Economic update – May 2012: Osborne’s austerity strangles Britain
The UK is back in recession. According to preliminary data from the Office for National Statistics (ONS), real GDP declined by 0.2 per cent in the first quarter of 2012, having declined by 0.3 per cent in the final quarter of 2011.
Economists define a recession as two consecutive quarters of falling GDP. These preliminary data may be revised.
Some economists have pointed out that the decline in GDP is at odds with other evidence about the economy, in particular stronger retail sales and a pick-up in business confidence. They think, when the ONS has more information, we will eventually find the economy avoided recession.
Whether or not we are in recession, the bigger picture shows economic activity in the UK is very weak. Real GDP has fallen in four of the last six quarters and has increased by just 0.4 per cent since the coalition government took office in the second quarter of 2010.
This is a result of a number of factors, some of which – global energy prices for example – are outside the control of the government. But there is little doubt the government’s austerity measures have contributed to the slowdown.
Here is a scorecard of different economic indicators over recent months:
Analysis of previous recessions – across a number of advanced economies – has shown those that follow the bursting of debt and asset bubbles tend to be deeper and to last longer than other recessions. The same analysis shows recoveries following this type of recession tend to be slower and more faltering that other recoveries.
The current UK experience is adding more evidence in support of this conclusion.
The recession of 2008-9 was the deepest since the 1920s (matching the depth of the 1930s recession) and the recovery following it is turning out to be the slowest for at least 100 years. Putting aside whether or not the economy is back in recession, output was still more than 4 per cent lower in the first quarter of 2012 than it was at its peak four years earlier.
The Office for Budget Responsibility thinks it will not exceed this peak until some time in 2014.
It is not that the economic news is all bad: business confidence has been higher this year than in the second half of 2011; retail sales were much better than expected in March and the latest figures show a fall in unemployment over the last three months for the first time in nine months.
But for every positive indicator, there is another negative one: consumer confidence is at very low levels; manufacturing output fell more than expected in February; and full-time employment is still falling.
Inflation is also proving sticky. The big hope for 2012 was that a sharp fall in inflation would increase households’ spending power, leading to a boost in consumer spending and stronger output growth. But inflation unexpectedly increased in March and prices have risen about 2 per cent faster than earnings over the last year. As a result, any recovery in spending is likely to be weak or short-lived.
At best, 2012 looks like being another year of disappointing growth.
GDP declined by 0.2% in the first quarter:
Preliminary figures show real GDP contracted by 0.2% in the first quarter of 2012. These figures may be revised, but if they are not, the UK is back in recession (on the technical definition of two consecutive quarters of declining GDP).
The main weakness in the economy was in construction, where output fell by 3.0% in the first quarter, but industrial output was also down by 0.4%. Furthermore, the increase of 0.1% in service sector output was attributable wholly to the government sector. See Figure 1.
Employment is increasing – but only for part-time workers:
Employment in the latest three months, to February 2012, was 53,000 higher than in the previous three months (though it was still down 57,000 compared to a year earlier).
The number of part-time workers was up 80,000 in the latest three months, while full-time working fell by 27,000. Not all of this increase in part-time working is voluntary. There are now 1.40 million people who say they are working part-time because they cannot find full-time employment – the highest number since records began in 1992.
Unemployment has fallen:
On the Labour Force Survey (LFS) measure, unemployment fell by 35,000 over the latest quarter. As a result, unemployment in the three months to February was down to 2.65 million, or 8.3% of the labour force. However, long-term unemployment increased by 26,000 to 883,000 – its highest level since 1996.
The claimant count measure of unemployment increased by 3,600 in March and has now gone up for 13 consecutive months; here, too, there has been a fall recently in short-term unemployment and an increase in long-term unemployment.
Retail sales volumes surge:
The volume of retail sales increased by 1.8% in March – and the value of sales was up by the same amount. In part, this can be explained by panic buying of petrol towards the end of the month and by good weather, which led to earlier than usual purchases of spring clothing.
But the underlying trend in sales also looks to have improved in recent months, despite the continued squeeze on household finances. It may be that households are spending less on services so they can spend more on goods, or that they are cutting their savings.
Consumer confidence remains low:
Consumer confidence in April remained at a historically very low level. In recent months, people’s worries about the future – both for the economy and for their own personal financial situation – appear to have increased.
Manufacturing output trend remains flat:
Manufacturing output was down 1.0% in February and down 1.4% over the last year. Monthly data on output have become erratic and – unless there is more evidence of weakness in the next few months – it still seems likely the underlying trend is flat, as it has been for more than a year now. See Figure 2.
Business survey confidence dropped in April:
The CIPS purchasing managers’ survey shows confidence in the manufacturing sector fell back in April (from a ten-month high) but is still at a level previously consistent with modest expansion in output. The construction indicator also fell slightly between March and April but is still consistent with healthy growth.
The service sector indicator also fell, to its lowest level for five months, but points to growth at a reasonably healthy pace.
Price inflation up to 3.5%:
There was a surprise increase in consumer price inflation in March, up from 3.4% to 3.5% (though inflation fell from 3.7% to 3.6% on the retail price measure). This was largely due to food prices.
Inflation is widely expected to fall during 2012 – not least by the Bank of England – but so far progress has been slower than expected. Inflation in the UK has proved rather stickier than in several other major advanced economies, with measures announced in the budget adding 0.2% to inflation from April.
Earnings inflation remains below 2%:
Inflation pressures cannot be blamed on higher wages. Average earnings increased by just 1.1% in the year to the three months ending in February and regular earnings were only up 1.6% over the same period.
Earnings growth in the public sector is the lowest since records began in 2001. Combined with the stickiness of price inflation, this means household spending power is still being squeezed.
Export growth has stopped:
Export volumes (excluding oil and erratic items) were unchanged in the year to the three months ending in February.
Exports to Europe fell by 4% – with the weakness concentrated in recent months – suggesting the eurozone crisis is now having an effect on the UK economy, though not on a scale that can fully explain the return to recession; exports to the rest of the world were up 3%.
Government borrowing down on the year:
Public sector net borrowing (excluding financial interventions) was £126 billion in the 2011-12 financial year, down from £137 billion in 2010-11. This was in line with recent OBR forecasts but higher than the £116 billion target set in the June 2010 budget. See Figure 3.
Interest rates remain at 0.5%; QE at £325 billion:
The Monetary Policy Committee left interest rates at 0.5% in April and the scale of quantitative easing (QE) at £325 billion. There is now only one member voting for an increase in QE as the committee trade off the need to boost growth in the economy and the slowness of the fall in inflation.
Sterling rose against the euro and the US dollar during April. The increase against the euro can be explained by the eurozone’s persistent problems; the increase against the US dollar is harder to understand.
The UK equity market ended the month a little lower, for the second month in a row.
The 10-year UK government bond yield was little changed at close to 2.25%.