XpertHR economic commentary January 2012: Welcome to 'no-growth Britain'?

How long will the age of austerity last?

The UK is firmly locked in to the age of austerity. The question now is how long it might be expected to last.

Chancellor George Osborne's Autumn Statement saw the crucial admission that the UK budget deficit is not now expected to be eliminated until 2017, missing the previously stated target of the end of the current Parliament in 2015.

So how long might the UK's age of austerity be expected to last?

We could be looking at a period of long-haul austerity for the UK economy, or even permanent austerity in our lifetimes.

The FT's Martin Wolf takes a particularly sombre view:

The big facts are that the UK is set for a lost decade and a longer period of stringency than expected. The Government's position is that there is no alternative. That has now become a self-fulfilling prophecy.

Public sector austerity will be "the new normal for the next 20 years," argues consultant Steven Toft. Toft says:

Further severe spending cuts [...] look unavoidable unless taxes rise significantly or we get a near-miraculous growth spurt in the next five years. Whoever is in office during the next decade will have to deal with this problem eventually.

Tax rises are an ever less palatable option for the Coalition Government. Public support for tax rises to prop up public spending is in sharp decline, according to new data from the National Centre for Social Research. It finds:

[S]upport for government increasing taxes and spending more on health, education and social benefits has halved from a peak of 63% [in 2002], to just 31% [in 2011]. It's striking that support for 'tax and spend' policies has reduced to a level last seen in 1983 in the aftermath of recession and continuing 'stagflation' in the economy.

Further public spending cuts consequently appear a much more likely option.

Why 2011 was 'the year of reluctant recovery'

2011 has been the year of the reluctant recovery. Growth has disappointed, both here and abroad.

This is the view of Bank of England Governor Mervyn King.

A key plank of what we might call 'Osbornomics' was that as public spending is scaled back, the private sector would step in as engine of growth and creator of jobs. The crucial second part of this formula is so far proving slow to materialise.

UK economic growth has consequently been - as King puts it - disappointing. But economic growth is at least ongoing at present.

Indeed, both King and Osborne received a welcome pre-Christmas gift in the shape of an upward revision to growth figures. The UK economy grew by 0.6% in the third quarter of 2011, according to latest revised estimates of growth in gross domestic product (GDP) published by the Office for National Statistics (ONS) just before Christmas (Tuesday 22 December 2011). This is up by 0.1 percentage point when compared with the preliminary and first revised estimates, both of which put third-quarter GDP growth at 0.5%.

However, there were also other less positive revisions in the GDP data release. As Sunday Times Economics Editor David Smith points out, "the third quarter's gain is the second's loss - that has now been revised down from 0.1% to zero."

GDP prospects for 2012: Welcome to 'no-growth Britain'?
Could we be about to enter the era of "no-growth Britain" (to use a phrase coined by pseudonymous HR blogger Rick)?

Here is a round-up of latest GDP growth predictions:

• Bank of England Governor Mervyn King says UK GDP growth will be "flat or close to zero" over the first half of 2012.
• UK GDP growth will run at 0.7% in 2012, while the eurozone will see GDP growth of -0.8%, in the view of Goldman Sachs.
  
• The UK economy will contract by 0.4% in 2012, according to Legal & General.
• The Office for Budget Responsibility (OBR) predicts that the UK economy will grow by 0.9% over the course of 2011, with growth slowing to 0.7% in 2012. The BBC's Stephanie Flanders warns that even these predictions could prove "optimistic." She says: "If there is a recession in the eurozone, it is difficult to see how that forecast for 2012 would be achieved." Ernst & Young predicts a "mild" recession for the eurozone in 2012, while the IMF's Christine Lagarde warns that the global economic outlook is "quite gloomy."
  
• The UK economy will contract by 1.3% in 2012, says Standard Chartered.
  

ONS will publish its preliminary estimate for economic growth in the fourth quarter of 2011 later this month, on Wednesday 25 January 2012. The Guardian notes that recent PMI survey data suggest "that the economy will either stagnate in the fourth quarter of 2011 or grow extremely slowly."

The most optimistic assessment would appear to be that fourth-quarter growth will come in at or very slightly above nil.

It says something about our times that near-flat growth represents the best outcome that can realistically be hoped for at present.

GDP prospects for 2012: Will an 'Olympic bounce' help the UK skirt a double-dip recession?

A double-dip recession in 2012 is a possibility for the UK. But it is not a foregone conclusion.

A number of factors could serve to improve prospects for UK GDP growth to some extent:

• Growth in the first quarter of 2012 will be aided by the Bank of England's October 2011 extension of quantitative easing. Martin Weale estimates "that the current programme of asset purchases [will] boost growth by up to 0.5%, in line with the Bank's official calculations." ONS publishes its preliminary estimate of Q1 2012 GDP growth on Wednesday 25 April 2012.
• Growth in the second quarter of 2012 could benefit from an "Olympic bounce." UK GDP growth in the second quarter of 2012 will be boosted by deferred revenue from advance Olympic ticket sales in Q2 2011. ING estimates that Olympic ticket sales are worth £400 million in total, which could have created a 0.2% "Olympic bounce" had they been incorporated into GDP data for Q2 2011. It remains to be seen what impact this deferred revenue will have on growth in the second quarter of 2012. ONS publishes its preliminary estimate of Q2 2012 GDP growth on Wednesday 25 July 2012.
• Growth in the third quarter of 2012 is likely to be boosted by the Olympics themselves. ONS publishes its preliminary estimate of Q3 2012 GDP growth on Thursday 25 October 2012.
  

It also remains to be seen what impact the measures to boost growth set out in Osborne's Autumn Statement will have in 2012.

Budget 2012: Osborne to deliver Budget 2012 on Wednesday 21 March 2012
Osborne has set the date for the Budget 2012. The Chancellor will deliver the Budget 2012 on Wednesday 21 March 2012.

How will the eurozone debt crisis affect the UK economy?
Further ahead, David Cameron's decision to veto a "tax and budget pact to tackle the eurozone debt crisis" could have implications for longer-term growth prospects for the UK. The proposed fiscal compact that emerged - to take effect from March 2011 - is expected to create "a 'euro-plus' zone."

Jon Snow of Channel 4 News reported from Brussels on the day of Cameron's veto (Friday 9 December 2011):

The sense here is that Britain has finally left the top table, that a two-speed Europe is under way [with] the UK [...] in Division Two. [...] No one knows how damaging isolation may prove. Nor how advantageous.

Despite the agreement in Brussels, the "eurozone banking system [remains] on the edge of collapse" with a "collateral crunch" looming, the Telegraph reports

Further quantitative easing: A dead cert for 2012?
Further extensions to the Bank of England's programme of quantitative easing (defined by the Guardian as "the economic term for allowing the Bank of England to print more money") appear all but inevitable in 2012:

• The minutes of the Bank of England Monetary Policy Committee (MPC) meeting for November 2011 were interpreted as pointing to the possibility of further quantitative easing in February 2012.
• MPC member Martin Weale said there is "likely to be a strong case for extending the asset purchase programme" after the current programme concludes in February 2012.
  

Interest rates: Zero chance of a rate rise in 2012
While further quantitative easing seems a certainty for 2012, there would appear to be no prospect of interest rates rising from their current record low of 0.5% (at which level they have been parked since March 2009) over the course of this year.

The latest analysis of interest rate rise predictions compiled by ThisIsMoney.co.uk reports "the prospect of low rates for years," and finds that the "range of predictions are 2013 to 2016."

Inflation: On a downward path for 2012
Inflation now appears to have embarked on a long-predicted downward path - albeit slowly. Latest inflation data from ONS show:

• Retail prices index (RPI) inflation stood at 5.2% in November 2011, down 0.2 percentage points from 5.4% in October.
• Consumer prices index (CPI) inflation fell back to 4.8% in November 2011 (from 5.0% in October). CPI nonetheless continues to overshoot the Government's symmetrical target of one percentage point either side of 2%, just as it has for each successive month since December 2009.
  

Inflation is expected to fall back sharply in 2012 as the influence of the January 2011 VAT hike to 20% falls out of the inflation data:

• RPI inflation will drop throughout 2012, from 4.1% in the first quarter to 2.8% by the fourth quarter, according to latest forecasts compiled by XpertHR (XpertHR subscription required).
• CPI "inflation is likely to fall sharply to the 2% target or below" during 2012, according to Standard Chartered.
  

But as inflation falls, concerns about the possibility of deflation are becoming more widespread. The Guardian reports that "the head of the City's financial watchdog, Adair Turner, [recently] warned that the global economy was at risk of a deflationary spiral as the private sector and governments seek to pay off their debts at the same time."

Pay awards: On track for two years of below-inflation pay awards
Below-inflation pay awards mean that recovery is proving more painful than recession for many UK households. Recent analysis from the IFS suggests that if latest OBR projections prove correct, real household disposable incomes are likely to be lower by 2016 than they were in 2006.

Pay awards for UK workers - as measured by the XpertHR pay databank - have now been stuck below the level of inflation for nearly two years.

However, the gap between pay awards and inflation is narrowing slowly. The median whole economy pay award held steady at 2% (XpertHR subscription required) over the three months to 30 November 2011, according to XpertHR data. With RPI inflation falling back to 5.2% in November 2011, the gap between pay awards and inflation has consequently narrowed to 3.2 percentage points.

But it seems all but certain that pay awards will notch up their second anniversary of coming in consistently below the level of RPI inflation, when XpertHR publishes its analysis of whole economy reward trends over the three months to December 2011, later this month (on Friday 20 January 2012).

Pay prospects for 2012
So what of pay prospects for 2012?

• Public sector workers can expect ongoing pay austerity. Osborne announced in his Autumn Statement that public sector pay rises will be capped at an average of 1% following the end of the current two-year pay freeze (which concludes in either April 2012 or April 2013, depending on department).
• Private sector pay prospects for 2012 are more positive. Private sector employers expect across-the-board pay increases awarded in the 2011/2012 wage round to be worth 2.5% at the median, XpertHR Benchmarking research reveals (see chart). Two-fifths of private sector employers expect pay awards for 2011/2012 will be higher than the previous year's (XpertHR Benchmarking subscription required).
  

Unemployment to go from bad to worse in 2012
The UK unemployment rate has hit its highest level in 15 years, according to latest data from ONS:

• The headline unemployment rate (on the ILO definition) rose to 8.3% between August and October 2011.
• The number of unemployed people rose by 128,000, to 2.64 million.
• ONS comments: "The unemployment rate is the highest since 1996 and the number of unemployed people is the highest since 1994."
  

Employment Minister Chris Grayling argues that the latest unemployment figures suggest that "the labour market is stabilising."

But few economic commentators appear to share Grayling's view. The majority expect the UK unemployment situation to get worse rather than better in 2012:

• The BCC predicts that unemployment will hit 8.7% in Q4 2012 (2.77 million).
• The CIPD expects unemployment to hit 2.85 million by the end of 2012, and to peak at 2.9 million in the first half of 2013.
• Retail consultants CBRE predict that a "retail recession" is about to hit UK high streets, and estimates that retailers could cut up to 40,000 jobs over the next 18 months.
  
• The unemployment rate for 2012 as a whole will be 8.5%, according to Goldman Sachs.
  
• "The effects of the eurozone crisis will hit [unemployment] over the next six months [...] The eurocrisis excuse may well be needed, and be genuine, from March [2012] when the picture around January starts to emerge." This is the view of the CMPO's Paul Gregg.
  

Youth unemployment set to keep rising in 2012
Youth unemployment rocketed past the so-called "million milestone" in the closing months of 2011. Latest youth unemployment data show:

• The number of unemployed 16 to 24 year olds in the UK rose to 1.03 million over the three months to October 2011.
• The youth unemployment rate rose to 22.0% over the three months between August and October 2011. 
  

The BCC predicts that youth unemployment will continue to rise this year. It expects that 42% of 16 and 17 year olds and 22.5% of 18 to 24 year olds will be unemployed by the fourth quarter of 2012.

Some commentators are now seeking to coin terms to describe the plight of young people in today's labour market. These include the following:

• Generation U: This refers to "unemployed or underemployed undergraduates forced to take useless or unsatisfying work until they find their true calling," according to ThisIsMoney.co.uk.
• The Precariat: Author Guy Standing defines "the precariat" as "a growing number of people across the world living and working precariously, usually in a series of short-term jobs, without recourse to stable occupational identities or careers, stable social protection or protective regulations relevant to them. They include migrants, but also locals."•    
  

In Standing's view, the so-called "precariat" could "produce new instabilities in society [and] are increasingly frustrated and dangerous because they have no voice."

Will we see further social unrest in 2012?
The rioting and senseless destruction suffered by many UK towns and cities during August 2011 will be one of ugliest memories of last year for many people.

How likely is it that we might see further social unrest in 2012?

• The risk of social unrest is increasing around the world, according to the ILO World of Work report 2011. The ILO warns that "the world economy is likely to create only half the jobs needed," resulting in a new and deeper jobs recession. Against this background, the ILO's new social unrest index suggests that "in over 45 of the 118 countries examined, the risk of social unrest is rising. This is especially the case in advanced economies, notably the EU, the Arab region and to a lesser extent Asia." The ILO finds that "unemployment is most strongly associated with the estimated risks of social unrest, along with disposable income."
• In a sobering blog post, Frances Coppola argues that "austerity-driven recessions" across the eurozone could result in revolution or even war. She says: "[O]nce recession takes hold in the entire eurozone, people will start to see that their lives and their futures are being sacrificed on the altar of a political dream that is rapidly becoming a nightmare - and they will take action. We are already seeing political unrest in Greece, Spain and Portugal. As recession deepens, this unrest will worsen and may be violently repressed - a fertile ground for actual revolt and even war."

The UK establishment is taking the prospect of further social unrest in 2012 very seriously indeed:

• The Foreign Office warns that instability in the eurozone could cause dangerous unrest. 
• Armed Forces planners believe economic issues arising from the eurozone crisis pose a "strategic risk" to the UK. General Sir David Richards said: "I am clear that the single biggest strategic risk facing the UK today is economic rather than military. [...] The country's main effort must be the economy. No country can defend itself if bankrupt."

The Treasury, meanwhile, is reportedly "considering plans to restrict the flow of money in and out of Britain to protect the economy in the event of a full-blown euro break-up."

Prospects for public sector strike action in 2012
It remains to be seen if this year will bring further mass strike action in protest at planned public sector pensions cuts, following on from the "day of action," which involved "up to two million UK workers" (according to union estimates quoted by the BBC) on Wednesday 30 November 2011.

Negotiations between the Coalition Government and trade unions are ongoing as 2012 commences, but appear close to conclusion.

At present, it would therefore seem that while mass public sector strike action in 2012 is possible, it is not necessarily probable.

Any ongoing public sector strike action will be firmly opposed by the Coalition Government. 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."

A happy new year to all XpertHR readers!
Please allow me to take this opportunity to wish a happy and prosperous New Year to one and all! And do please check out XpertHR's 2012 HR Calendar to keep track of all the important HR events and add them to your Outlook calendar.

• Economic prospects for 2012: The HR bloggers weigh in
  
• Key bargaining statistics on pay, prices and employment for January 2012
• The '2012' image at the top of this page was sourced from Wikimedia Commons.