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With the new decade well underway, the casual observer could be forgiven for finding the economic outlook distinctly optimistic. But there are still reasons to be cautious, says XpertHR benchmarking editor, Michael Carty.
Much of the UK may have been buried under heavy snow for the opening weeks of the year, but 2010 has nonetheless seen distinct evidence of the green shoots of economic recovery. These include the continued thawing of pay freezes and the UK's belated return to economic growth.
The new year would therefore appear to have got off to a strong start. But, as always, it is best to be reserved in assessing the economic outlook. The UK economy is by no means out of the woods yet: any recovery is likely to be fragile at best; and a strong risk remains of a double-dip recession, or worse.
UK economy emerges from recession at last
The good news is that the UK economy has finally emerged from what has proved to be the longest recession on record. Preliminary official data on gross domestic product (GDP) for the fourth quarter of 2009 (published last week, on Tuesday 26 January 2010), showed a rise of 0.1 percentage points (PDF format, 96.6K) (external website). This is the first positive reading since the first quarter of 2008 (when growth stood at 0.7%), and follows six successive quarters of negative GDP growth (not to mention the estimates for the third quarter of 2009 wrong-footing many professional economists by failing to signal an end to the recession when they were published in October). The return to economic growth confirms the end of the recession. Estimates for the third quarter of 2009 remained unchanged, -0.2%.
Economic recovery could prove "lacklustre"
However, further growth is by no means guaranteed. As Bank of England governor Mervyn King stated in a speech the week before the GDP data were released: "The world economy is now coming out of recession. [...] But there is a long period of healing ahead."
The start of the new decade saw no end of commentators lining up to predict key economic trends for the coming years. These reflected varying degrees of optimism.
For example, the Ernst & Young ITEM Club weighed in with a prediction that "the UK faces a difficult decade of adjustment" (PDF format, 278K). It believes the UK needs to make the transition from an economy that is reliant on domestic consumption to one in which growth is driven by exports - if full-scale economic recovery is to be achieved. It expects to see a "lacklustre recovery", with GDP growth averaging only 1% in 2010, before rising to 2.5% in 2011 and 3.2% in 2012.
A more upbeat assessment came from Andrew Sentance, an external member of the Bank of England's Monetary Policy Committee (MPC), who coined a new phrase to describe the UK's economic prospects: "bounce-backability". Sentance argues that the risk of a double-dip recession has probably passed, but believes recovery is likely to be "fragile and uncertain" with a return to high inflation remaining possible.
But perhaps the most optimistic take on the UK's economic outlook at the start of this new decade came from the Work Foundation's Will Hutton. Writing in the Observer, Hutton says:
"[F]or the sharp economic recovery in prospect, be grateful. [...] Britain is emerging comparatively lightly from what could have been a second Great Depression."
Hutton ascribes this prospective recovery to two key factors: interventionist Government policy; and the widely-touted new spirit of collaboration between employers and their workforces. He writes:
"Companies and workforces have moved heaven and earth to protect jobs. Part of the story is wage freezes, wage cuts and working fewer hours, but top companies have decided that they would rather cut investment in plant than cut their investment in people."
Pay awards remain positive for now...
Pay freezes have undoubtedly played a key role in helping preserve jobs during the recession, but they appear to be in abeyance, for now at least, according to the year's first release of pay awards data from IRS.
Pay awards have rebounded to some extent from the all-time low of zero recorded in July and August 2009. The median basic pay award currently stands at 1.2% in the three months to 31 December 2009, down slightly from 1.3% in November. The headline award has now been worth 1% or more for four successive rolling quarters, but settlements remain weak. The 1.2% headline award is worth less than one-third of its value a year ago (3.7%).
Looking ahead, prospects for pay awards in 2010 are uncertain.
Indeed, it is possible that the current weak resurgence in pay awards could represent only a temporary thawing of the trend towards freezing pay. As IRS pay specialist Rachel Sharp noted on the eve of 2010, pay restraint is likely to spread from the private sector to the public sector this year:
"[P]ay awards remain weak [...] as the [2009/2010] bargaining round gets into full swing in January the outlook for pay settlements remains uncertain. The Government's emphasis on pay restraint in the public sector looks to be matched by a limited ability, or willingness, of employers in the private sector to fund substantial wage increases."
...but pay freezes could return in 2010
A number of other commentators share the view that pay could well continue to take the strain this year. For example, leading economist and former Bank of England Monetary Policy Committee (MPC) external member David Blanchflower highlights the critical role of earnings in mitigating the worst effects of the recession. Writing in the Times, Blanchflower argues:
"[E]arnings have taken a lot of the strain. Nearly half of private sector settlements have been pay freezes and earnings growth has remained well contained. Overtime has been reduced and shift premiums cut. Companies have simply stopped hiring."
In a subsequent article in the Observer, Blanchflower sets out his belief that it's time for UK workers to get used to severe pay restraint:
"The flexibility of the British labour market has meant people have taken cuts in their pay and I think people don't understand that pay is not going to rise for quite a while."
The British Chambers of Commerce (BCC) also believes pay freezes are here to stay, reporting that three-fifths of UK employers plan to freeze pay in 2010.
And while severe pay restraint has so far been largely confined to the private sector, public sector pay will also fall victim to spending cuts. Many public sector workers already face low pay increases or pay freezes in 2010. But in an interview with the Sunday Times, Chancellor Alistair Darling indicated that public sector pay would be subject to "restructuring", which could result in pay cuts for some jobs. According to Darling:
"We need to restructure the way people get paid. In both the public and private sector, what was being paid has sometimes lost touch with what someone actually does. And that's not only unfair; it's also grossly inefficient."
The Sunday Times goes on to report that "Darling has ordered a wider study of public pay, by the Senior Salaries Review Body, which will report by the [2010] Budget."
Employers in both the public and private sectors will therefore be paying particularly close attention to all factors surrounding pay decisions this year.
Inflation: Volatile outlook for 2010
Movements in inflation are of course one of the most significant factors influencing pay awards, particularly in the private sector. Inflation is likely to prove volatile in 2010.
Latest official data show that retail prices index (RPI) inflation rose by 2.4% over the 12 months to December 2009, up sharply from 0.3% in November. The current spike in RPI is primarily driven by the sharp rise in fuel prices and the return to the 17.5% rate of VAT. The latter factor could risk a return of stagflation (soaring inflation coupled with weak economic growth), according to CEBR research reported in the Daily Telegraph.
Analysts expect RPI inflation to peak at 3.1% in the second quarter of 2010, according to latest inflation forecasts compiled by IRS. RPI will then fall back to 2.6% in the third quarter, before rising once more in the fourth quarter, to close out 2010 at 2.7%.
It remains to be seen whether pay awards will be characterised by the same volatility that we can expect to see from inflation. But with a return to pay freezes possible, 2010 could yet see RPI recede as a key influence on private sector pay.
Unemployment growth stalls, but could resume later in 2010
The recent path taken by unemployment has been altogether more straightforward, but the pace at which it has risen has proven surprising. A unique feature of the recession was the failure of unemployment to rise as high as might have been expected. This trend has taken a new twist with the latest unemployment data, which appear to show that the rise in unemployment has stalled.
Key data on unemployment include the following:
- The headline unemployment rate (on the ILO definition) stood at 7.8% over the period September to November 2009. The Office for National Statistics (ONS) reports that this figure is unchanged when compared with the rate for the three months to August 2009, which also ran at 7.8%.
- The ILO unemployment level was 2.46 million over the period September to November 2009, which the ONS reports is down 7,000 on the previous quarter. The ONS notes: "This is the first quarterly fall in the number of unemployed people since the three months to May 2008."
Will Hutton believes that unemployment has not yet finished on its upward path:
"Unemployment will certainly carry on rising in 2010, but the eventual rise will be around 1.25m; serious, but not as cataclysmic as it could have been."
Yet it remains possible that the current static unemployment growth could be just a lull, and that it could accelerate once more.
The CIPD warns of a possible "sting in the tail of the recession" in the shape of a further rise in redundancies during winter 2009/2010 as employers cut jobs to boost productivity and shrink labour costs. The CIPD consequently believes unemployment could peak at 2.8 million during 2010.
Other commentators fear that peak unemployment could be significantly higher still. Writing in the Guardian, David Blanchflower issued a stark warning on unemployment, and its potential to reverse the UK's fragile economic recovery:
"At the moment unemployment looks like it has stalled, but it's not stalled for long. If a new government got in and started cutting public spending it could rise to four or five million. It would be the economics of lunacy to cut public spending any time soon - certainly 2010 and maybe in 2011. We'd have a double-dip recession, maybe even a triple dip."
However, the prospect of prompt, swingeing cuts to public spending in the immediate wake of the 2010 general election would appear to have receded somewhat. On Sunday 31 January 2010, both Conservative leader David Cameron and shadow chancellor George Osborne indicated that they would make only limited public spending cuts directly after a Conservative election victory.
Time to focus on retention
Trends in unemployment growth will also affect workers' ability to change jobs. A growing body of evidence suggests that employers can expect any unlocking of the labour market - resulting from economic recovery in 2010 - to be accompanied by a mass exodus of their workers. Many top-performing employees - who have stayed put while they weathered the worst of the recession - may start looking for new opportunities when circumstances start to improve.
Research from consultants Pricewaterhouse Coopers LLP (PwC), for example, finds that one in three (33%) employees feels their employer has not valued them during the recession, and that they would consequently leave for another job if it were possible.
Employers therefore need to focus on getting retention exactly right. Michael Rendell of PwC comments:
"Some big employer brands fell down at the end of the 'noughties' and the impact long-term of people decisions taken during the downturn is now being felt. The ways people are recruited, rewarded, retained, incentivised, trained and retired over the next few years will determine the employers of choice for the new decade and beyond."
Why it pays to benchmark employment practice in 2010
The best advice as we enter February 2010 is to hope for the best but prepare for the worst.
Public and private sector employers face significant challenges as the economy returns to faltering growth. Many are likely to be faced with the need to balance economic imperatives for ongoing restraint in spending on pay and other areas with concerns as to how they can hold onto their core workforce.
In this context, benchmarking HR work and employment practice represents an ever more relevant and worthwhile exercise: it can prove invaluable in terms of helping employers control costs when budgets are stretched.
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