XpertHR economic commentary October 2011: Welcome to the low-growth world

Economic growth prospects hit by global 'crisis of confidence'

The markets have been in turmoil in recent weeks.

The global economy is suffering from "a clear crisis of confidence," which is likely to dampen growth prospects. This is according to IMF Managing Director Christine Largarde in an interview with Der Spiegel.

Lagarde called on governments around the world to deliver "fiscal consolidation qualified by growth-intensive measures" in order to break the "vicious circle" of falling confidence and consequent low growth. Lagarde's message was reinforced by the IMF repeating its "mantra that both domestic and external rebalancing are essential to a revitalised global economy." It argues that governments around the world must balance austerity measures with a commitment to promoting growth:

Fiscal consolidation cannot be so fast that it kills growth, nor so slow that it kills recovery. The key is credible medium-term consolidation.

With growth sluggish at best in many major economies, there is real concern that we could be looking at a double-dip recession. The Telegraph's Damian Reece says: "Some put the chances of recession in Europe as high as 50%. If that happens then the UK can't possibly escape."

At present, UK economic growth remains in positive territory - but only just. As we reported last month, the UK economy grew by 0.2% in the second quarter of 2011. The Office for National Statistics (ONS) is scheduled to publish its next revised estimate on growth in gross domestic product (GDP) on Wednesday 5 October 2011. Preliminary estimates for growth in the third quarter of 2011 are due out one month today, on Tuesday 1 November 2011.

Global recession in prospect for 2012?
A "low-growth world" could yet prove to be the best case scenario, if the pessimistic findings of a new global poll of 1,031 investors, traders and analysts from Bloomberg are anything to go by. Bloomberg reports that a majority of those surveyed "anticipate Europe's debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year."

Around three-quarters of the investors, traders and analysts surveyed expect the euro area to fall into recession within the next 12 months, while "more than a third of participants say deteriorating European debt will derail the world economy over the next year."

A brace of other recent reports have set out less pessimistic - but nonetheless gloomy - projections for growth in the UK and around the world:

• "The UK's economic recovery is more anaemic than most expected at the start of the year. We expect weak growth of 1.1% in 2011." This is the view of the British Chambers of Commerce (BCC).
  
• "The global economic recovery is in a dangerous new phase." This according to the IMF World Economic Outlook. The IMF has cut its forecast for global economic growth in 2011 from 5% to 4%, but warns that "even this lowered projection counts on a lot going well." It has downgraded its expectations for UK economic growth for 2011 to 1.1% (down from 1.5%), and for 2012 to 1.6% (down from 2.3%). The IMF is currently putting together a "large and ambitious eurozone rescue plan" to be unveiled next month.
  
• NIESR estimates that the UK economy grew by just 0.2% in the third quarter of 2011. NIESR contends that - provided we do not fall back into recession - we are now in a prolonged period of depression, which could endure until 2013.
• The OECD sees slowing growth across the globe. It says that "the recovery almost came to a halt in the second quarter in many OECD economies." The UK is not immune to this trend. The OECD's central projection for the UK economy is for 0.4% GDP growth in Q3 2011and 0.3% in Q4. It also cautions that uncertainty around its projections is "unusually large," as a result of tumultuous global economic circumstances.
  

It is also likely that UK economic growth could be affected by a planned wave of strike action in protest at public sector job cuts and pensions changes. The public sector unions have scheduled the first nationwide "day of action" for the end of next month (Wednesday 30 November 2011).

Osborne to deliver autumn statement next month (29 November 2011)

One day before the unions' "day of action" Chancellor George Osborne will deliver his autumn statement (which replaces the Pre-Budget Report) on Tuesday 29 November 2011.

The Financial Times suggests that Osborne could use his autumn statement to announce "bold measures" to restore growth. It reports that Osborne has recently said "that the eurozone crisis gave him the opportunity to make some difficult trade-offs in favour of growth that might get parked in the 'too difficult' box in calmer times."

What might we expect from Osborne's autumn statement?

• It seems all but certain that the Chancellor will announce business tax cuts.
• It remains to be seen if he will accede to calls for the 50p income tax rate to be scrapped.
• Osborne may announce new capital spending measures. The BBC reports that plans are being drawn up to inject "as much as £5bn in extra capital spending, on top of what was announced in March's Budget, could be channelled towards the nation's roads, rail and broadband internet."
  

The Office for Budget Responsibility (OBR) will also publish its next UK economic outlook report on 29 November. The OBR is expected to downgrade its assessment of UK growth prospects. Osborne has already acknowledged that "we have all had to revise down our short-term expectations [for growth] over recent weeks."

Targeting US economic growth: Actions from Obama and the Fed

It will be interesting to compare Osborne's growth measures with those set out by President Barack Obama.

Obama last month unveiled the American Jobs Act: a $447 billion package of proposed tax cuts and spending plans, designed to create jobs and reboot economic growth. The Wall Street Journal reports:

Mr Obama studiously avoided calling his American Jobs Act a 'stimulus' plan, a term freighted with political baggage.

However, Obama's proposals could yet be stymied by the Republican-dominated Congress.

The Federal Reserve Bank (FRB) also launched an "unconventional" plan of action to stimulate the economy, nicknamed Operation Twist.

Operation Twist involves the launch of a new $400 billion 'Maturity Extension Program and Reinvestment Policy', which the FRB says is intended to "put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery."

Unemployment: Private sector failing to replace lost public sector jobs

Measures to stimulate job creation may also be required in the UK. The private sector is failing to replace jobs lost in the public sector, according to latest unemployment data from ONS. Public sector employment fell by 111,000 over the three months to June 2011, while private sector employment rose by 41,000 over the same period.

This was not the only bad news in the latest ONS unemployment data:

• The headline unemployment rate (on the ILO definition) was 7.9% between May and July 2011, up 0.3 percentage points on the preceding three-month period (7.6%).
• The number of unemployed women showed an increase of 41,000 on the quarter to hit 1.06 million: "the highest figure since the three months to April 1988," according to ONS.
• The number of unemployed men rose by 39,000, to 1.45 million.
• For a third successive month the number of people forced into part-time work ("because they could not find a full-time job") has hit a record high, rising to 1.28 million in the latest quarter.
• The youth unemployment rate was 20.8% over the three months between May and July 2011, an increase of 1.6 percentage points on the previous quarter.
  

The British Chambers of Commerce (BCC) expects unemployment to continue to climb for the next year:

Unemployment is now forecast to peak in Q4 2012, at 2.62 million; in June, we predicted a slightly lower jobless peak of 2.6 million in Q2 2012. But, given the difficult economic background, the expected rise in unemployment is moderate, and the UK labour market is set to remain quite resilient overall.

Is inflation 'about to peak'?

Inflation is once again uncomfortably high and rising, latest official inflation figures from the ONS reveal:

• Retail prices index (RPI) inflation rose by 5.2% over the 12 months to August 2011. This is up 0.2 percentage points from 5.0% a month ago.
• Consumer prices index (CPI) inflation - the Government's target measure - ran at 4.5% in August 2011, an increase of 0.1 percentage point on the previous month's figure (4.4%). CPI has once again come in at more than double the official target rate of 2%.  
  

How much further might we expect inflation to rise?

CPI is widely expected to top 5% at some point in the next few months. But it may not rise much further thereafter.

Bank of England Monetary Policy Committee (MPC) member Adam Posen argues that CPI is "about to peak." Posen believes that inflation will then fall back, once "temporary factors" (such as the influence of the January 2011 VAT hike) fall out of inflation data. He says:

The point is that the UK's economic recovery is weak, and has been weak in precisely the ways that fit with a mainstream view of what happens following a financial crisis. Given that dynamic, there is no reason to think that there will be sustained higher inflation in the UK.

Pay awards remain subdued

The headline pay award is worth 2% (XpertHR subscription required). This is according to latest readings from the XpertHR pay databank for the three month period ending 31 August 2011. The headline pay award is consequently 3.2 percentage points below RPI inflation.

The XpertHR analysis also reveals that one settlement in five gave no pay increase.

Below-inflation pay awards are making life hard for UK households. Indeed, the worst effects of the so-called 'great recession' on UK household incomes have yet to be felt, according to a report from the London School of Economics (LSE). The report says:

Declines in living standards look set to continue until at least 2013-14. If realised, this would mean that average living standards had not grown in well over ten years, making it one of the worst decades for changes in living standards since at least the Second World War.

It remains to be seen what impact the 2011/2012 national minimum wage uprating - which comes into effect from today (Saturday 1 October 2011) - will have on whole-economy pay awards in the closing months of 2011.

The CIPD's Charles Cotton expects that the 2011/2012 national minimum wage increase is likely help drive "some increase in the number of private sector workers receiving a pay award in the second half of 2011, especially in the retail, catering and hotel sectors."

National minimum wage increases for 2011/2012 effective from today

The increases to the national minimum wage for 2011/2012 come into effect today (1 October 2011). The new national minimum wage rates for 2011/2012 are as follows:

• The national minimum wage adult rate increases to £6.08 per hour for 2011/2012. This represents an increase of 2.5% on the 2010/2011 national minimum wage adult rate, which previously stood at £5.93 per hour (from 1 October 2010 to 30 September 2011). The 2011/2012 national minimum wage adult rate (at £6.08 per hour) is therefore set 15p per hour higher than the 2010/2011 rate. The Low Pay Commission's (LPC) 2011 report says that "the 2011/2012 national minimum wage adult rate increase "take[s] account of the continued economic uncertainty while protecting the lowest-paid workers from falling further behind the average."
• The national minimum wage "youth development rate" (for workers aged 18 to 20) rises to £4.98 per hour (an increase of 6p per hour, or 1.2%, from the previous rate of £4.92 per hour).
• The national minimum wage youth rate (for workers aged 16 and 17) now stands at £3.68 per hour (an increase of 4p per hour, or 1.1%, from the 2010/2011 rate of £3.64 per hour).
• The apprentice minimum wage rate rises from to £2.60 per hour (an increase of 10p per hour, or 4.0%, from the 2010/2011 rate of £2.50 per hour).
• The Government has published guidance on the national minimum wage for interns (XpertHR subscription required). XpertHR reports that the guidance "confirms that entitlement to the national minimum wage does not depend on an individual's job title but on whether the arrangement that he or she has with an organisation makes him or her a 'worker' for national minimum wage purposes."
• Click here for further details of the decisions underpinning the 2011/2012 national minimum wage increases.
  

The future of the national minimum wage: Two-year increases and removal of income tax burden in prospect?

So what might we expect from future annual increases to the national minimum wage? It is possible that we will see major change to the national minimum wage over the coming years. Potential changes include: the introduction of two-year national minimum wage increases; and an increase of the minimum income tax threshold to remove income tax obligations from workers on the national minimum wage.

The LPC has already been issued with the remit for its 2012 report (to be delivered by the end of February 2012), which will recommend the level of national minimum wage rates for 2012/2013 (effective from Monday 1 October 2012).

The remit includes a "simplification agenda," under which the LPC must "consider whether national minimum wage regulations can be made even simpler and easier to administer." One aspect of this "simplification agenda" is to consider "the removal, simplification or consolidation of any elements of the national minimum wage."

The LPC is also tasked to "consider the best way to give business greater clarity on future levels of the national minimum wage, including the option of two-year recommendations." Such a move would address a common complaint from some employers, who feel that the current system does not provide sufficient time to prepare for each year's national minimum wage increase.

Indeed, nearly two-fifths of employers surveyed by XpertHR in 2011 said that the national minimum wage should be updated every two years (XpertHR Benchmarking subscription required).

Further down the line, reports suggest that the Coalition Government will announce plans to remove income tax obligations from workers receiving the national minimum wage in time for the 2015 general election. The Guardian's Allegra Stratton reports:

[The Government is] committed to raising the income-tax-free threshold to £10,000 by 2015, but they would like to go into the next election pledging to lift all low earners on the [national] minimum wage or less out of income tax altogether. A pre-election reintroduction of the 10p rate would ease life for those on just that little bit above £10k before they can be given their earnings fully tax-free.

Interest rates: Prospect of rate rise recedes...

Interest rates remain at their record low of 0.5%, following the September 2011 meeting of the Bank of England Monetary Policy Committee (MPC).

It seems that with each passing month, prospects of an interest rate increase become ever more distant. Indeed, in a recent speech at Chatham House, Osborne cited ongoing low interest rates as a key achievement of his unswerving commitment to his economic plan A:

Britain will stick to the deficit plan we've set out. It's the rock of stability on which our recovery is built. It's delivered record low interest rates. Abandoning it would put that at risk.

...but further quantitative easing moves up the agenda

The MPC also voted at its September 2011 meeting to maintain the value of its programme of quantitative easing (defined by the Guardian as "the economic term for allowing the Bank of England to print more money") at £200 billion. But it appears increasingly likely that the MPC could move to extend quantitative easing in the near term, in an attempt to revive economic growth. Many analysts believe that if such a strategy is pursued, it is likely to be decided at the MPC's November 2011 meeting. However, economist David Blanchflower suggests that such a move could come as early as this week. The Observer reports that this view is gaining ground with analysts.

Over recent weeks, both the BCC and the Institute of Directors (IoD) have called for a £50 billion extension of quantitative easing, from £200 billion to £250 billion.

Bank of England research suggests that quantitative easing has had a "significant" impact on the economy (although it also cautions that there is "considerable uncertainty around the precise magnitude of the impact."). It reports that quantitative easing may have boosted GDP by between 1.5% and 2%. However, it could also have increased CPI inflation by between 0.75% and 1.5%.

Indeed, the MPC will have to weigh up the possibility that renewed quantitative easing could also serve to drive inflation still higher. Speaking to the Guardian, Jeremy Cook of World First says:

The main argument against [further quantitative easing] will have been the inflation picture in the UK and, as such, we maintain the view that the Bank of England will sit on its hands until the BoE meeting in November during [the results of which will be announced on Thursday 10 November 2011] which it will have the Quarterly Inflation Report to consult.

Even if the MPC pursues this policy, its intended outcome is by no means guaranteed. It remains to be seen whether renewed quantitative easing might be sufficient to restore UK economic growth and prevent a double-dip recession.

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