XpertHR economic commentary December 2011: In the bleak midwinter

Osborne's Autumn Statement: A turning point for Osbornomics?
Osborne delivered his Autumn Statement - which replaces the Pre-Budget Report - on Tuesday 29 November 2011.

Osborne used the Autumn Statement to set out a package of measures designed to attempt to reboot economic growth many of which have implications for employers.

Acknowledging that growth has been weaker than he had hoped, he stated that he will "do whatever it takes" to prevent Britain from sliding back into recession - a scenario which he believes could be about to befall "much of Europe."

But crucially, the Chancellor was also forced to admit that the primary stated aim of 'Osbornomics' - the elimination of the UK's budget deficit by 2015 - will not now be achieved until 2017.

The BBC's James Landale describes Osborne's Autumn Statement as a pivotal moment for the Coalition Goverment's economic strategy:

The landscape is fundamentally transformed. A government that promised to eliminate the budget deficit by the next election has admitted that it will fail. It now says it needs another two years to meet its deficit target. And what's more, to do that, it needs to inflict yet more pain - a squeeze on tax credits and further pay restraint for the public sector. There will be more spending cuts in the years after the election.

The Chancellor also delivered "bleak news for the public sector," with protracted pay austerity and further job losses in prospect.

Public sector unions' 'day of action': 'Up to two million' public sector workers strike
Osborne's Autumn Statement was followed in quick succession by yesterday's (Wednesday 30 November 2011) national "day of action" in protest at public sector pensions changes, which involved "up to two million UK workers" (according to union estimates quoted by the BBC).

The Guardian presents a map of where strike action took place.

Cabinet Office Minister Francis Maude has suggested that the Government could be willing to consult on changes to the strike laws, if strike action proves "very disruptive."

While the day of action on public sector pensions was the biggest protest seen over the past month, it was not the only one. Other recent protests at current economic conditions included:

• the student fees protest in central London;
• the March for Jobs 2011 (which saw students recreate the 1936 Jarrow march); and
• the ongoing Occupy London protests.

Economic growth is ongoing, but feeble
The UK economy grew by 0.5% in the third quarter of 2011. This is according to latest revised estimates on growth in gross domestic product (GDP), published by the Office for National Statistics (ONS) last week. This was unchanged from the preliminary estimate of 0.5%, published at the start of November 2011.

Although third-quarter growth was weaker than might be expected at this stage in a 'typical' recovery from recession, it was nonetheless better than many analysts feared. Reuters notes that this was "the fastest pace of growth since the third quarter of 2010." But Alan Clarke of Scotia Capital puts things into perspective:

Stronger than expected GDP growth is a relief rather than something to celebrate.

The UK economy's painful and protracted journey to recovery
The fear now is that the UK economy could be about to tumble back into recession.

David Cameron, George Osborne and Bank of England Governor Mervyn King would appear to have settled on a narrative that the UK faces a protracted and painful journey back to recovery:

• "Cameron has served notice that Britain faces a long and slow road to economic recovery, admitting that tackling high levels of debt is proving harder than he had imagined," the Guardian reports.
• Osborne argues that the UK economy is on a "difficult journey" to recovery, one which "we are determined to finish." Osborne says: "We have to understand that this journey is the only route that will take us to prosperity and recovery."
• "The journey to a more balanced world economy will be long and arduous," says King.
  

UK economic woes: Blame Europe?
Each also apportions at least some of the blame on the ongoing crisis situation in the eurozone. This was most succinctly expressed in Cameron's speech to the CBI:

Paralysis in the eurozone is causing alarm in the markets and having a chilling effect on economies in many countries - including our own.

Jon Snow of Channel 4 News argues that the eurozone crisis could be the defining event of our age. He believes it is "bigger than we can know and potentially more destructive than we dare to want to know."

US economist Paul Krugman notes that the recent behaviour of the markets suggests that they are "in effect pricing in a real possibility of eurozone collapse."

Eurozone growth prospects are weakening as the crisis unfolds. The European Central Bank (ECB) has slashed its eurozone growth forecasts, and now expects GDP growth of 1.6% in 2012, falling to 0.8% in 2013. As the repercussions of the debt crisis become clearer, it is possible that growth could undershoot these forecasts, with double-dip recession a real possibility for man eurozone countries.

The eurozone debt crisis will inevitably have implications for the UK economy. But this does not mean that the eurozone debt crisis is entirely responsible for the UK's economic situation, economist David Blanchflower argues:

Austerity in the UK is pushing us back into recession, as it is in the eurozone.

UK economic growth to get worse before it gets better
Official forecasts on UK economic growth prospects from the Office for Budget Responsibility (OBR) and the Bank of England suggest that growth will get worse before it gets better:

• The UK economy will grow by 0.9% over the course of 2011, with growth slowing to 0.7% in 2012, according to the OBR's latest Economic and Fiscal Outlook report sets out its predictions for growth. XpertHR reports: "By 2015 and 2016 growth is expected to be at 3%. Key reasons for the reduction in the OBR's forecasts include the effects of unexpected external inflation shocks - energy price and commodity price rises - which 'explains the slowdown in growth in Britain in the past 18 months.' In addition, the pre-recession 'unsustainable boom' was bigger than previously thought and the bust was consequently bigger too."
• The Bank of England suggests that UK economic growth might be expected to flatline in the opening quarters of 2012. Mervyn King says: "The immediate impact of the decline in sentiment is that the outlook for growth of the world economy has worsened since August." Speaking to the Treasury Select Committee earlier this week, King suggested that UK GDP growth will be "flat or close to zero" over the coming six months. The Bank of England's latest quarterly Inflation Report meanwhile suggests that UK GDP growth will come in at around 1% over 2012 as a whole. This is roughly half the level it had previously predicted. However, it also cautions that "the outlook for output growth is unusually uncertain."
  

Many other commentators have made dire predictions for UK growth prospects, but the majority expect the UK to avoid a double-dip recession:

• "Growth will be minimal in Q4 2011, and the first two quarters of 2012 (0.1 - 0.2 % per quarter)," says the British Chambers of Commerce (BCC). It has downgraded its GDP forecasts for 2011 to 0.9% and for 2012 to 0.8%.
• "[T]he risk of a recession has risen, [but] our forecast suggests that two consecutive quarters of negative growth will be avoided. However, it is likely that growth will almost stall over the winter." This is according to the CBI, which has cut its expectations for UK GDP growth in 2012 from 2.2% to 1.2%.
  
• UK economic growth will go negative in the fourth quarter of 2011, according to the OECD Economic Outlook. It predicts that UK GDP growth will dip into negative territory in the fourth quarter of 2011 and the first quarter of 2012. The OECD expects the UK economy to grow by 0.5% over the course of 2012 as a whole, rising to 1.8% in 2013.
  

In contrast, James Knightley of ING Financial Markets argues that "the probability of negative fourth quarter GDP is high," while economist Roger Bootle believes the UK is on course for a double-dip recession.

Interest rates: Next rate rise is a long way off
As it has for each consecutive month since March 2009, the Bank of England Monetary Policy Committee (MPC) voted at its November 2011 meeting to maintain UK interest rates at their record low rate of 0.5%.

And as has been a common theme over recent months, analysts' expectations of when an upward move in interest rates might arrive has again moved still further into the future. ThisIsMoney.co.uk provides a useful overview of analysts' expectations as to when interest rates might rise. There is no clear consensus as to the exact date, but "a rise looks a long way off - as early as 2013 but could be as late as 2015, according to the range of predictions."

Inflation: Has the tide finally turned?
After months on a steep upward path, inflation has fallen back slightly, according to latest data from ONS:

• Retail prices index (RPI) inflation ran at 5.4% in October 2011, down 0.2 percentage points from 5.6% in September.
• Consumer prices index (CPI) inflation slid back to 5.0% (down from 5.2%). Despite this, CPI continues to overshoot the Government's 2% target rate.
  

The Guardian's Larry Elliott argues that these figures represent "the start of a trend that will accelerate in the early part of next year." He says that "short of a war in one of the world's oil producing regions or a catalogue of unexpected natural disasters, UK inflation has now peaked."

The consensus view among economic commentators is that inflation levels will recede rapidly over the coming months:

• "Inflation is likely to fall back sharply through 2012 as the contributions of VAT, energy and import prices decline, and downward pressure from slack in the labour market persists. But how far and how fast inflation will fall are uncertain." This is according to the Bank of England Inflation Report. It expects CPI to undershoot the Government's 2% target rate "at the forecast horizon."
• The BCC predicts that RPI will average "5.2% in 2011, 3.5% in 2012 and 2.3% in 2013." It expects CPI to average "4.5% in 2011, 3.3% in 2012 and 2.0% in 2013."
• The CBI believes "the degree of spare capacity in the economy will bear down on inflationary pressures, not least within the labour market where wage growth is expected to remain subdued." It expects CPI to average 4.5% in 2011, and 2.9% in 2012, while RPI will average 5.3% in 2011, and 3.7% in 2012.
• The OBR expects CPI inflation to average 4.5% in 2011, 2.7% in 2012 and 2.1% in 2013.
  

Gap between pay awards and inflation narrows slightly
The slight easing in inflation has resulted in a slight narrowing of the gap between pay awards and inflation.

The median pay award was worth 2.0% (XpertHR subscription required) over the three months to 31 October 2011, according to latest analysis from the XpertHR pay databank. The headline pay award is consequently 3.4 percentage points below the current rate of RPI (5.4%).

Pay awards have been below inflation for nearly two years
UK workers have now been making do with below-inflation pay awards for just short of two years (XpertHR subscription required). XpertHR's Rachel Sharp says that "the headline pay award [...] has been lower than RPI inflation since December 2009 (on a non-lagged basis)."

The persistence of this wide gap between pay awards and inflation has consequences for the pace of economic recovery. XpertHR pay specialist Jo Doonar notes (XpertHR subscription required):

Consumers are feeling the pressure - the combination of higher prices, zero-to-low pay rises and increasing unemployment means that incomes are suffering in real terms and there are very few stimuli to get the economy off the ground.

Is there a silver lining to below-inflation pay awards?

With inflation expected to fall back rapidly as 2012 gets underway, it appears possible that the gap between pay awards and inflation will continue to narrow.

Nonetheless, reward consultants Mercer predict another year of below-inflation pay awards in 2012.

But they argue that there is a silver lining: Ongoing below-inflation pay awards could be helping to mitigate job losses.

Collapsing confidence and additional public spending cuts will hit UK jobs market hard
However, declining confidence means the UK unemployment situation could be about to get a lot worse, argues Sunday Times Economics Editor David Smith:

Firms have been betting on recovery. They did not want to get rid of workers only to have to hire them again when things picked up. They were keen to recruit, so as to be well placed as the recovery built up momentum. [W]hat we have seen in recent months, I fear, is capitulation on both fronts. Businesses that hoarded labour have come to regret it and are now throwing in the towel. Those that recruited are no longer doing so and in some cases are laying people off. Confidence in the recovery has evaporated, and with it the hopes for many in the job market.

The UK's labour market situation will also be worsened by a drastic increase in predicted levels of public sector job losses, according to the OBR. As a direct result of additional public spending cuts set out in Osborne's Autumn Statement, the OBR now expects "a fall of around 710,000 in general Government employment" over the period between January 2011 and the first quarter of 2017. The OBR says:

General government employment is expected to fall further than we predicted in March, primarily because of the additional spending cuts pencilled in for 2015-16 and 2016-17 in the Autumn Statement. There is some evidence that public sector employers are front-loading expected job reductions.

As Personnel Today's Laura Chamberlain notes, "this compares to the OBR's previous prediction of a loss of 400,000 public sector jobs for the shorter period running from the first quarter of 2011 to the start of 2016."

Unemployment: Bad news all round
The latest unemployment data release brought bad news across the board:

• The headline unemployment rate (on the ILO definition) was 8.3% between July and September 2011, up 0.4 percentage points on the previous quarter's rate (7.9%).
• The number of unemployed people rose by 129,000, to 2.62 million.
• The number of people unemployed for more than 12 months was 868,000 over the three months to September 2011 (representing an increase of 31,000 on the quarter).
• The number of people unemployed for more than two years was 422,000 over the three months to September 2011 (an increase of 13,000 from the previous quarter).
  

Youth unemployment passes the 'million milestone' in 2011
Latest youth unemployment data also made for dismal reading. Youth unemployment has now passed the "million milestone":

• There are now 1.02 million unemployed 16 to 24 year olds in the UK. ONS says: "The unemployment level and rate for people aged from 16 to 24 are the highest since directly comparable records began in 1992. However earlier data, calculated on a slightly different basis, indicates that the level of youth unemployment was higher in the mid-1980s."
• The youth unemployment rate was 21.9% over the three months between July and September 2011, up 1.7 percentage points from the previous quarter.
• The ONS also reports an alternative measure of youth unemployment. This measure - introduced in April 2011, following pressure from Iain Duncan Smith - measures the youth unemployment rate "excluding people in full-time education." According to this measure, there were 730,000 unemployed 16 to 24 year olds between July and September 2011, up 58,000 on the quarter. The alternative youth unemployment rate was 20.6%, up from 18.4% in the previous quarter. The Government is reportedly lobbying to replace the internationally-accepted youth unemployment measure with the alternative measure.
  

Last week, Nick Clegg announced a new "youth contract programme" to target youth unemployment. The BBC reports that the £1 billion programme aims "to create 400,000 work and training placements" and "will see wage subsidies worth £2,275 offered to employers to take on 160,000 18- to 24-year-olds over the next three years." Further details were set out in Osborne's Autumn Statement.

Unemployment woes: Blame Europe?
Reacting to the latest unemployment data, Employment Minister Chris Grayling said:

These figures show just how much our economy is being affected by the crisis in the Eurozone. Our European partners must take urgent action to stabilise the position."

Grayling's decision to blame rising UK unemployment on the eurozone debt crisis was widely criticised. The consensus view among Grayling's critics would seem to be that while it is highly likely that the current crisis in the eurozone will have some impact on UK unemployment in the future, it is incorrect to suggest that it could already be having such an immediate impact. Responses to Grayling's words include the following:

• Lib Dem peer Matthew Oakeshott tweeted: "Sorry,Chris Grayling,we can't blame the eurozone crisis for jobless figures. Lesson 1 in the economics textbook- unemployment lags economy."
• Business Secretary Vince Cable said: "I would certainly not blame the euro-crisis."
• The CMPO's Paul Gregg commented: "This argument is so obviously bogus, it is disappointing for a minister to be using this as a line of defence. However, the labour market figures are not as bleak as the headlines suggest. The effects of the Euro-zone crisis will hit us over the next six months, not the last, and the minister should have kept his powder dry as he'll need this excuse in the coming months."
  

Dreaming of an 'austerity Christmas'?
Tough economic times mean that Christmas cheer might be in short supply for some, as the UK looks forward to an "austerity Christmas."

Consumer confidence is in the doldrums, according to GfK NOP.

And there is widespread evidence of UK consumers reducing their consumption levels in the run-up to Christmas as the effects of below-inflation pay awards and widespread job insecurity take hold, Bank of England research suggests: "[H]ouseholds were budgeting ever more keenly, trading down to avoid overspending, or simply going without, and increasingly deferring expenditure on durable goods until replacement became unavoidable. [...] Contacts anticipated that the Christmas period would be broadly flat compared to last year, and there were rising concerns about future failures in the [retail] sector, if demand fell short of even these modest expectations."
The traditional office Christmas party is also falling victim to the challenging economic conditions, XpertHR Benchmarking research finds.

As we approach the end of the year in which public spending cuts have really begun to bite, many public sector employers have cancelled or severely scaled back Christmas celebrations. Public sector organisations are also significantly more likely to be partially open for business on Christmas day (XpertHR Benchmarking subscription required) itself than those in the private sector.

• Key bargaining statistics on pay, prices and employment for December 2011
• The image of the map of Europe used in this post is a detail of an image sourced from Wikimedia Commons.