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.
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.
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.