Economic commentary - June 2009

So, things may be getting better. But what things - and what, exactly, do we mean by better?

Over recent weeks, as the immediate crisis of capitalism has eased back into a more familiar and understandable recession, commentators have fallen over themselves to identify green shoots. Perhaps we now have shorter attention spans and have grown tired already of bad news about the economy, but among the hopeful signs identified by a range of experts are:

• a steady rise in share prices on the UK and other stock exchanges;
• good trading results at big retailers, including Sainsburys and John Lewis (though notably not Marks & Spencer);
• tentative improvement in the housing market with estate agents reporting a rising number of enquiries; and
• a renewed rise in oil prices - based on hopes of a swift recovery.

Just try not to mention house repossessions, soaring unemployment and the eye-watering rate of contraction in the economies of the European countries with which we do much of our trade.

Meanwhile, pay settlements recorded by our colleagues at IRS in the three months to the end of April slumped to a headline rate of just 1.5% - the lowest level since IRS launched its pay databank a quarter of a century ago, and probably for many years before that. In the private sector, the median rate of pay settlements is just 1%, and more than one in three employers has implemented a freeze. 

That's more good news if you are struggling to cut costs and see reductions in the wages bill as one way of doing that. Along, no doubt, with overtime bans, cuts in working hours and headcount reductions, either voluntary or compulsory.

But for the economy as a whole, constraining wage rises to zero or as close as possible to zero may not be the best thing. Faced with falling or frozen incomes, people will tend to cut back on their own spending - and that behaviour will be reinforced by the fear of losing their jobs. People are more likely to pay off debts or try to run up some savings rather than contribute to efforts to get money flowing through the system again by spending it on goods and services which save and create jobs, build business confidence and help end the recession, as the TUC reports in its latest Recession Report.

That is one reason - the main reason - why the job of boosting the economy falls to governments. In his Budget speech just a few weeks ago, chancellor Alisdair Darling was fairly upbeat about the prospects for the UK economy, forecasting a 3.5% fall in economic output this year, followed by a return to growth of 1.25% in 2010 and a healthy 3.5% thereafter.

At the Bank of England, however, governor Mervyn King is less optimistic. The Bank is predicting a 4.5% fall in GDP this year - rather worse than Darling's estimate - with growth not beginning again until the middle of 2010. Speaking at the launch of the Bank's quarterly Inflation Report last month, King said the Monetary Policy Committee's best judgement was that there would be "a relatively slow and protracted recovery". He added: "The economy will eventually heal, but the process may be slow."

Given the state of the economy, business organisations had lobbied hard for a freeze on the National Minimum Wage. This would have been unprecedented in its ten-year history, and was rejected as an option. But the Low Pay Commission, which recommends the rates at which the minimum wage should be paid, and the government have held this year's increase to a minimal 7p an hour to £5.80 - or just 1.2%. The increase will take effect on 1 October.

With pay rises in the first half of the year at record low levels and price inflation now falling again, this minimal increase will go some way towards ensuring that the very lowest paid at least fall no further behind. But, given the significant impact in previous years of the increase in the minimum wage on the wider pay settlement picture each autumn, it now appears that there will be little chance of a return to the 3% or 4% pay rises of recent years in 2009.

Meanwhile, the worst of the redundancies and unemployment are yet to come and will still be a problem long after banking crises and falling share prices have long been forgotten. Things (things like share prices and perhaps to some extent business confidence) are getting better - for some. But it will be a long time before there is much comfort for the majority.

Key bargaining statistics on pay, prices and employment for June 2009