Economic commentary January 2011: Prospects for the coming year

A faltering economic recovery might be underway, but the challenging circumstances continue to stack up for the economy and for HR as 2011 dawns.

Latest data on growth in gross domestic product (GDP) show that the UK economy is continuing to recover from recession, although growth is weaker than previously thought. Some commentators remain concerned that we are not out of the woods yet.

Indeed, former UK Prime Minister Gordon Brown has warned that the coming decade could see a "decline of the West," in which the pursuit of austerity measures could see the West fall behind Asia. Brown believes that Europe and the US "face high unemployment for a decade and worsening youth unemployment to come."

The full impact of the Coalition Government's programme of austerity measures on the UK economy has yet to be felt. But some argue that they offer opportunities for HR, as well as challenges.

Economic prospects for 2011

Here we canvass the views of a number of commentators and bloggers as to the economic prospects for 2011. Each was asked two questions:

• What are your expectations for the UK economy in 2011? and
• What could this mean for HR?
  

The following individuals provide their responses to these questions:

• John Philpott, CIPD
• Mark Swift, EEF
• The HRD
• Dr Paul L Latreille
  
• Kevin J Ball
  

We additionally present details of latest data on key economic indicators of interest to HR. You can also get at-a-glance data on these indicators from our pay bargaining statistics table for January 2011.

John Philpott: The CIPD perspective

John Philpott is the CIPD's chief economic adviser. You can read his blog on the CIPD website.

2011 will be a 'fingers crossed year'. The economic outlook has rarely been more uncertain. If all goes well and the unexpectedly strong progress made in 2010 is sustained, the jobs market will be able to cope with the impact of the government's spending cuts and tax increases without any significant rise in unemployment. However, things only have to turn out a bit worse than expected for the jobs situation to weaken, which remains the CIPD's expectation. As the disappointing official unemployment figures published at the end of December 2010 indicate, relative optimism can easily give way to a more sombre outlook.

This doesn't mean that we are facing a return to the dire days of late 2008 and 2009. But 2011 will nonetheless probably feel like another year in the economic doldrums rather than the start of a rapid return to prosperity, with unemployment rising from 2.5 million to around 2.7 million. Moreover, even if the jobs situation doesn't deteriorate significantly the bulk of workers will feel a squeeze in their living standards, with pay rises still relatively modest against a backdrop of higher prices for many essential products and higher taxes. Add in the possibility of employment disputes and wider social discontent arising from the fiscal squeeze and public sector job cuts and it's not hard to conclude that 2011 could prove to be a troubled year all round. HR will, as always, play a pivotal role in ensuring organisations across all sectors of the economy are resilient in the face of any such turbulence.

Mark Swift: The EEF perspective

Mark Swift is head of media relations at EEF, the manufacturers' organisation. You can read his blog posts here.

Manufacturers have performed strongly in 2010 as the UK and global economies have recovered. A major component of this has been manufacturers' ability to capitalise on exports, especially to emerging markets. The latest forecasts from EEF show that while plans for growth were inevitably hampered during the recession, the focus for the next three years is to make further gains in global markets, underpinned with investment in new machinery and innovation in the UK.

As a result, EEF is forecasting that manufacturing will outperform the rest of the economy in 2011 and 2012. This growth in manufacturing will be especially important, as the responsibility for creating jobs and wealth now falls increasingly on the private sector with the public sector taking a back seat.

Whilst the mood amongst manufacturers is one of optimism, it is tinged with some uncertainties at home and abroad. Firstly, whilst access to finance has improved over the last year, it remains a problem, especially for small and medium size companies which could hamper their efforts to invest and grow. Secondly, the impact of spending cuts at home and austerity programmes across Europe could dampen demand in what remains the UK's main export market. Finally, there is the impact of rises in the cost of raw materials and the prospect of increased volatility in exchange rates due to currency wars.

Despite these factors, 2011 should see the rebalancing of the UK economy firmly underway with a shift in emphasis from the public to the private sector and manufacturing generating sustainable economic growth.

The HRD: The HR director's perspective

Anonymous blogger the HRD is a UK HR director, and author of the My Hell Is Other People blog.

I'm going to admit very early on here to a volte-face. Four or five months ago I was predicting economic meltdown in Q1 of 2011. I no longer think that is the case, but I do think it will be tough. The VAT increase is going to take a while to be accommodated in the minds of consumers and initial volatility in the Foreign exchange market (FX) could play havoc with the price of imports and exports. Could we also see a run on the pound? Maybe. The collapse of the Euro as we know it? I wouldn't rule it out.

OK, so maybe that doesn't sound THAT much better than I was predicting. But if the job losses in the public sector aren't as great as originally thought, then that at least is one thing to be thankful for. It is going to be a hard first half to the year in 2011, but, disasters aside, not much harder than the last 18 months. And then in the second half to last quarter we are going to see things picking up.

Given this, my message to HR professionals is this: "The world does not end in December 2011." This is not about getting through the next year, this is about taking advantage of the economic environment to put in place growth plans. This is the time to start thinking about the skills that are going to make your business successful over the next decade.

The industrial relations environment is going to be tough, motivation and engagement won't be easy, and the temptation to focus on the here and now strong. But that won't get us anywhere. The world is changing rapidly, the rise of Brazil, Russia, India and China (BRIC) - the new economic super powers - relentless.

But UK businesses have a massive competitive edge in the intellectual capital that we hold and the people that we employ.

There is a huge opportunity for the HR profession to step to the front in 2011. It would be a hell of shame to waste it.

Dr Paul L Latreille: The economist's perspective

Dr Paul Latreille is an economist at the Swansea University School of Business and Economics.

Let's start with inflation. This has remained persistently above target and while the Bank of England Monetary Policy Committee (MPC) appear divided on the issue and the appropriate response, there seems little prospect it will fall below these elevated levels during 2011. Most supply-side factors work against inflation dropping back below the 2% consumer prices index (CPI) target: oil prices, VAT increases and fuel duty chief among these. As these begin to kick in, the hawks' pressure for interest rate rises will grow, despite little inflationary impetus from wage settlements and somewhat fragile consumer confidence.

What about unemployment? Again, matters are not promising. Despite improvements in the recent past, the impact of Government budget cuts is likely to be felt more obviously during the next year. The effect will be felt in the private sector too as providers of goods and services to Government, so that the overall effect of the austerity measures will be much greater (something economists describe as the 'multiplier effect', and which may counteract the desired deficit reduction). As noted by John Philpott in his CIPD Work Audit, the cuts in train will likely have a particularly pronounced impact on women, who dominate public sector employment. Indeed, unemployment recently hit the one million mark for women for the first time in more than 20 years.

What does all this imply for HR? First, the focus for many practitioners, and especially those in large parts of the public sector, is inevitably going to be on cost reduction, including headcount. But recent experience suggests there may be an appetite for more imaginative alternatives that share the pain. Even so, it would be a surprise not to see this resulting in increased levels of workplace conflict, some of which is likely to result in further rises in the number of Employment Tribunal claims. A second implication is thus likely to be an ongoing commitment to dealing with such issues and their fallout. Third, these changes will almost certainly have to be delivered with less resource. The challenge - to which the HR community will undoubtedly rise - will be to continue to deliver even in the face of reduced budgets and without cutting soft targets such as training.

This arguably bleak picture assumes the continued stability in the eurozone. To date, loans have been successful in shoring things up, but the sharks continue to circle, with Portugal, Spain and Belgium all potential targets. The first failure and all bets are off.

Kevin J Ball: The HR strategist's perspective

HR strategist and writer Kevin J Ball was the author of the inaugural post in XpertHR's ongoing "If I could change one thing about HR..." series, and is a regular blogger on the People Matters site from West Consulting.

I support the Office for Budget Responsibility's (OBR) GDP forecast of 2.3% for 2011. This involves a slow start to the year as VAT rises and government cuts bite. I think The Bank of England is right to expect a year of 3.3% CPI inflation, so expect an interest rate rise in the autumn. The ONS reports pay settlements (in terms of whole-economy average regular pay growth) rising by 2.2%, so we're all going to be poorer in 2011. UK's 7.9% unemployment rate looks modest compared with eurozone's 10.1% and USA's 9.8%. My guess is a rise to around 2.8 million by the middle of 2011.

I see downside political risk - we are tiptoeing between a stalling US recovery and a eurozone debt crisis: worsening of either would hurt us. A steady hand from the Coalition so far shouldn't let us forget how fragile they could be. A tough economic start to 2011, tuition fees and voting reform are all real hazards that add to an air of business caution for 2011.

For HR, I see a continuing siege mentality. Businesses will squeeze pay downwards and invest only cautiously. The trend towards part-time and fixed-term employment will continue. We can expect more employee-unfriendly attitudes and policies from the Government. Enlightened employers could usefully recognise the withdrawal of the State as an opportunity for a greater social role: McDonald's degrees sound amusing to the snobbish, but this could be a model of employment from the nineteenth century that offers competitive advantage in the twenty-first while skills continue to be in short supply."

Economic growth: 2010 GDP growth estimates revised down

Economic recovery is ongoing, but weaker than was previously thought, according to latest estimates on GDP growth (PDF format, 247.3K) released on Wednesday 22 December 2010. Growth for each of the first three quarters of 2010 was revised down in the latest data release:

• 2010 Q3 GDP growth was 0.7% (revised down from 0.8%);
• 2010 Q2 GDP growth was 1.1% (down from 1.2%); and
• 2010 Q1 GDP growth was 0.3% (down from 0.4%).
  

Preliminary estimates on GDP growth for the fourth quarter of 2010 will be published toward the end of this month (on Tuesday 25 January 2011). These figures will provide a crucial indicator as to whether economic recovery is ongoing, as well as a first estimate as to the overall picture for GDP growth in 2010 as a whole.

The economy is expected to grow by 2.1% this year, according to latest projections from the OBR (PDF format, 3.9MB), which were revised down from its previous forecast for 2.3% growth in 2011. Osborne argues that the OBR report confirms that his approach is working, and that a double-dip recession can be avoided. Only time will tell if he is correct.

Pay awards: A new stability at 2%?

Pay awards would appear to have fully recovered (subscription required) from their collapse during the recession to a record low of zero, and are now showing some signs of stability. This is according to latest data from the XpertHR pay databank. The whole economy median pay award stands at 2% for the three months to 30 November 2010, unchanged from the rate recorded for the preceding four rolling quarters.

Private sector employers expect pay awards to hold steady at this level during the coming year. XpertHR's 2010/2011 private sector pay prospects survey (subscription required) finds that employers expect the median pay award for the 2010/2011 wage round (the year from 1 October 2010 to 30 September 2011) will be 2%. This compares with a 1.2% median pay award recorded in 2009/2010.

Unemployment shows sharp rise

Latest unemployment data (PDF format, 331.6K) revealed a pre-Christmas surge in unemployment:

• The headline unemployment rate (on the ILO definition) rose to 7.9% over the three-month period from August to October 2010. The ONS reports that "this is the first quarterly increase in the unemployment rate since the three months to April 2010."
• The ILO unemployment level was 2.50 million over the period August to October 2010, up 35,000 on the previous quarter.
• The employment rate ran at 70.6% in the three months to October 2010 (down 0.1 percentage point from 70.7% in the previous rolling quarter).
• The inactivity rate held at 23.2% over the three months to October 2010, unchanged on the quarter. However, the number of working age people who are inactive increased, hitting 9.29 million.
  

It is widely agreed that the unemployment rate will climb higher during 2011, as the full impact of public spending cuts begins to be felt.

Inflation: Is high inflation here to stay for 2011?

Inflation was elevated throughout 2010, and remains so as the New Year begins. Latest data (published on Tuesday 14 December 2010) revealed a further surge in inflation:

• Retail prices index (RPI) inflation ran at 4.7% in November 2010, a rise of 0.2 percentage points when compared with the rate recorded one month previously (4.5%). RPI therefore remains significantly higher (by 2.7 percentage points) than the headline pay award (which is worth 2%).
• CPI inflation remains above target, coming in at 3.3% in November 2010 (up from 3.2% in October).
  

Sunday Times economics editor David Smith argues that "the inflation problem will get worse before it gets better." The increase in VAT from 17.5% to 20% - which comes into effect on Tuesday 4 January 2011 - will inevitably contribute significant upward pressure on inflation over the coming months. Rising fuel prices will also play their part.

High inflation therefore appears set to continue for the time being:

• CPI "inflation [is] likely to rise further over coming six months and could well reach 4% by the spring, somewhat higher than the November Inflation Report central projection," according to the minutes of the MPC's December 2010 meeting (PDF format, 53.7K).
• RPI inflation is expected to average 4.5% over the course of 2010 as a whole  (subscription required), according to latest forecasts compiled by XpertHR. It is then projected to fall back to 3.8% during 2011.
  

Interest rates: No move from 0.5% for now

To no-one's great surprise, the MPC voted to keep UK interest rates at their current record low of 0.5% (at which they have been parked since March 2009) at their final meeting of 2010.

Sunday Times economics editor David Smith believes that rates will remain unchanged during the opening months of 2011. Smith says "it is a safe bet that we will get to the second anniversary of that without any change."

However, pressure is growing from some members of the MPC for interest rates to be raised. MPC member Adam Posen has also been vocal in criticising Bank of England Governor Mervyn King's support of the Coalition Government's austerity measures as "excessively political." It will be interesting to see how these internal tensions within the MPC play out over 2011.

Employee relations: Will 2011 bring industrial unrest or "weary resignation"?

A key question for employers as 2011 unfolds will be the extent to which trade unions are successful in harnessing any adverse reactions to the Coalition Government's public spending cuts into widespread strike action.

Latest data on labour disputes (subscription required) show that strike action is currently running at only a fraction of the levels seen in peak years (PDF format, 29.3K), such as 1912, 1921, 1926, 1972, 1979 and 1984.

Michael Blastland speculates that these figures suggest that the UK workforce might have lost its appetite for strike action. In Blastland's view, "maybe the most interesting and typical thing about workplace relations throughout this recession [...] is that they seem to have been marked by weary resignation in the workforce or, dare we say it, co-operation during hard times on both sides."

The UK trade union movement is approaching a decisive moment as it attempts to reassert its relevance by opposing public spending cuts.

The key test of whether the UK public has indeed lost its appetite for strike action could come early in 2011:

• The Unite union is "preparing for battle" with coordinated industrial action in early 2011, according to Unite leader Len McCluskey.
• The TUC has announced that it will stage the "biggest and boldest event in our history": a national "mobilisation" which "will culminate in a national demonstration in central London" on Saturday 26 March 2011.

Rebalancing the economy in 2011 and beyond: "A huge HR project for UK plc"

It is certain that 2011 will prove to be particularly abundant with both challenges and opportunities for HR. Many HR practitioners will be tasked with helping shore up their organisation during an uncertain and bumpy economic recovery. Those in the public sector, meanwhile, will also be faced with challenges arising from the public spending cuts and their implementation.

Indeed, as pseudonymous blogger Redundant Public Servant notes, the challenges and opportunities facing the UK economy as a whole can be likened to an HR project. He writes:

I've made the point before (as have others like @FlipChartFT) that the rebalancing of the economy that the government is pursuing is a huge HR project for UK plc. If there is to be a successful shift of workers from public to private spheres it seems to me that providing an adequate level of support at the start of the journey would be sensible.

Let us hope that the UK HR profession once more proves itself capable of rising to the challenges awaiting it as the year unfolds.

And a happy and prosperous New Year to one and all!

• Key bargaining statistics on pay, prices and employment for January 2011