XpertHR economic commentary February 2012: Squeezed

Juicy Salif - 78365XpertHR’s February 2012 economic commentary examines current threats to UK economic recovery, including the ongoing income squeeze.

One month into 2012, and the UK economy finds itself back in negative territory.

Economic uncertainty is widespread, which in turn makes recovery ever more difficult.

“Uncertainty is [a] significant risk,” according to a survey of CFOs by Deloitte. It finds that “56% of CFOs rate the level of uncertainty facing their business as being ‘high’ or ‘very high.’ As one respondent put it, ‘Everyone is waiting for something very bad to happen.’” Respondents to the Deloitte survey also see a 54% chance of a double-dip recession for the UK.

The Guardian’s Larry Elliott identifies a “triple whammy” of factors making UK economic recovery problematic: “falling real incomes, austerity and the crisis in the eurozone”

XpertHR’s economic commentary for February 2012 looks in detail at the impact of each of these factors, and rounds up the latest data on key economic indicators of relevance to HR professionals and reward practitioners.

The UK’s ongoing income squeeze

Let’s start with falling real incomes.

An ongoing “income squeeze” is affecting UK households. This is according to a Bank of England survey of 1,985 UK households conducted in September 2011 by NMG Consulting.

The research shows that a majority of UK households experienced an “income squeeze” over the year to September 2011. The outlook for incomes in 2012 is “uncertain” as economic austerity measures take hold.

Across the survey sample, the average pre-tax household income was £2,850 per month. The average monthly ‘available’ income (defined as disposable income after tax, national insurance and housing costs) for UK households was £720 per month. Available income had fallen over the preceding year by £46 per month.

The Bank of England identifies three key factors contributing to the income squeeze: the January 2011 VAT hike; rising energy and import prices; and economic austerity measures.

Read the complete findings of the Bank of England research here.

Will the income squeeze ease off in 2012?

So how likely is it that the “income squeeze” might ease off in 2012?

Bank of England Monetary Policy Committee (MPC) member Ben Broadbent argues that there could be reason for some (cautious) optimism. He says that a number of the factors identified as contributing to the squeeze on household incomes are expected to ease over the coming months:

We would be wrong to paint only a gloomy picture. We have had a couple of really big hits to household income over the last two years. Between them, VAT and commodity prices might have taken 2.5% out of household incomes, and we’re not going to have those again. VAT is not going up again and petrol and oil prices look pretty stable. That’s a big effect which will add to real household income.

It should also be noted that a number of energy providers have recently cut some of their prices, which may in turn ease some of the burden on many UK households.

Higher pay awards for private sector workers in 2012 ‘a real prospect’

After a comparatively subdued 2011, private sector pay awards are showing some promising signs of growth in 2012, according to latest readings from the XpertHR pay databank.

XpertHR Pay and Benefits Editor Sheila Attwood reports that preliminary analysis of January 2012 pay awards for private sector workers suggests that “for many private sector workers, pay rises higher than the levels seen in 2011 are a real prospect.” She says:

Pay rises effective in January 2012 – exclusively in the private sector due to a lack of public sector bargaining at this time of year – are worth a median 2.8%.

XpertHR will publish its analysis of whole economy pay trends over the three months to 31 January 2012 on Friday 24 February 2012.

UK economy shrank by 0.2% in Q4 2011

The UK economy has lapsed back into negative territory, with gross domestic product (GDP) contracting by 0.2% in the fourth quarter of 2011. This is according to latest GDP estimates published by the Office for National Statistics (ONS) last week (on Wednesday 25 January 2012).

This lapse into negative growth means that a double-dip recession is possible. But it is not necessarily inevitable:

  • It is possible that estimates of GDP growth in the fourth quarter of 2011 will be revised upwards in subsequent data releases, taking it back into positive territory.
  • As we recently noted, growth in the second and third quarters of 2012 could also be boosted by an “Olympic bounce.”

Prospects for economic recovery: Is flat the new growth?

Double-dip recession remains a concern, but many commentators believe it could yet be avoided, and that GDP growth at or around nil is a more likely scenario. For example, Sunday Times Economics Editor David Smith says we might “have to get used to the idea of flat being the new growth.” He notes that the UK’s lapse back into negative territory could hit already-faltering consumer confidence hard.

Here is a round-up of expert GDP forecasts published over the past month.

  • “We believe UK GDP will stagnate overall until mid-2012, with one quarter very likely in negative territory,” says British Chambers of Commerce (BCC) Chief Economist David Kern. But BCC Director General John Longworth notes that “a new recession is not a foregone conclusion.”
  • The EEF expects 1% GDP growth in 2012. However, “the downside risks to growth are even more marked” than at the start of 2011.
  • The Ernst & Young ITEM Club forecasts that UK GDP will run at 0.2% in 2012, rising to 1.8% in 2013 and 2.8% in 2014. It says that the UK economy is “likely to remain stalled until the second half of [2012,] when falling inflation should provide a platform for a consumer recovery,” and that “a serious double dip” is not envisaged. However, it also cautions that even this “optimistic assumption” presupposes a speedy and successful resolution to pressing economic problems in the eurozone, China, and other territories.
  • The IMF has slashed its forecast for UK GDP growth in 2012 from 1.6% to 0.6%. It predicts a “mild recession” for the eurozone ,with GDP expected to contract by 0.5% in 2012. IMF Economic Counsellor Olivier Blanchard says: “The outlook for growth is mediocre. [...] The world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected.”

For more on latest expert GDP forecasts, click here.

Inflation: Second anniversary for above-target inflation

The position of the city of Hormuz set on the strait at the bottom of the Arabian Gulf-1572Inflation appears to have embarked on a downward path, but remains elevated. Indeed, the latest official inflation data release from ONS brought news of the second anniversary of above-target inflation:

  • Consumer prices index (CPI) inflation fell back to 4.2% in December 2011 (down 0.6 percentage points from 4.8% in November). Despite this fall, CPI has now notched up its second anniversary of coming in consistently above the Government’s 2% inflation target rate, just as it has for each successive month since December 2009.
  • Retail prices index (RPI) inflation dropped to 4.8% in December 2011, a fall of 0.4 percentage points from the previous month’s figure (5.2%).

At present, the consensus view among economic commentators is that inflation will continue to fall back throughout 2012. For example:

However, the story of inflation in 2012 may not prove this straightforward. Falling inflation could cause problems of its own. And it is also possible that a spike in oil prices could apply new upward pressure to inflation. The Guardian sums up this situation:

[I]it may be that by the end of 2012, it’s deflation, not inflation we’ll be worrying about – though if Iran carries out its threat to close the strait of Hormuz, and choke off oil supplies to the west, all bets are off.”

The Economist notes that “some 20% of world oil production passes” through the strait of Hormuz, and that “supply disruptions of that magnitude in the past were associated with oil price increases of between 25% and 70% – and with American recessions.”

Eurozone crisis intensifies further

When Greece fallsEven the “glimmer of hope” offered by falling inflation is contingent on a successful resolution of the eurozone crisis (as an FT survey of leading economists points out).

The ongoing crisis in the eurozone is the second factor in the “triple whammy” facing the UK economy.

The past month has seen the crisis intensify further:

  • The credit agencies have downgraded many eurozone countries (see the Guardian’s helpful overview). Standard & Poor’s has also downgraded the European Financial Stability Fund (the EFSF; the eurozone’s “big bazooka” bailout fund).
  • Concerns are emerging that a double-dip recession is possible for many eurozone countries. The IMF World Economic Outlook report says that “the global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.” The IMF says “the euro area economy is now expected to go into a mild recession in 2012.” It has slashed its global GDP growth forecast for 2012 from 4% to 3.3%
  • The draft euro-plus treaty “sets up a framework and a timetable for the evolution of European economic policy as mediated by EU institutions that, if not substantially amended, all but guarantees Britain’s departure from the Union [by 2017].” This is according to New Statesman blogger Rafael Behr.

At the start of this week, William Hague warned that the eurozone crisis is having a “chilling effect” on the UK economy. Yet some commentators remain convinced that the eurozone crisis can and will be resolved relatively quickly. HSBC Chairman Douglas Flint believes European leaders will take “firm action” to resolve crisis by second half of 2012:

It would be naive to think that this can be solved within weeks, but my view is that it will be a reasonably short timeframe, certainly by second half [of 2012].

A fiscal treaty designed to help enforce budget discipline has now been signed by 25 of the 27 EU member states (with only the UK and the Czech Republic opting out), the BBC reports. It remains to be seen if this will mark a turning point in the eurozone crisis.

The impact of austerity measures on economic recovery

The impact of economic austerity measures on economic growth is the third factor in the “triple whammy” facing the economy.

A number of official bodies have issued warnings on the potential impact of austerity on growth:

  • Economic austerity is likely to produce further uncertainty as 2012 unfolds, Bank of England research suggests. Nearly half of UK households (48%) surveyed say they have been affected by austerity measures over the past year. But looking ahead, more than two-thirds of UK households (69%) expect austerity to affect them over the coming year. The three main expected effects of austerity are: higher taxes (cited by 32% of respondents), lower income (24%) and less spending on services used (20%). Fear of job loss is also prevalent, and rises sharply in households “that were reliant on the public sector for more than half of their income,” to around one in three.
  • IMF Fiscal Affairs Department Head Carlo Cottarelli says: “The pace of fiscal consolidation in advanced economies in 2012 is already high. Too rapid consolidation, if economic growth slows, could exacerbate risks.”
  • The ILO says: “Recently observed cuts in labour market spending, such as reduced support for programmes for young jobseekers in the United Kingdom, are likely to come with substantial long-term adverse consequences for labour market prospects.”
  • “Expansionary contraction is oxymoronic although I don’t think you actually need the prefix oxy.” This is according to Harvard professor Larry Summers, speaking at last month’s World Economic Forum in Davos.

However, it is unlikely that Chancellor George Osborne will announce any rethink of austerity measures when he delivers his Budget 2012 speech next month (on Wednesday 21 March 2012).

Osborne once again reaffirmed his faith in austerity measures in a speech to the Asian Financial Forum in Hong Kong in January 2012:

[G]lobal confidence in a country depends on its determination to deal decisively with the challenges it faces – and by getting to grip with our debts, Britain has shown it is determined to do that.

Unemployment rate hits highest level since November 1995

Economic austerity measures appear to be having a direct impact on unemployment.

The first unemployment data release of 2012 shows the failure of the private sector to create new jobs to fill the gaps resulting from public sector job cuts.

Unemployment continues to climb across a number of measures:

  • The headline unemployment rate (on the ILO definition) hit 8.4% between September and November 2011, its highest rate since November 1995.
  • The number of unemployed people rose to 2.68 million, an increase of 118,000.
  • Youth unemployment once again hit a record high, rising to 22.3% over the three months to November 2011.
  • The number of people “working part-time because they could not find a full-time job” also hit a record high of 1.31 million.

Economic commentators are united in expecting labour market conditions to worsen throughout 2012:

  • “The number of unemployed looks set to hit the three million mark this year, as the economy heads back into recession,” says economist David Blanchflower.

  • The British Chambers of Commerce (BCC) says: “We are predicting an increase in the UK jobless total to 2.77 million by the end of 2012.”
  • Latest DWP projections suggest that “an extra 750,000 people will join the ranks of the long-term unemployed over the next four years,” the Guardian reports. It says the DWP forecasts “show an increase of 32% from 2.4 million to 3.3 million in the number of people expected to be entered into the Work Programme – the government’s flagship project for finding work for those who are typically out of work for longer than 9-12 months.”
  • The EEF expects the ILO unemployment rate to run at 8.6% over 2012.   
  • The Ernst & Young ITEM Club expects unemployment to “peak in the first half of 2013 at almost 3 million, 9.3% of the labour force, before beginning to fall back.”
  • “Long-term uncertainties over the state of the economy will force employers to put at least some of their hiring strategies on hold, and to think harder before employing new staff; a situation that will force significant changes in the behaviour of job seekers in the year ahead.” This is according to the latest Quarterly Recruitment Review from Jobsite.

How much more quantitative easing can we expect in 2012?

Bank.of.england.arp.750pixWith the economy back in negative territory, many commentators expect to see an extension to the UK’s programme of quantitative easing in the near future, in order to attempt to boost growth.

New quantitative easing could come as soon as midday on Thursday 9 February 2012, when the results of the MPC’s February 2012 meeting are announced.

For example, the Evening Standard says that “a February return to the printing presses by the Bank of England look[s] all but certain,” following the news of falling inflation.

There is also speculation that the MPC could be considering other measures to boost growth, such as improving credit flow to businesses.

So how much additional quantitative easing might we expect?

The BBC’s Stephanie Flanders notes that “many economists expect a further £50 billion-plus of quantitative easing once the current programme is complete.” This would increase the total value of the Bank of England’s “asset purchases financed by the issuance of central bank reserves” to £325 billion.

Flanders cautions that we could soon reach “the technical limits of quantitative easing.” This is “the practical question of when and whether the Bank will run out of Government bonds to buy.” She says:

[T]he Bank has set itself fairly clear limits on the kind of bonds it will buy, and how much. If the MPC is still worrying about deflation and recession a year from now, those limits could well start to bind. [... HSBC research suggests that] the MPC has significantly less than £500 billion in government bonds available for quantitative easing in 2012, £275bn of which it has already bought, or is committed to buying in the next few weeks. And that is the absolute limit.

So there is a ceiling on quantitative easing.

Even the Bank of England could be feeling the squeeze before 2012 is out.

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