Economic commentary March 2011: Budget 2011 & protests in prospect

The language of war and conflict is in increasing use as the political, social and economic fabric show signs of wear and tear, internationally and - to some extent - in the UK. Recent notable examples include the following:

• Chancellor George Osborne stated in his speech to the World Economic Forum at Davos on 28 January 2011 that a crucial part of "our vision for growth is a war on all the barriers that stop your businesses expanding, investing and taking new people on." He said that the 2011 Budget will play a crucial role in this war.
• "[E]mployers are facing a sustained increase in workplace unrest as austerity measures, longer working hours, stress and a genuine skills gap take their toll on the UK workforce." This is according to the third annual State of HR report from Speechly Bircham and King's College London.
• IMF chief Dominique Strauss-Kahn issued a bleak assessment of prospects for global economic recovery: "It is not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis." He believes that, over the coming decade, "we could see rising social and political instability within nations - even war."
  
• "Events have a way of building on themselves," notes the Economist, with reference to the way in which the ousting of Mubarak's regime in Egypt has been followed by unrest in Libya and other countries. It concludes: "One watches and hopes for the best. But leaders of more stable countries need to be working hard to make sure they're prepared for the economic impacts of something less than that."

The March 2011 economic commentary from XpertHR looks ahead to Osborne's 2011 Budget (to be delivered on Wednesday 23 March 2011), and to the TUC's planned March 2011 day of action, which could prove a crucial indicator as to whether there is a public appetite for protest at economic austerity. We also round up latest data on all key economic indicators of relevance to HR.

Economic growth: Are we seeing the 'Osborne dip'?

Economic austerity measures could hit UK growth prospects hard, resulting in a faltering recovery that might be termed the "Osborne dip." This theory was posited by economist David Blanchflower more than a year ago, in January 2010. Latest data suggest that this could now be happening.

UK economic growth remains in negative territory. Gross domestic product (GDP) showed growth of -0.6 percentage points in the fourth quarter of 2010, according to latest revised estimates published last week (on Friday 25 February 2011). This compares with the initial estimate of -0.5% GDP growth published one month previously. The next revised GDP estimates for Q4 2011 will be published four weeks today, on Tuesday 29 March 2011.

But while current GDP readings might appear consistent with the theory of an "Osborne dip," such an outcome is by no means guaranteed.

Prospects for growth: Is a 'normal' recovery possible?

[I]s this going to be a "normal" recovery? Or has a once-in-a-century financial crisis thrown the usual rules of macroeconomic policy up in the air?

These questions are posed by BBC economics editor Stephanie Flanders. At present, governments, official bodies and the majority of economists "all believe the usual rules [of economic recovery] do apply." But she argues that the shock negative GDP growth seen in Q4 2010 has had a seismic effect, and could provoke many to reconsider the advisability of austerity measures if it is sustained.

There is some disagreement among economic commentators as to whether the first set of GDP data for 2011 (due to be published on Wednesday 27 April 2011) will show evidence of a January 2011 'bounce back' from the effects of the severe weather seen in the closing weeks of 2010, or signal a double-dip recession.

• On the one hand, a hat-trick of extremely strong Purchasing Managers' Index (PMI) data from the manufacturing, construction and services suggests that January 2011 was a strong month for the economy.
• On the other, NIESR argues that any perceived strong improvement in growth in January 2011 is a distortion resulting from companies carrying over business delayed by the December 2010 snow: "The underlying level of GDP appears relatively flat over the last few months, suggesting the output gap is widening."
  

The Bank of England's February 2011 Inflation Report (PDF format, 679K) states that "the outlook for growth remains highly uncertain." It also includes the following observation:

[T]he strength of the recovery is likely to be dampened by the fiscal consolidation and a continuing squeeze on households' purchasing power from the effects of higher commodity prices and a persistent impact of the recession on productivity and hence wages.

Inflation spike continues as VAT hike kicks in

Inflation is spiking ever higher as the impact of the January 2011 VAT increase is felt. Latest official data on inflation reveal the following:

• Retail prices index (RPI) inflation rose by 5.1% over the 12 months to January 2011. This is up 0.3 percentage points from 4.8% in December 2010.
• Consumer prices index (CPI) inflation - the Government's target measure - rose by 4.0% in January 2011, up 0.3 percentage points on the previous month's figure (3.7%). CPI is now double the Government's symmetrical target rate of 2%, and has remained more than one percentage point above target since January 2010.
  

Inflation is expected to continue to rise in the coming months. Bank of England Governor Mervyn King's February 2011 letter to George Osborne explaining the persistence of above-target inflation stated:

There is a great deal of uncertainty about the medium-term outlook for inflation. [...] Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months.

The Inflation Report expands further, stating that CPI is expected "to remain well above the 2% target over the next year or so, reflecting in part the recent increase in VAT."

Writing in the Telegraph, Damian Reece notes that events in Libya could usher in a new oil price shock, one consequence of which would be further significant upward pressure on inflation in the UK. Reece says:

[T]he implications [...] of a volatile oil price suffering regular price spikes [are] serious. It could dampen growth and push up costs - compounding our stagflation problem and making Mervyn King's interest rate dilemma still more acute.

The oil price shock could also presage a new global recession, according to the Financial Times (sign-in required):

The past five global recessions have all followed sharp jumps in the oil price. Investors, traders and analysts [...] have all been nervously asking is a sixth imminent.

Interest rates: On course for second anniversary at 0.5%

Interest rates remain at the record low of 0.5%, following the February 2011 meeting of the Bank of England Monetary Policy Committee (MPC). A majority of economic commentators expect that interest rates will notch up their second anniversary at this level, when the MPC's next policy decision is announced next week (on Thursday 10 March 2011).

However, interest rates will not remain at this level forever. A rate rise is inevitable. But the timing of the first hike in rates will be crucial.

Interest rates: Will the 2011 rate rise be "nice" or "not nice"?

It is likely that higher interest rates will be necessary later this year - but it is important for the MPC to wait until the economy has absorbed the initial impact of the austerity plan.

This is the view of British Chambers of Commerce Chief Economist David Kern.

Many commentators are concerned that raising rates while inflation remains high could create the perception that the MPC has allowed inflation to get out of control. For example, former MPC member Kate Barker argues that the current MPC members risk a "profound loss" of faith in the eyes of the public and of pay setters.

Current MPC member Charles Bean shares these concerns. Bean argues that whether the inevitable interest rate rise "dents confidence" hinges on whether it is perceived to be a "nice" rise or a "not nice" rise. He offers the following definition:

• A "nice" rise in interest rates: "[I]f we raise rates because the economy is growing quite strongly and the recovery is entrenched, then that's a nice rise in interest rates and unemployment will be coming down."
• A "not nice" rise in interest rates: "[I]f it is in response to a spike in oil prices that we think is likely to persist and inflation is becoming embedded, that is not a nice reason to raise interest rates, but we would have to do it."
  

A "not nice" rise in the near term seems increasingly likely. Mervyn King sought to dampen speculation that an interest rate rise could materialise in Spring 2011. But the minutes of the MPC's February 2011 reveal that three MPC members now favour prompt action to raise interest rates. Daily Telegraph Assistant Editor Jeremy Warner says:

Absent of developments in the Middle East plunging the world back into recession, an actual rate rise by May now looks to be pretty much a done deal.

One potentially "not nice" outcome of a near-term rise in interest rates could be its impact on pay awards. Any rise in UK interest rates could kill pay award growth in 2011, argues US economist Paul Krugman.

Pay awards are stable, but falling further behind inflation

The headline pay award remains stable at a median 2% (subscription required) over the three months to 31 January 2011, according to latest figures from the XpertHR pay databank.

There is some evidence to suggest that pay awards are moving slowly upwards. The XpertHR pay data show that the upper quartile settlement has increased, while pay freezes are in decline.

But a wage-price spiral (in which in which higher inflation, coupled with higher inflation expectations, feeds through into higher wage demands) would appear unlikely:

• The gap between pay and inflation continues to widen in 2011.
• "[M]ost [pay] deals are not coming anywhere near the cost of living as measured by the RPI, or indeed the CPI," says XpertHR pay specialist Sarah Welfare (subscription required).
  

Unemployment expected to keep rising in 2011

Unemployment keeps rising as 2011 progresses, according to latest official data:

• The unemployment rate reached 2.49 million, having risen by 44,000 over the three months to December 2010.
• The youth unemployment rate hit a record high of 20.5%.
• However, the headline unemployment rate (on the ILO definition) held at 7.9% over the three months to December 2010.
  

Economic commentators are united in expecting unemployment to continue to rise over the coming months:

• "A sharp labour market correction, with firms shedding workers US-style at the same that the public sector workforce is trimmed cannot be ruled out," according to the Institute for Fiscal Studies (IFS).
• The CBI expects unemployment to peak "higher than previously expected" at 2.71 million by the end of 2011, falling back only slightly to 2.64 million by the close of 2012.
• Q1 2011 will be "a quarter of reckoning for the jobs market," says the CIPD. We can expect to see "last year's modest recovery [...] reversed by a modest relapse this year."
  

Staying the course on economic austerity: Sticking with Plan A

A February 2011 editorial in the Guardian argued that Osborne's economic strategy has reached a "turning point," with previously supportive commentators such as NIESR, the IFS and the CBI now criticising the Chancellor's approach as unemployment shoots up and GDP growth goes negative.

But the Coalition Government is resolute that it is not for turning. Discussing the 2011 Budget in a Telegraph interview, Prime Minister David Cameron ruled out both tax cuts and an economic Plan 'B':

The most important thing is to pursue properly plan A. That is to deal with the deficit, yes, but also to have a clear set of measures to help encourage the private sector to grow. And that is what we're doing. [...] to deliver what we have talked about, which is deficit reduction, and pro-growth policies.

Looking ahead to the 2011 Budget: "The future favours the bold"

Spring 2011 begins on Sunday 20 March 2011. The first week of Spring 2011 will see two key events, which are likely to illustrate the polarities of thought on the Coalition Government's package of economic austerity measures:

• The first is Osborne's 2011 Budget speech, to be delivered on Wednesday 23 March 2011.
• The second is the TUC's planned "day of action" in protest at public spending cuts.
  

Osborne gave an overview of what might be expected from the 2011 Budget in his speech at Davos:

The ambition of my Budget on 23 March will be to turn the tide on the forces of stagnation. And the guiding principle as I put the Budget together will be: the future favours the bold.

As we noted last month, it appears to be the case that Osborne counts UK trade unions among the "forces of stagnation." But despite Osborne's avowed willingness "to consider changes to the law around strikes," it is unlikely that the 2011 Budget will include any measures aimed at the unions.

So what might we expect from the 2011 Budget? Much of the Coalition Government's broad economic strategy for the period to 2015 was sketched out in Osborne's June 2010 Budget.

A further major policy decision - which might normally have been expected to represent a core part of the 2011 Budget speech - was set out in last month's announcement on Project Merlin.

Recent weeks have seen hints emerging as to other measures that might be included in the 2011 Budget. These include:

• measures to promote economic growth;
• a possible delay in the fuel duty increase scheduled for April 2011; and
• reform of the rules on "controlled foreign companies."
  

It remains to be seen if the national minimum wage rate for 2011/2012 (which will come into effect from 1 October 2011) will be announced in the 2011 Budget speech. The national minimum wage 2011/2012 announcement will be highly anticipated, as this will represent the first time that the level of the national minimum wage will have been set under a Conservative Chancellor since the introduction of the national minimum wage in 1999.

TUC promises "biggest and boldest event in our history" for 26 March 2011

Three days after the 2011 Budget, the TUC is staging what it describes as "the biggest and boldest event in our history" in protest at economic austerity measures, on Saturday 26 March 2011. It plans a day of action centred on London, billed as the March for the Alternative. TUC general secretary Brendan Barber explains the TUC perspective on public spending cuts that informs the planned protest:

[T]here is nothing inevitable about these cuts. They are part of a political project to shrink the state and privatise services, and are a conscious rejection of alternative policies of fair tax and economic growth."

The TUC event on 26 March 2011 represents a crucial test of public appetite for protest at economic austerity measures. The ability of the unions to galvanise public protest in response to economic austerity measures will be put to its first major test.

However, some commentators argue that the full picture of the public reaction to spending cuts will emerge more slowly, as their true impact begins to be felt and the exact shape of the 'new normal' becomes apparent.

As UK HR blogger Rick states in the Flip Chart Fairy Tales blog:

This will be a world with fewer swimming pools, dirtier streets, less frequent bin collections, limited care for the elderly and no public lavatories. At the same time, parking charges, allotment rents, cremation costs and replacement rubbish bins will become more expensive. How people react to this remains to be seen but, as the scale of the cuts sinks in over time, it would be surprising if people did not react with some anger."

Informed decisions are key for successful HR activities

Budgets are also a key concern for many HR practitioners in 2011. One in three organisations has seen their annual HR department running costs budget decrease over the past two years, latest XpertHR benchmarking research reveals (XpertHR benchmarking subscription required). And three-tenths expect their HR running costs budget to be scaled back over the next two years (XpertHR benchmarking subscription required).

With the economic outlook remaining uncertain and HR budgets shrinking at many organisations, challenging times remain in prospect for HR and pay practitioners. It is consequently ever more essential that all decisions relating to pay and employment conditions are supported by absolutely reliable benchmarking and job pricing data.

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