“It is far too soon to conclude that we are out of the woods.”
This is New York Federal Reserve head William Dudley’s assessment of the global economic outlook. Dudley’s words are particularly relevant to the UK.
April 2012 could prove a pivotal month for the UK economic recovery.
Despite some positive signals, particularly from falling inflation and gradually rising pay awards, the UK economic situation remains precarious.
We will learn this month if we are in a double-dip recession, or if UK economic growth merely continues to flatline (arguably the best-case scenario in current circumstances).
XpertHR’s economic commentary for April 2012 looks at prospects for growth, trends in unemployment and inflation and predictions for private sector pay awards. We also report on the key announcements from Chancellor George Osborne’s Budget 2012.
Budget 2012: What it means for HR
Chancellor George Osborne delivered the Budget 2012 on Wednesday 21 March 2012.
The Budget 2012 saw Osborne operating within tight constraints, delivering what the Telegraph describes as a “fiscally neutral” set of announcements.
KPMG Chief Economist Andrew Smith argues that the Chancellor’s commitment to “sticking to ‘Plan A’ [means] there is little scope to radically alter the (at best) sluggish outlook for the economy.”
The headline announcements in Osborne’s Budget 2012 were focused on the extremes of the income tax spectrum. XpertHR reports:
On tax, the Chancellor announced that the 50% higher rate will reduce to 45% from April 2013. The personal income tax allowance will increase to £8,105 from April 2012, and to £9,205 from April 2013 (an increase of £1,100).
Measures relating to employment law set out in Budget 2012 included the following:
- A relaxation of Sunday trading laws from 22 July 2012 to 9 September 2012 to coincide with the Olympics and Paralympics.
- Confirmation that “protected conversations” are on the way, subject to consultation during 2012.
- A commitment to “scrap or improve” 84% of health and safety legislation.
XpertHR resources on Osborne’s Budget 2012:
Official resources on Budget 2012:
- Budget 2012 statement by the Chancellor of the Exchequer, the Rt Hon George Osborne MP
- Budget 2012 documents
- Office for Budget Responsibility (OBR) Economic & Fiscal Outlook: March 2012
In search of lost time: UK economy back at 2004 levels
The Economist has created The Proust Index, which it describes as “a measure of lost time for hard-hit countries.” The Proust Index is named after French novelist Marcel Proust, author of À la Recherche du Temps Perdu – an epic meditation on lost time.
The Proust Index assesses economies around the world on “seven indicators of economic health.” It finds that UK has lost eight years, while the US economy has been set back a decade, and Greece has lost 12 years.
The Economist says that high and rising unemployment in the UK economy is a particular cause for concern:
[Unemployment] measures are the most worrying of all. Growth will reset the economic clock, providing new jobs and the resources to pay down debts. The IMF predicts that in three years Italy will be the only G7 country with real GDP [gross domestic product] lower than in 2007. Within this group, America, which is already growing again, is in a better position than Britain, which is not. But periods of unemployment scar workers even after economies have crawled back to health. For some, the time lost to the crisis will never be recovered.
Unemployment hits highest level since 1995
High and rising unemployment is a matter of serious concern in the UK, particularly in light of the Proust Index assessment of the risks it poses to recovery.
The headline unemployment rate hit a 17-year high last month:
- The headline unemployment rate (on the ILO definition) rose to 8.4% of the economically active population between November 2011 and January 2012 (up from 8.3%). ONS says this measure ” was last higher in the three months to November 1995.”
- The number of unemployed people rose by 28,000 to stand at 2.67 million.
- The number of unemployed 16 to 24 year olds was 1.04 million (an increase of 16,000).
- The youth unemployment rate hit 22.5% over the three months to January 2012 (up from 22.1%).
Is private sector job creation overtaking public sector job losses?
But the latest data on levels of employment appeared to bring some good news for Osborne.
Private sector job creation could finally be starting to overtake the rate of public sector job losses – one of the key planks of ‘Osbornomics.’ ONS says:
The number of people employed in the public sector fell by 37,000 between September and December 2011 to reach 5.94 million, the lowest figure since June 2003. The number of people employed in the private sector increased by 45,000 on the quarter to reach 23.17 million.
However, these figures may not ultimately prove as positive as they first appear:
- ONS does not appear to report whether these new jobs in the private sector are full-time or part-time. Overall, numbers of part-time workers are on the rise. There were 7.88 million people in part-time employment over the three months to January 2012, a rise of 59,000.
- Economist David Blanchflower argues that a closer analysis of the data (from the time when the Coalition Government’s policies began to take hold) suggests that “the private sector is not generating the jobs to offset cuts in the public sector.” Blanchflower says: “The public sector job cull meant that net job creation was negative, of the order of -44,000. I have no idea how anyone in their right minds could interpret this as good news.”
Bleak outlook for unemployment in 2012 and 2013
Economic commentators are united in expecting unemployment to continue to rise. Latest unemployment forecasts include the following:
- The British Chambers of Commerce (BCC) expects the unemployment level to hit 2.9 million (equivalent to 9% of the workforce) in Q1 2013. The BCC believes young workers will be hardest hit. It expects to see a 41% jobless rate for 16 and 17 year olds by Q1 2013, while the 23% of 18 to 24 year olds will be out of work by Q4 2012.
- The OBR expects unemployment to peak this year. XpertHR summarises its latest unemployment forecasts: “Unemployment will peak in 2012 – both on the ILO measure (8.7% unemployment in 2012) and the claimant count (1.67 million unemployed). The OBR says that one million more jobs will be created over the next five years. Consumer prices index inflation is forecast to average 2.8% in 2012 but to fall to 1.9% in 2013.”
Brighter outlook for pay awards
Pay awards are showing a gradual increase.
The headline whole economy pay award was worth 2.6% over the three months to 29 February 2012, according to latest analysis of reward trends from XpertHR (XpertHR subscription required). This is in line with the revised figures for the two preceding rolling quarters.
Looking ahead, XpertHR’s private sector pay forecast survey finds that private sector employers expect pay awards to be worth 2% at the median over the 12 months to 28 February 2013 (XpertHR subscription required). This figure rises to 2.5% for those in the manufacturing and production sector.
- Subscribers to XpertHR Benchmarking can access and drill down into the complete results data from the Pay Forecast 2012 survey.
- All XpertHR subscribers can access XpertHR’s Private Sector Pay Forecast Benchmarker, which enables you to see how pay trends at your organisation measure up.
National minimum wage 2012/2013: Adult rate increases by 1.8%; younger workers’ rates frozen
Retail sector pay awards over the coming year could well be affected by the national minimum wage rates for 2012/2013. The Coalition Government announced in March 2012 that:
- The national minimum wage adult rate will increase by 1.8% to £6.19 per hour with effect from Monday 1 October 2012.
- National minimum wage rates for younger workers are to be frozen at their current levels for 2012/2013.
Interest rates: Three years at rock bottom
Last month marked the third anniversary of record-low interest rates of 0.5% for the UK.
Looking ahead, there would appear to be no chance of an interest rate rise during 2012:
- The BCC and IFS are united in predicting that a rate rise is unlikely before late 2013.
- Bank of England Governor Mervyn King suggests that “an increase in bank rate is not fully priced in until mid-2014.”
RPI inflation hits lowest level since December 2009
Inflation continues on the gradual downward direction it has plotted over recent months, according to latest inflation data from ONS:
- Retail prices index (RPI) inflation fell back to 3.7% in February 2012, down from 3.9% in January. ONS notes that “the annual rate was last lower in December 2009 though the 3.7% was equalled in January 2010 and February 2010.”
- Consumer prices index (CPI) inflation stood at 3.4% in February 2012, down 0.2 percentage points from 3.6% in January.
Falling inflation is vital for economic recovery
Reuters says that how far and how fast inflation falls could be of key importance to economic recovery.
It says that “falling inflation is seen as crucial for the fragile economic recovery to gather pace.” This is because falling inflation is “keeping hopes alive that easing inflation will allow hard-pressed consumers to increase spending this year and boost the economy.”
Inflation forecasts: Oil price volatility could make inflation “sticky”
It is not a foregone conclusion that inflation will continue to fall. The inflation outlook is complicated by rising oil prices (with UK petrol prices achieving record highs during March 2012).
Latest inflation forecasts include the following:
- The British Chambers of Commerce (BCC) expects CPI to average 2.7% during 2012, while RPI will run at 3.2%. BCC Chief economist David Kern says: “Falling inflation will ease the squeeze on living standards.”
- IHS Global Insight economist Howard Archer warns of the dangers that “sticky” inflation could pose to recovery: “Sticky inflation would maintain the squeeze on consumers’ purchasing power and make it harder for the Bank of England to do more quantitative easing should the economy continue to struggle.”
- The OBR’s central forecast is for “inflation to continue falling as the upward pressures from energy and commodity prices fade and spare capacity weighs on prices.” It predicts that CPI will average 2.8% in 2012, falling to 1.9% in 2013. However, the OBR is also mindful of the risks to inflation posed by volatile oil prices. Its report additionally includes projections for a possible “‘temporary oil price spike scenario,’ in which a temporary shock to oil prices leads to prolonged cyclical weakness in the economy.”
- The ONS calculates that measures set out in Osborne’s Budget 2012 will also make a small upward contribution to inflation. They will increase the 12-month rate of CPI inflation by 0.17 percentage points, and will add 0.13 percentage points to the 12-month rate of RPI inflation.
US economy in focus: ‘A new recession is inevitable’
Prospects for the US economy are critical to the fortunes of the global economy.
At first glance, the US economy appears to be faring significantly better than the UK.
But – as is also the case in the in UK – the US recovery is precarious. Some commentators are concerned that these levels of growth cannot be sustained, with the most pessimistic warning that a new recession could be in the offing:
- “A new recession is inevitable” for the US economy, argues Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), which has a strong record of predicting recessions. CNN says: “Achuthan predicts the recession will happen even without a new shock to the economy, such as a spike in oil and gas prices or a Greek sovereign debt default sparking a financial meltdown. If those things occur, he says they will simply make an inevitable recession more painful.” This “would be a new recession, not a double-dip.”
- Rising oil prices and weak global growth represent potential “headwinds” for the US recovery, says New York Federal Reserve head William Dudley.
- A weak property market means that the US recovery could stall in the coming months, according to Robert Reich, writing in the Guardian. Reich identifies this as “the central paradox at the heart of the American economy today.”
- It is unlikely that recent falls in the US unemployment rate can be sustained without a recovery in demand, according to the Federal Reserve Chairman Ben Bernanke. He says: “What we may be seeing now is the flip-side of the fear-driven layoffs that occurred during the worst part of the recession, as firms become sufficiently confident to move their workforces into closer alignment with expected demand for their products.”
UK economic growth: ‘No recovery to speak of’
Returning to the UK economy, the immediate concern is that we could already be in a double-dip recession.
At present, the UK economy remains stuck in reverse:
- The UK economy contracted by 0.3% in the fourth quarter of 2011, according to latest revised estimates of growth in gross domestic product (GDP) published by the Office for National Statistics (ONS) last week.
- This represents a slightly sharper contraction than that reported in the preliminary and first revised estimates, both of which showed GDP contracting by 0.2% in Q4 2011.
Looking ahead, the Guardian’s Larry Elliott argues that a return to pre-recession levels of growth is not even a possibility at the moment:
Despite a monetary and fiscal boost unprecedented in peacetime, there is no recovery to speak of. [...] As things stand, the choice appears to be between permanent slow growth or short booms followed by protracted hangovers.
UK economic growth forecasts: Is a double-dip recession inevitable?
This month sees the publication of the eagerly-awaited preliminary estimate of economic growth in the first quarter of 2012 from ONS, on Wednesday 25 April 2012.
The UK will officially be back in recession if GDP is shown to have contracted for a second consecutive quarter.
But how likely is a double-dip recession for the UK economy?
Some commentators believe that the UK is already back in recession:
- The OECD estimates that the UK economy contracted by 0.4% in the first quarter of 2012. However, it expects UK GDP growth to return to positive territory quickly, to run at 0.5% in the second quarter.
- The past 15 months have seen UK economy undergo “the Osborne collapse, according to economist David Blanchflower: “It appears austerity has failed in the UK lab experiment.”"
However, the majority of economic forecasters appear reassured that a double-dip recession can be avoided, but with only unspectacular levels of growth. Many see a “zigzag” recovery – similar to that envisioned by Mervyn King – as the more likely scenario for growth.
Here is a round-up of recently-published GDP predictions:
- “After a rebound in Q1, growth is likely to weaken in Q2 due to the additional Bank Holiday for the Queen’s Diamond Jubilee. The London Olympics in Q3 may also distort the growth figures.” This is according to the BCC. It has revised its 2012 GDP forecast down from 0.8% to 0.6%. 2013 unchanged at 1.8%.
- NIESR believes that recession can be avoided, but that the economy will remain flat in the near term: “Avoiding a return to recession is obviously welcome, but at present the UK economy can best be described as ‘flat’. We expect the UK’s economic recovery to take hold in 2013. [...]We do not expect output to pass its peak in early 2008 until 2014.”
- The OBR is the only economic commentator to raise its estimates for UK GDP growth in 2012. It says: “We still expect the economy to avoid a technical recession with positive growth in the first quarter of 2012, although another fall cannot be ruled out given the volatility of quarterly output estimates.” The OBR expects the UK economy to grow by 0.8% in 2012, having previously predicted 0.7% growth.
Are we looking at a ‘debt-fuelled recovery’ for the UK?
But even if double-dip recession can be avoided, would the UK be likely to enjoy ‘the right kind of recovery’?
The UK economy is likely to experience a “debt-fuelled recovery,” according to the Guardian’s Phillip Inman. Inman says:
What kind of consumption-driven recovery are economists cheering when wages are growing more slowly than the cost of a weekly shop? The answer is a debt-fuelled recovery.
This is Inman’s recipe for a debt-fuelled recovery:
[B]etter off families are paying down their mortgages more slowly than expected and dipping into savings to maintain their standard of living. Poorer families are turning to pay-day loan companies. Their combined efforts keep retailers’ tills ringing and appear to have prevented a double-dip recession.
Worryingly, Inman believes that the behaviours underlying the debt-fuelled recovery suggest that “the notion of a re-balancing between debt and savings appears to have gone out the window.”
And wasn’t it debt that helped get us into this mess in the first place?
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