XpertHR economic commentary November 2011: For a few billion pounds more

rexfeatures_633320b.jpgWith Chancellor George Osborne sticking to his guns on plan A, the November 2011 XpertHR economic commentary assesses prospects for growth and asks if we might now be in for an age of long-haul austerity.

“Right now, temporary tax cuts or more spending are two sides of exactly the same coin – a coin that has to be borrowed. [...] We’d be risking our nation’s credit rating for a few billion pounds more …”

The above words come from George Osborne’s speech to the Conservative Party Conference in Manchester on 3 October 2011. Osborne ruled out the possibility of temporary tax cuts as a measure to promote economic growth, and once again to reiterated his commitment to his economic plan A.

In the face of a crisis of economic confidence – two-thirds of UK managers believe a double-dip recession is a foregone conclusion, while a Bank of England expert believes it is a “significant” possibility – Osborne is sticking to his guns.

Last month also saw the Bank of England pump “a few billion pounds more” into the economy in an effort to stimulate growth, through a £75 billion extension to its programme of quantitative easing.

The November 2011 XpertHR economic commentary rounds up the latest data on key economic measures of relevance to HR professionals and reward practitioners (including economic growth, inflation, pay awards and unemployment). We also report on the extension of quantitative easing (nicknamed “QE2″) and look ahead to Osborne’s autumn statement.

The most serious financial crisis since the 1930s?

“This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever, ” says Bank of England Governor Mervyn King, expressing a widespread and growing sense of unease about the state of the global economy.

The debt crisis in the eurozone appears to have been allayed by last week’s deal to expand the eurozone bail-out fund, and produced a rally in the stock markets, although this would appear to have swiftly abated.

But the debt crisis has not been decisively resolved. As Chris Dillow, writing in Investors Chronicle, points out: “Economists agree that, for now at least, the plans are sketchy.” For example, the summit calls on national governments to recapitalise banks if this cannot be achieved via private sources of capital. Dillow says:”But these are the same governments that are struggling to cut debt.”

Indeed, some of the more alarmist commentators warn that things could still be about to get significantly worse for the global economy:

  • The International Labour Organisation’s (ILO) World of Work report 2011 warns that the global economy is at the brink of a renewed and more severe jobs depression, which could delay global recovery and ignite social unrest in many territories.
  • The OECD says that “uncertainties regarding the short-term [global] economic outlook have risen dramatically in recent months.” It now expects euro area GDP growth of just 0.3% in 2012.
  • The Guardian reports that “economists [are] united in arguing that the eurozone is now in recession,” and are now waiting for official data on eurozone growth (due later this month) to confirm this.
  • The Telegraph quotes a “senior London-based credit analyst” who says: “The money ran out in June and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western.”

UK economy grew by 0.5% in third quarter of 2011

For now, the UK economy has avoided falling back into negative territory.

The UK economy grew by 0.5% in the third quarter of 2011. This is according to the preliminary estimate on growth in gross domestic product (GDP) published by the Office for National Statistics today (Tuesday 1 November 2011). ONS says “there is no evidence to suggest that the riots in August had any significant impact on GDP for Q3.”

A revised estimate for Q3 growth follows in short order (on Thursday 24 November 2011).

Prospects for UK economic growth: Gloom abounds

Growth is ongoing for now. But could a double-dip recession be in store for 2012?

During October, S&P once again has confirmed the UK’s AAA credit rating, stating that “the outlook remains stable.” However, it also cautions that recovery has been “lacklustre.” S&P says:

The official assumption that the private sector will quickly step in to replace the withdrawal of public spending may prove optimistic, especially given weakening external demand.

Business Secretary Vince Cable appears to share these concerns, conceding that a double-dip recession is possible.

Bank of England Monetary Policy Committee (MPC) member Paul Fisher goes further, stating that there is “a significant chance” of a double-dip recession. Fisher says:

Looking at Q4 for example, at best it seems likely to be flat, could easily have negative growth, so the technical outcome of two quarters of negative growth in a row could quite easily come about. But hopefully we have spotted it coming and we’ve taken action which will help to prevent it.

Over recent weeks, a number of other commentators have set out increasingly gloomy predictionsfor UK growth prospects.

  • 100 leading economists urged Osborne to commit to a plan B in a letter to the Observer. They said: “We urge the government to adopt emergency and commonsense measures for a Plan B that can quickly save jobs and create new ones. A recovery plan could include reversing cuts to protect jobs in the public sector, directing quantitative easing to a green new deal to create thousands of new jobs, increasing benefits to put money into the pockets of those on lower and middle incomes and thus increase aggregate demand.”

  • The British Chambers of Commerce (BCC) cut its UK GDP forecast for 2011 to 1.1% (down from 1.9% at the start of 2011).
  • UK managers fear “growth stagnation,” and are expressing a “growing sense of impatience” for something to be done to stimulate growth, according to a survey of members of the Chartered Management Institute (CMI). Two-thirds (68%) of UK managers believe a double-dip recession is “on the cards”
  • The UK economy will grow by just 0.9% in 2011, rising to 1.5% in 2012, according to the Ernst & Young ITEM Club.
  • “For 2011 as a whole, it now looks likely that UK GDP growth will average 1% or less, reflecting the wide range of shocks to the global and European economies this year.” So says PwC chief economist John Hawkwsworth.
  • “The likelihood of a technical recession is high in the UK,” says UBS, predicting 0.9% UK GDP growth for 2011.

Latest official projections on economic growth are expected later this month:

  • The Bank of England publishes its latest quarterly Inflation Report on Wednesday 16 November 2011. Forecasts for a flatlining economy (at best) could well be in prospect. The minutes of the October 2011 MPC meeting suggest growth is likely to be “close to zero” in the fourth quarter of 2011.
  • The Office for Budget Responsibility’s (OBR) UK economic outlook report follows on Tuesday 29 November.  

Policymakers now find themselves with very few instruments with which to combat the financial crisis and boost growth, much of their arsenal having been used during the recession.

Quantitative easing: The last resort?

Printing money is the last resort of desperate governments when all other policies have failed.

This was George Osborne’s damning indictment of quantitative easing in 2009, when he was in opposition.

Two years on, quantitative easing would appear to be a much more attractive option for Osborne. The MPC voted at its October 2011 meeting to extend its programme of quantitative easing by £75 billion, taking it to £275 billion in total. The MPC also voted to maintain interest rates at their record low of 0.5%.

Osborne approved the extension of quantitative easing, stating that “monetary policy has a critical role in supporting the economy as the Government delivers on its commitment to fiscal consolidation and should be the primary tool for responding to changes in the economic outlook in order to ensure that inflation remains on track to meet the 2% inflation target in the medium term.”

The Telegraph reports that further extensions to quantitative easing could be on the cards, with some analysts predicting that as much as £500 billion might ultimately be injected into the economy.

What impact will further quantitative easing (QE2) have?

How effective is QE2 likely to be?

As we noted last month, Bank of England research suggests quantitative easing may have boosted GDP by between 1.5% and 2%. However, it could also have increased consumer prices index (CPI) inflation by between 0.75% and 1.5%.

Chris Dillow of Investors Chronicle argues that the £75 billion extension of quantitative easing could have only a limited impact on growth, while also serving to push up inflation. Using the Bank of England’s methodology, Dillow estimates that the impact of QE2 could be “equivalent to a rise in real GDP of just under 0.7% (and a rise in the price level of similar magnitude).”

Inflation continues to roar ahead of pay awards in 2011

Inflation remains uncomfortably high at present, and the gap between pay awards and inflation is growing ever wider as 2011 progresses.

Latest inflation data from the Office for National Statistics (ONS) reveal the following:

  • Retail prices index (RPI) inflation accelerated to a 30 year high of 5.6% in September 2011, up 0.4 percentage points on the rate recorded one month previously (5.2%). RPI therefore remains significantly higher (by a factor of 3.6 percentage points) than the headline pay award of 2% as measured by XpertHR.
  • CPI inflation continues to rise further above the 2% target rate, hitting 5.2% in September 2011 (up from 4.5% in August). The current CPI rate equals the record high set in September 2008.

Where will inflation go from here?

The consensus view is that inflation will fall back in the near future.

Mervyn King believes inflation is now at – or near to – its peak rate. In a speech last month, King said:

[Inflation] is likely to be at, or close to, the peak, and we expect inflation now to start to fall back, as it did in the months following the peak in inflation in September 2008. [...] So it is the outlook for inflation, rather than its current rate, which explains the MPC’s decision to resume asset purchases.

The BBC’s Stephanie Flanders notes that this view is shared by many analysts. Flanders says:

The average prediction for [CPI] inflation in 2012 is now 2.5%, less than half of the latest figure. Unfortunately, they expect inflation to fall for the same reason it fell after 2008 – because of weakening demand in the UK and broader global economy.

RPI inflation is also expected to plot a downward course throughout 2012, falling from 4.2% in the first quarter of 2012 to 3.2% in the fourth quarter, and averaging 3.6% over the year as a whole. This is according to latest inflation forecasts compiled by XpertHR.

Brighter prospects for private sector pay awards in 2012?

Private sector pay awards look set to stage something of a recovery in 2012.

Private sector employers forecast that the median pay award will be worth 2.5% in the 2011/2012 wage round (XpertHR Benchmarking subscription required). This is according to XpertHR’s survey of private sector pay prospects for 2011/2012, full data from which can be accessed via XpertHR Benchmarking.


XpertHR’s Sheila Attwood comments:

Pay award levels have been subdued for several years now, and although a median pay increase of 2.5% in 2012 is above the levels we are currently seeing, it is still well below pre-recession levels, and inflation.

Unemployment: Bad news all the way

The latest official unemployment data from ONS brought a wealth of bad news:

  • The headline unemployment rate (on the ILO definition) was 8.1% between June and August 2011. This is up 0.4 percentage points on the preceding three-month period (7.7%).
  • The number of unemployed people showed “the largest quarterly increase since the three months to July 2009,” increasing by 114,000 over the quarter to hit 2.57 million.
  • The number of people in employment showed its largest fall since the three months to July 2009, dropping to 29.1 million over three months to August 2011.
  • The youth unemployment rate rose to 21.3% over the three months between June and August 2011. But the youth unemployment level stopped just short of the “million milestone” with a total of 991,000 16 to 24 year olds unemployed. “The unemployment level and rate for people aged from 16 to 24 are the highest since comparable records began in 1992,” according to the ONS.  

Economist and former MPC member David Blanchflower provides a detailed analysis of these “horrendous” job figures (and includes a link to XpertHR’s analysis of the youth unemployment data).

The unemployment figures paint a picture of an economy tipping back toward recession, according to The Work Foundation’s Ian Brinkley:

The labour market figures released this morning are very troubling. The fall in employment of 180,000 in a single quarter is comparable to the quarterly losses seen during the depths of the last recession.

Is long-haul austerity in prospect for the UK economy?

A year ago today we reported on Mervyn King’s theory that we could be at the start of a “sober decade” (“savings, orderly budgets, and equitable re-balancing.”). One year on, King’s prognosis appears accurate.

Indeed, it appears possible that the UK economy could be on course for long-haul austerity – perhaps even for permanent austerity in our lifetimes. Writing in the Guardian, Steven Toft notes that the inevitable rise in “age-related public spending” over the coming decades means that the only real alternative to prolonged austerity would be if the UK populace suddenly developed an “appetite for much higher taxes.”

Unsurprisingly, this is unlikely to materialise. Indeed, there is a growing sense of public impatience with economic austerity measures, reflected in the public sector unions’ first nationwide “day of action,” which takes place at the end of this month (Wednesday 30 November 2011).

What can we expect from Osborne’s autumn statement?

But for now, the more immediate challenge facing the Coalition Government is how to counter the UK’s “productivity slump” by boosting economic growth and job creation.

Osborne is expected to detail the Coalition Government’s plan of action to counter flatlining productivity when he delivers his autumn statement – which replaces the Pre-Budget Report – four weeks today (on Tuesday 29 November 2011). Back in the summer, Osborne promised “bold measures” to restore growth.

So what can we expect from Osborne’s autumn statement?

Credit easing will top the agenda. The new policy of “credit easing” was announced in Osborne’s Conservative Party Conference speech.

Osborne described credit easing as “another form of monetary activism,” designed to “get the economy moving” by “inject[ing] money directly into parts of the economy that need it such as small businesses.

The Telegraph reports on how credit easing is expected to work:

Credit easing will at first see the Government inject billions of pounds into the corporate bond markets by buying bonds in larger companies, but the Chancellor then hopes to create a small and medium sized enterprise (SME) bond market, encouraging banks to package up parcels of debt issued by smaller companies.

Some commentators have cast doubts on the likely effectiveness of credit easing, arguing that small businesses could continue to experience problems accessing funds, and that the ability for banks to pass credit risk on to the state could sow the seeds of another banking crisis.

Full details of what the policy of credit easing will entail and when it is to come into effect will be set out in autumn statement.

Other measures likely to be included in the autumn statement include the following:

  • It seems all but certain that Osborne will announce business tax cuts.
  • However, Osborne has ruled out temporary tax cuts for UK workers and families.
  • It remains to be seen if Osborne will respond to calls from business and from some economists for the 50p income tax rate to be scrapped.
  • The Financial Times speculates that a further VAT increase (taking it from 20% to 22.5%) could be required in the near term in order to meet the Coalition Government’s economic objectives. This is because the UK’s structural deficit could be 25% bigger than previously thought. Osborne is likely to be hesitant about pursuing such a policy, as the January 2011 VAT increase (which took the VAT rate from 17.5% to 20%) is widely believed to have contributed to the UK’s current problems with high inflation and low economic growth.
  • The Guardian reports that Vince Cable has “confirmed his department was working on a package of capital investment spending in time for the autumn statement at the end of November.” However, the FT reports that the Cabinet has clashed over the specifics of the growth agenda.

Recent weeks have also seen the Government weigh up more radical options, such as the controversial proposal that the right to claim unfair dismissal should be replaced by new “Compensated No Fault Dismissals” in order to boost economic growth, as recommended by a leaked report commissioned by David Cameron.

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