Economic commentary – May 2010: The lull before another storm?

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Economic recovery struggles on, but conditions are volatile as the election approaches: weak growth, public spending cuts and possible public sector strike action await the next Government, says XpertHR benchmarking editor, Michael Carty.

It can have escaped no-one’s attention that the general election is imminent. At the start of April 2010, Gordon Brown set the ball rolling for one month’s frenetic campaigning by calling the election for Thursday 6 May 2010.

The election campaign has been short and vigorously contested. The economy quickly emerged as the central issue, yet detailed policy promises from Labour and the Conservatives on the toughest economic decisions – including how to tackle the national debt through public spending cuts – have been conspicuous by their absence. However, a strong performance from Liberal Democrat leader Nick Clegg in the first prime ministerial debate (which also saw David Cameron launch an unprovoked assault on the HR profession as “form-fillers”) means that the 2010 general election is no longer a two-horse race.

Reducing the budget deficit and securing economic recovery will require a difficult balancing act from the next Government. This will undoubtedly be complicated further by the underlying industrial relations context, which is far from placid.

With harsh economic decisions required, it might seem ironic that the broad economic picture that will greet the new parliament is one of renewed – albeit weak – growth. But closer analysis shows that economic recovery is by no means secure.

UK economic recovery sustained in first quarter of 2010 …just

The UK’s emergence from the 2008/2009 recession appears to be on a slightly surer footing for now. Latest official estimates (PDF format, 170.4K) show that the economy failed to dip back into negative growth as 2010 got underway. However, the rate of growth achieved was by no means spectacular: gross domestic product (GDP) rose by 0.2 percentage points in the first quarter of 2010 when compared with the previous quarter.

This represents a slowdown of 0.2 percentage points from the estimated rate of GDP growth for the preceding quarter (the fourth quarter of 2009), which ran at 0.4%. It is likely that the figure for the first quarter of 2010 will also be subject to subsequent revisions as additional data are collected.

It is too early to tell whether this preliminary estimate will ultimately prove consistent with Chancellor Alistair Darling’s projections in the Budget 2010 for UK GDP growth between 1% and 1.5% for 2010.

However, two recent surveys argue that underlying conditions for UK economic growth appear reasonably strong:

Ironically, the UK economy’s sustained return to growth could further complicate the economic challenges facing the next Government. With the recession apparently over, the inevitable austerity measures that will be enacted in the new parliament may seem unnecessary to some parts of the electorate. And some economists warn of the risk that if not correctly judged, these austerity measures could endanger further economic growth and drive up unemployment.

Unemployment hits 14-year high of 8%

Prospects for unemployment are not good. The final unemployment data release prior to the general election will have made very unwelcome reading for Gordon Brown.

The headline unemployment rate hit 8.0%, its highest level in nearly 14 years. And the bad news did not end there. The ILO unemployment level reached 2.50 million (“the highest figure since the three months to December 1994,” according to the ONS) and numbers working part-time because they could not find a full-time job climbed to a series high of 1.05 million.

It appears likely that unemployment will continue to rise in the aftermath of the 2010 general election – no matter which party ultimately wins – as austerity measures on public spending kick in. The CIPD estimates that around 500,000 public sector jobs will be lost over the next five years.

Pay awards stable at 1%

A new stability would appear to have settled across whole-economy pay awards – for now at least – according to pay specialists at IRS/XpertHR. Data on pay trends for the first quarter of 2010 show that the median basic pay award stood at 1% in the three months to 31 March 2010, unchanged from the preceding two rolling quarters.

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Pay awards have therefore rebounded to some extent from the all-time low of zero recorded in July and August 2009, settling into an apparently low and stable pattern. But the 1% headline award is worth only two-thirds of its value a year ago (1.5% in the three months to 31 March 2009).

A breakdown by sector reveals a stark divide: the private sector median was 0.5% over the 12 months to March 2010, 1.5 percentage points below the headline public sector pay award (2%). However, this pattern may not persist for very long after the election.

The March 2010 announcement of pay restraint for some public sector workers represents an overture toward the impact of post-election public spending cuts on public sector pay. But the exact nature of public spending cuts – and the reactions they provoke in public sector workers – remain to be seen.

RPI inflation continues to outperform pay awards…

Pay awards for workers across the whole economy remain firmly parked behind inflation. The spike in inflation is ongoing. Retail prices index (RPI) inflation – the measure most commonly used by private sector pay setters – rose by 4.4% over the 12 months to March 2010, up 0.7 percentage points from 3.7% the previous month. Headline RPI is therefore 3.4 percentage points above the median whole economy pay award of 1%.

…and inflation spike could force an interest rate rise

The recent sharp rise in factory output prices could drive inflation still higher, pushing pay awards (which are unlikely to stage a strong recovery in the near-term) further behind inflation. Rising inflation could also force the Bank of England’s Monetary Policy Committee to raise interest rates, according to the Guardian.

Such an outcome would be counter to forecasts set out by Darling in the Budget 2010, in which he stated that “interest rates [are] expected to remain low and stable“.

Daily Telegraph economics editor Edmund Conway warns that high inflation pushing up interest rates could have dire economic consequences, due to a complex chain reaction involving gilt markets, explained in full here. Conway says:

“Very simply, the minute the Bank of England even thinks about lifting interest rates [...] it will set off a chain reaction which could make a fiscal crisis of the Greek variety all the more likely.”

The May 2010 interest rate decision has been moved from its usual first-Thursday-in-the-month slot to the following Monday (10 May 2010), so as not to coincide with the general election. With interest rates firmly parked at 0.5% for 14 consecutive months, it could be argued that this delay to the May 2010 decision represents the closest thing to a note of unpredictability seen in monetary policy decisions for a long time.

The “sound and fury” of the election campaign

The economy – and what is to be done to enable ongoing recovery while tackling the UK’s record £163.4 billion budget deficit – has rightly emerged as the key issue in the election campaign, and has been vociferously debated. But here the phrase “sound and fury signifying nothing” would appear relevant.

Endless hot air and column inches have been devoted to the back-and-forth over Labour’s planned national insurance increases for 2011, which the Conservatives branded a “tax on jobs”. Sunday Times economics editor David Smith argues that business support for Conservative Shadow Chancellor George Osborne’s proposed reversal of Labour’s planned 2011 national insurance increases is curious, given that Darling would have been pilloried had he made the exact same promise in the Budget 2010. Smith therefore prescribes a healthy dose of scepticism toward all economic pronouncements from the main political parties until 6 May 2010 is past.

Daily Telegraph business editor Alistair Osborne argues that the flare-up over national insurance is a political dead-end. He says the main parties would prefer to focus on this as it represents “an issue almost guaranteed to make voters’ eyes glaze over. Better that than scaring them with a glimpse of the swingeing public spending cuts to come – whoever gets in.” Osborne believes we are seeing ” an election campaign straight from Monty Python”, involving four weeks of campaigning on just about everything but [...] the big issue facing all the parties – how to tackle the deficit that is strangling the life out of our economy.”

Each of the three main political parties has chosen to avoid setting out its stall on planned post-election austerity measures in too much detail. This could be because the likely severity of these measures might not play well with the public. Leaked comments from Bank of England governor Mervyn King take this idea further, suggesting that victory in the 2010 general election could prove a poisoned chalice. US economist David Hale reports that King privately told him that “whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be.”

Manifestos in focus

Each of the main political parties has now published its election manifesto. The XpertHR Group provides detailed guidance on what the manifestos have to offer:

BBC economics editor Stephanie Flanders argues that for all their differences, the Labour and Conservative manifestos share some key characteristics when it comes to the economy:

“[N]either of them makes any further contribution to public understanding on how Britain’s budget deficit is going to be cut. And they both leave plenty out.” According to Flanders, both manifestos are designed to avoid mention “of the fiscal upheaval we face in the next five years.”

In contrast, the Liberal Democrat manifesto (PDF format, 865.9K) includes tables setting out broad details of its proposals on tax and spending.

Little more in the way of detailed economic promises emerged from the third televised prime ministerial debate – held on Thursday 29 April 2010 – despite its ostensible focus on the economy.

Public spending cuts: What can we expect?

Yet despite the best efforts of the Labour and Conservative parties, some limited detail on the potential scale of their plans for post-election public spending cuts has crept out. The Daily Telegraph summarises much of what is known:

“Labour intends to cut waste by £15bn, starting from next year, and pour the proceeds back into public services. The Tories have proposed to cut a further £12bn of waste in the coming years, using £6bn of this to trim the forthcoming increase in national insurance, and the rest on public investment.”

Some further insight was offered by Sir Philip Gershon, who has helped draw up Conservative plans for efficiency savings. He stated in an interview with the Financial Times that planned Conservative controls on public sector recruitment (including reduced use of agency workers and not filling vacancies) would save “perhaps £1 billion to £2 billion” in 2010/2011. The Financial Times calculates that this could translate into the loss of between 20,000 and 40,000 public sector jobs during the next 12 months.

Is public sector post-election strike action inevitable?

Whichever party wins the 2010 general election, and whatever schedule of public spending cuts is pursued, the reaction from public sector workers is likely to be heated, with widespread strike action seemingly inevitable.

Over recent weeks, two key figures in the trade union movement have weighed in on prospects for public sector strike action:

  • TUC general secretary Brendan Barber warns that there are “very real risks” of public sector strike action in response to planned public spending cuts in the aftermath of the election. According to Barber: “If there are serious cuts in public spending and in vital public services, then there are very real risks of some very difficult disputes. Whoever wins the next general election will have to think very carefully before they reach for the axe and what that will mean not only for pay and living standards but for the quality of services that the public sector delivers.”
  • PCSU general secretary Mark Serwotka believes that “the choice in this election is who’s least worst” in terms of public spending cuts and their impact on public sector employment levels. Serwotka argues that public sector unions should therefore plan for action to protect jobs now: “[W]e all know it’s coming. Therefore, what would be irresponsible is to wait till it comes. So what we’re calling for is the public sector unions to get together now, and start preparing the defence. Do I think that will involve industrial action? I think that it’s inevitable. Do I think that industrial action has more chance of success if unions do it together? Absolutely. I think it will be a fatal mistake if each union was left to try and defend its individual sector, where the chances of them succeeding are small.”

The balance of industrial relations has shifted in employers’ favour as a result of the recession and ongoing high unemployment. The likelihood of public sector strike action could consequently be argued to reflect the desperate situation facing public sector workers. As economist David Blanchflower notes:

“At such a difficult time for the UK economy, with high and rising unemployment, low investment and limited spending, it is probably not a great idea to call a strike. Workers usually have very little bargaining power in a recession.”

The CIPD’s prediction at the start of 2010 that the aftermath of the recession could bring widespread unrest to UK workplaces may yet prove entirely accurate.

A lull before another storm?

The current economic situation could well prove to be a lull before another storm. The situation is unusually uncertain, with UK GDP growth weak, inflation elevated, and unemployment high and rising. There are also concerns that the Greek economic crisis could spread across Europe (although some commentators argue that the UK is comparatively unlikely to suffer a similar fate, at least at present).

UK economic recovery is by no means assured, and industrial relations are likely to be characterised by unrest as the next Government is forced to take tough decisions.

In this challenging context, it is essential that employers in all sectors ensure that key decisions on the conditions of employment and on compensation and benefits are underpinned by reliable and authoritative benchmarking data.

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