the UK economy remains at around 4% lower than its pre-crisis peak. This feeds into the potential economic depression argument as we are now over four years into this crisis and even in what were considered past serious declines such as 1973-76 0r 1979-83 we were by now in positive territory.

These monthly numbers are in fact also better than what the NIESR told us previously. It may have slipped their mind to point it our but they previously told us that the three months to July saw a fall of 0.2% so they have a 0.5% improvement on their initial release.

Industrial Production

The headline writers got some licence to declare Happy Christmas War Is Over when the numbers below were produced.

(Industrial) Production rose by 2.9 per cent between June 2012 and July 2012, with manufacturing rising by 3.2 per cent

However a more sober and reasoned analysis would be based on this.

The seasonally adjusted Index of Production fell by 0.8 per cent in July 2012 compared with July 2011

The seasonally adjusted Index of Manufacturing fell by 0.5 per cent in July 2012 compared with July 2011

So as the headline writers move from the despair headlines of the June numbers to the triumphant July ones the reality is that we are struggling. Added to this if we look at the underlying numbers we see industrial production is at 100.7 where 2009 =100, so no real change at all. Manufacturing is better at 105.7 but over 3 years that is edging forwards rather than the hoped for growth.

UK trade figures

It would appear that my dictum that monthly trade figures are so inaccurate as to be virtually useless is not generally followed. We followed the same route from despair (June) to relative triumph (July) only yesterday. But if we look behind the headlines to the trends we see this.

Excluding oil and erratic items, the volume of exports was 0.9 per cent higher in the three months ending July 2012 compared with the preceding three months.  The volume of imports fell 0.8 per cent over the same period.

So not much happening there and even over a three month period it is necessary to add as far as we can tell as trade figures are still not that reliable even over three months. It all looks rather stagnant. However we see in the detail that we are doing much better outside the European Union-just like Portugal’s numbers I discussed yesterday- as our non-EU exports rose by 4.3% over the latest three months compared to an overall rate of 0.9%.

Today’s employment figures

These operate in some respects as a case for the defence of the UK economy as shown below.

The employment rate for those aged from 16 to 64 was 71.2 per cent, up 0.5 on the quarter. There were 29.56 million people in employment aged 16 and over, up 236,000 on the quarter.

And if we look deeper into the good news we find some more good news!

This is the highest figure since the three months to April 2009…… (and this is) the largest quarterly increase since the three months to July 2010.

So far so good as we review a super-powerful UK employment situation,or do we? To fully understand the situation we need to add some nuance and we can do some of this by analysing the situation between part and full-time work since the credit crunch began in spring 2008.

the number of people in full-time employment fell by 640,000

 the number of people in part-time employment increased by 628,000

So there has plainly been a shift to part-time work which takes some of the gloss off the numbers above. Also there has been a shift towards self-employment which rose by 52,000 in the latest numbers to 4.22 million. Combining these two trends has probably impacted on another nuance to our numbers.

Real Wages are continuing to fall

We see from the numbers below that real wage growth continues to be negative.

Average total pay (including bonuses) was £471 per week in July 2012. In the three months to July 2012 total pay rose by 1.5 per cent on a year earlier, down 0.3 from the three months to June.

The rate of fall depends on whether you compare with the official UK consumer inflation measure at 2.6% or RPI at 3.2% or of course your own measure! Also in another worrying trend the rate of wage growth is slowing.

Comment

If we start with the UK employment situation we see that it has behaved much more flexibly than in previous recessions. This was something that we had wished for and on its own if you read economic papers from a decade or so ago then this would be graded a (surprising) success. However as yet another proof of the aphorism be careful what you wish for we see that the flexibility we wanted then also has implications and costs of its own.

Workers have moved from full to part-time and this has had knock-on effects on the level of wage growth both nominal and real. So the undercut to a better employment situation is partly that the cost of labour is cheaper in real terms. Also we see that it has had implications for productivity in the UK economy as shown below.

Whole economy output per worker fell by 0.7 per cent between the fourth quarter of 2011 and the first quarter of 2012.

However a lot of care is needed with official productivity numbers as if we call the UK situation one of labour hoarding with falling output being recorded then it has to fall. In other words we are singing the same old song. Also we recorded very high labour productivity in 2007! What happened next?

Accordingly we are left with a UK economy where the employment situation has to some extent mirrored the German example that we had previously regarded as good. What we need now is for the “hoarded” workers to up production but with the level of real wages lower who will buy it? Not such a dissimilar situation to Portugal except from a higher base. We can of course export more but we have hoped for such “rebalancing” for quite a while now. Accordingly we face the prospect of yet more stagflation until we are willing to finally break-up our banking industry and repair own broken monetary transmission mechanism. When historians look back on this period there is an ever increasing danger that they will regard it as a depression.

This entry was posted in Banking Reform, GDP, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • forbin

    hello shaun,

    they tell us we have trouble ahead if the young don’t get employed – growing army of never have’s = dangerous

    they tell us more part time jobs = less tax taken , less spending power – ergo economy shrinks again

    less productive ? perhaps whats being measure is the shorter hours a lot of these part time jobs have…… or why use machinery and computers ( improves productivity ) when all all you need is a few cheap toilet cleaners / shelf stackers ?

    honest Shaun , I dont think any government over the past 30 years has really tackled lower wages – its always been the for the best – the last boom was money brought into the economy from using houses as collateral – thats maxed out now and the lower wages are squeezing the results further…..

    as Indy Jones said – no good ,not good at all……

    Forbin

  • JW

    Hi Shaun
    We are just mirroring the US with the employment stats. More part-time replacing full-time. Less male, more female employment. These add up to a reducing take home pay for the majority in real terms. This is inevitable given the global headwinds, a sobering reality of reducing relative standards of living for the vast majority whilst the debt induced ‘growth’ of the last decade or so is unwound. We are going back to the underlying trend that would have been there since the 70s without the mirage of ‘financialised’ growth. It will take a long time to unwind and its not very nice.

  • Rods

    Hi Shaun,

    Another excellent piece of analysis, where you have looked ‘under the bonnet’ and analysed well a group of conflicting statistics.

    “My contention has been that the UK is in more of a depression where economic growth flatlines for a considerable period rather than in a recession where it is falling quickly”.

    Shaun, is this a depression in the UK or not? Nobody seems to know as there is no standard definition of a depression. A recession is easy on the basis that we all know the standard definition of a recession “It is when you have two or more adjacent quarters of negative growth”.

    But nobody seems to have provided a formal definition of a depression in a similar way, so this is my first attempt:

    “A depression is when there is a sustained period of very slow, below trend or negative growth, so that output remains below the last pre-recession peak for at least 3 years.”

    Now, I haven’t done any analysis yet to see how this would fit into the profiles of previous depressions and recessions, especially whether the 3 year period should be a bit shorter or more likely longer maybe even as long a 5 years. The key to me is the below pre-recession peak output as this quite rightly excludes, very slow growing economies with several mild recessions, as there output on trend would be higher. I would welcome your comments and that of other readers to see if we can make together a formal definition that you and the other readers are happy with. You could then use this formal definition on your blog, so you can say on our definition, with confidence, whether an economy is just in recession or in a depression.

  • Anonymous

    Shaun..Thousands and thousands are being denied benefits for the first time having been on icap benefit for years and these people are then deemed to be too ill for jsa but not ill enough for esa and are caught in no mans land as far as benefits are concerned..
    Do you know if these figures include the thousands who have had their benefits stopped due to sanctions…I do know many many people on the forums i help on have given up on esa and stopped claiming and are relying on their dla to live on…I do wonder if this affects the figures?

  • Shaun Richards

    Hi Forbin

    You make a good point which is the time that individual’s are unemployed for matters considerably. Whilst “labour hoarding” may have capped unemployment for now what is missing is something to reduce it preferably quickly.Otherwise long-term unemployment and its implications are going to be bigger and bigger issues….

    Which film did he say that in by the way?

  • Shaun Richards

    Hi JW

    It remains my view that rather than ploughing on with the zombie bank culture we would do much better if we addressed the underlying problems. We would then know where we stand and be able to start again. A bit of honesty would do us a lot of good….

  • Shaun Richards

    Hi Rods

    There have been efforts at providing a definition of a depression but as you point out none of them have acquired the status of the recession definition. The two main factors are clearly size of the decline and how long it lasts for. The Economist magazine had a go at this and agreed with your 3 years and added a 10% decline in GDP. The trouble with the 10% decline definition is that say in the UK’s current situation our perception of the problem depends also on how long we are in it. So I would have the decline element reducing the longer the time period.

    What I mean by this is that say over 3 years a 10% drop is a depression, but after five years with some growth to follow people might be in the same position as an economy which had dropped by 6% and then not grown. So my suggestion would be that the longer the period a depression lasts for the less GDP needs to fall.After all if we look at the UK with our 4% decline and no recovery,when is that a depression?

    Another intriguing way of putting it is to define it in terms of how it began i.e depressions tend to come from bursting asset and credit bubbles. Is that enough for a definition?

  • Shaun Richards

    Hi Geoff

    I think I have figured out the acronym’s which incapacity benefit,job seekers allowance and employment and support allowance.

    To answer your questio the overall labour market figures will include such people. If they are not in work for any reason other than retirement then they will be captured by the category for inactivity. This category fell by 181,000 in the last quarter to 9.01 million. For the categories that apply to your question we saw the following.

    temporary sickness: fell by 3,000 to 181,000

    long-term sick: fell by 32,000 to 2.104 million

    I hope these were genuine falls rather than the sick being squeezed off the list however it is just numbers which are not broken down further. I wish I could be more help as I had some experience via someone I know of the last effort in this direction- the All Works Test- and I did not like much what I saw. Good luck…

  • Anonymous

    Hi Geoff
    I think I have figured out the acronym’s which incapacity benefit,job seekers allowance and employment and support allowance.
    To answer your questio the overall labour market figures will include such people. If they are not in work for any reason other than retirement then they will be captured by the category for inactivity. This category fell by 181,000 in the last quarter to 9.01 million. For the categories that apply to your question we saw the following.
    temporary sickness: fell by 3,000 to 181,000
    long-term sick: fell by 32,000 to 2.104 million
    I hope these were genuine falls rather than the sick being squeezed off the list however it is just numbers which are not broken down further. I wish I could be more help as I had some experience via someone I know of the last effort in this direction- the All Works Test- and I did not like much what I saw. Good luck…

  • Anonymous

    Hi Rods
    There have been efforts at providing a definition of a depression but as you point out none of them have acquired the status of the recession definition. The two main factors are clearly size of the decline and how long it lasts for. The Economist magazine had a go at this and agreed with your 3 years and added a 10% decline in GDP. The trouble with the 10% decline definition is that say in the UK’s current situation our perception of the problem depends also on how long we are in it. So I would have the decline element reducing the longer the time period.

    What I mean by this is that say over 3 years a 10% drop is a depression, but after five years with some growth to follow people might be in the same position as an economy which had dropped by 6% and then not grown. So my suggestion would be that the longer the period a depression lasts for the less GDP needs to fall.After all if we look at the UK with our 4% decline and no recovery,when is that a depression?

    Another intriguing way of putting it is to define it in terms of how it began i.e depressions tend to come from bursting asset and credit bubbles. Is that enough for a definition?

  • Anonymous

    Hi JW

    It remains my view that rather than ploughing on with the zombie bank culture we would do much better if we addressed the underlying problems. We would then know where we stand and be able to start again. A bit of honesty would do us a lot of good….

  • Anonymous

    Hi Forbin
    You make a good point which is the time that individual’s are unemployed for matters considerably. Whilst “labour hoarding” may have capped unemployment for now what is missing is something to reduce it preferably quickly.Otherwise long-term unemployment and its implications are going to be bigger and bigger issues….
    Which film did he say that in by the way?

  • JW

    Hi Shaun
    Yes it would be good for the 99.9%. Unfortunately the 0.1% are doing very nicely out of this situation and its not in their interest to let too much ‘light’ in.