XpertHR economic commentary May 2012: On the critical list

UK economy in double-dip recession
The UK economy has plunged back into a state of technical recession.

The UK economy contracted for a second consecutive quarter, shrinking by 0.2% in the first quarter of 2012. This is according to the preliminary estimate on growth in gross domestic product (GDP) published by the Office for National Statistics (ONS) last week.

The technical definition of a recession is two successive quarters of negative GDP growth.

This is the UK's first double-dip recession since the 1970s, according to Reuters.

The Guardian's Larry Elliott notes that news that we are back in recession makes things difficult for Chancellor George Osborne:

Slow growth makes it harder for the government to hit its deficit-reduction targets and may well result in the UK having its credit-rating downgraded. That would be a bitter blow for Osborne, since his entire economic and political strategy has relied on the UK remaining in the dwindling club of nations with a prized AAA rating.

'Three successive quarters' of falling GDP possible, says Bank of England
How likely is it that economic growth will get back on track?

The economy may also contract in the current quarter, the Bank of England Monetary Policy Committee (MPC) warns. The MPC says that it "could not rule out the publication of official data showing GDP falling for three successive quarters."

Here is a round-up of latest expert forecasts on UK economic growth in 2012 and beyond:

• The Ernst & Young ITEM Club thinks "this year's growth is likely to be lower than last year's depressing" data. It expects UK GDP to grow by 0.4% in 2012 - half the level predicted by the Office for Budget Responsibility (OBR). It forecasts GDP growth of 1.5% in 2013 and 2.6% in 2014.
• The IMF has followed the OBR's lead in revising its forecasts for UK GDP growth in 2012 upwards to 0.8%.
  
• The OECD's Christoper André argues that Osborne should relax his austerity measures for a year, in order to boost growth. André  recommends instead cutting VAT and increasing borrowing.
  
• Standard & Poor's (S&P) cautions that austerity measures will "likely drag on economic growth," with GDP expected to grow by around 1.6% each year between now and the 2015 general election. S&P has reaffirmed the UK's AAA credit rating as "stable." This is in contrast to Fitch and Moody's, both of which recently changed their assessment of the UK economic outlook to "negative."
  

A premature end to rapidly falling inflation?
Recent months have seen a welcome easing of inflation from the high levels seen throughout 2012.

But this trend could be coming to a premature end, latest official inflation data suggest:

• Consumer prices index (CPI) inflation ran at 3.5% in March 2012. This represents an unexpected rise of 0.1 percentage point when compared with the previous month's figure (3.4%). "The largest upward pressures to this change came from food, clothing and recreation & culture," says ONS.
• Retail prices index (RPI) inflation, however, showed a slight fall to run at 3.6% over the 12 months to March 2012, down 0.1 percentage point from February's figure (3.7%).
  

The rise in CPI means "the sharp slowdown in UK inflation has come to a premature end," according to Scotiabank's Alan Clarke.

So where will inflation go from here?

• The minutes of the MPC's April 2012 meeting note a "a risk that inflation would fall less rapidly in the near term than the Committee had anticipated in its February Inflation Report central projection." The MPC had previously predicted that inflation would fall "below the 2% target by the beginning of next year."
• Alan Clarke of Scotiabank argues that "the barrage of petrol- and budget-related price hikes coming through and water bill increases" are likely to prevent "inflation slowing very much from here."
• In contrast, Vicky Redwood of Capital Economics believes that "inflation should start to fall again before long, not least as last year's rises in energy prices continue to fall out of the annual comparison."

For more on the future path of inflation, see XpertHR's latest round-up of inflation forecasts (XpertHR subscription required).

Will the gap between pay awards and inflation continue to narrow?
Pay awards have been failing to keep pace with the cost of living for an extended period.

The median whole-economy pay award (as measured by the XpertHR pay databank) has been set below the level of RPI inflation for each consecutive rolling quarter since the three months ending 31 December 2009 (XpertHR subscription required).

Sunday Times Economics Editor David Smith says that closing the gap between pay awards and inflation is important for economic recovery:

The fall in both measures of inflation [RPI and CPI] is essential if the growth in real incomes is to be restored, thus supporting spending.

The gap between pay awards and inflation has been narrowing over recent months. However, as XpertHR pay specialist Jo Doonar notes (XpertHR subscription required) the current uncertainty over the future path of inflation also makes future changes to the gap between pay awards and inflation uncertain:

Although the gap between inflation and pay awards is narrow (it is currently one percentage point compared with 2.8 percentage points for 2011 as a whole), which should be good news in terms of real pay, the fall in retail prices index (RPI) inflation has not been as dramatic as some economists expected and it now stands at 3.6%.

The median whole economy pay award was 2.6% over the three months to 31 March 2012, according to latest figures from the XpertHR pay databank (XpertHR subscription required).

So how likely is it that the gap between pay awards and inflation will continue to narrow?

XpertHR Pay and Benefits Editor Sheila Attwood says that "the gap between pay awards and inflation is only going to close considerably if inflation falls as there is no sign of a significant rise in the level of pay awards."

Youth unemployment eases, but youth unemployment crisis remains
The UK's youth unemployment crisis is ongoing, with well over one million people aged between 16 and 24 unemployed. However, youth unemployment saw a slight fall in the latest official data:

• The youth unemployment rate was 22.2% on the ILO measure over the three months to February 2012, down 0.1 percentage points on the previous quarter.
• The youth unemployment level was 1.03 million over the three months to February 2012, down 9,000.
  

Alternative measure of youth unemployment marks first anniversary
The latest unemployment data release also marked the first anniversary of ONS publishing its alternative measure of youth unemployment, which excludes people in full-time education.

ONS started reporting the alternative measure of youth unemployment in its April 2011 data release following pressure from Secretary of State for Work and Pensions Iain Duncan Smith, who argued that the internationally-accepted ILO measure of youth unemployment was "misleading."

The CIPD suggests that Iain Duncan Smith's demand for a rethink on the reporting of youth unemployment could have been influenced by the CIPD's own thinking on youth unemployment.

The alternative measure of youth unemployment is controversial.

Some commentators argue that the Government favours it solely because it paints a picture of youth unemployment that is more flattering to them than the ILO measure.

Economist David Blanchflower says that use of the alternative measure of youth unemployment is tantamount to "fiddling the figures." This is because the alternative measure of youth unemployment excludes young people in full-time education, yet they continue to be included in the overall employment figures for young people.

While the alternative measure of youth unemployment remains some way short of the "million milestone" (a milestone which the ILO measure passed in November 2011), it has nonetheless showed a sharp increase over the past year:

• According to the alternative measure of youth unemployment, there were 719,000 unemployed 16 to 24 year olds between December 2011 and February 2012 (down 11,000 on the quarter). However, this is up sharply when compared with the first reported data on this measure, which stood at 660,000 over the three months to February 2011.
• The youth unemployment rate on the alternative measure stands at 20.5% (down from 20.7% in the previous quarter). This compares with 18.6% a year ago.
  

Headline unemployment rate shows a welcome fall..
Unemployment has shown a slight easing on a number of other key measures:

• The headline unemployment rate (on the ILO definition) fell back slightly to 8.3% between December 2011 and February 2012. This is down by 0.1 percentage point from the rate for the preceding three-month period (8.4%). ONS says: "This is the first quarterly fall in unemployment since the three months to May 2011."
• The number of unemployed people fell to 2.65 million, down 35,000.
  

...but are we looking at a 'part-time recovery'?
Part-time working is on the rise. Work Foundation researcher Andrew Sissons believes we could be seeing evidence of a "part-time recovery".

This is not necessarily a good thing:

• The number of part-time workers in the UK is rising rapidly, while the number of full-time workers is falling.
• The number of people reporting that they are working part-time because they cannot find a full-time job hit a record high of 1.4 million, and actually showed a greater increase (rising by 89,000 when compared with the previous quarter) than did the overall number of part-time workers (which rose by 80,000, to 7.4 million).
  

Unemployment 'will not peak until September 2012 at the earliest'
It seems probable that unemployment will resume its upward path later this year:

• The Institute for Public Policy Research (IPPR) sees a risk "that high unemployment becomes a permanent feature of the UK economy, as it did in the 1980s." It predicts that unemployment will not peak until September 2012 at the earliest, with a further 100,000 people becoming unemployed over the remainder of the year, primarily as a result of job cuts in the public sector.
• The Work Foundation says: "Going forward, we are unlikely to see any significant improvements in unemployment until the labour market becomes much stronger. This depends on solid economic growth, with increases in full-time work and hours worked. The outlook for both remains uncertain."
  

Benchmarking the impact of public sector cuts

Public sector cost-cutting measures are ongoing in 2012, and are likely to result in further job losses, XpertHR Benchmarking research suggests:

• Nearly nine in 10 public sector employers expect to make cuts to organisational wage bills in 2012.
• Redundancies (whether voluntary or compulsory) are the most common restructuring measure planned for 2012 by public sector employers surveyed by XpertHR.
  

The numbers of voluntary and compulsory redundancies that public sector employers expect to make in 2012 are higher than the equivalent number recorded by XpertHR a year ago, in 2011.

'Faster, higher, stronger': PPMA head calls for 'harder-edged' HR in the public sector
"Faster, higher, stronger." This is new Public Sector People Managers Association (PPMA) President Martin Rayson's assessment of what he expects to be the themes of his presidency. In an interview with HR Magazine, Rayson said: "It is not about doing HR differently, but with a harder edge."

Rayson pinpoints the key challenges for HR in the public sector:

The industrial relationship challenges, pay freezes - and belief that senior executives are paid too much - don't create a positive brand and this should be a concern to HR professionals.

XpertHR research suggests that staff morale in the public sector is deteriorating as public spending cuts continue:

• Three-quarters of public sector employers say staff morale worsened during 2011 as the impact of public spending cuts intensified.
• A further two-fifths say that industrial relations at their organisation worsened in 2011. Only one in 10 said that industrial relations had improved.
  

Rayson notes that while the spending cuts enacted so far were "front-loaded," Chancellor George Osborne's Autumn Statement included "hints of further reductions, so our challenge is to get organisations to focus on the long term."

Rayson's prescription for "harder-edged HR" in the public sector could be required for many years to come.

The age of austerity is in its infancy
Rather than winding down in time for the 2015 general election (as had originally been planned, or shortly after the election, as the revised timetable sketched out in Osborne's 2011 Autumn Statement suggested), the age of austerity could have only just begun

Indeed, as we noted last year, permanent austerity could be in prospect, at least in our lifetimes.

This is because increased longevity and consequent increased pension burdens and other costs arising from an ageing population could force additional austerity measures over the coming decades.

Leading UK HR blogger Rick argues that these factors are likely to result in "permanent cost-cutting." In his view, the UK's ageing population "means that the Government's response will have to be simultaneous tax increases and spending cuts."

Are we underestimating longevity and its financial impact?
A number of recent reports have explored the rising life expectancy levels and their potential financial impact:

• Rising longevity means that "around one-third of babies born in 2012 in the United Kingdom are expected to survive to celebrate their 100th birthday," according to latest ONS estimates.
  
• However, the IMF argues that such forecasts "have consistently underestimated lifespans." This gives rise to "longevity risk" ("the risk that actual lifespans of individuals or of whole populations will exceed estimates"). This in turn means that Governments risk having underestimated the future costs associated with ageing populations. The IMF believes that "longevity shocks" are likely as the true costs associated with increased longevity become clear.
• The OECD finds that "most countries will need a sustained period of fiscal tightening, acting on both the revenue and spending side [...] in order to bring their debt back to 50% of GDP by around mid-century." But this need for "sustained" cuts could be exacerbated significantly by mounting "spending pressures, principally from health and long-term care," arising from ageing populations.

Issues around the rising costs of future elderly care provision are also increasingly being addressed by the mainstream media. Last Friday's Daily Telegraph lead with a front-page story entitled Elderly care funding will force closure of libraries, councils warn. It highlights "an unprecedented show of cross-party unity [in which] local government chiefs have issued a direct plea to David Cameron, Nick Clegg and Ed Miliband, urging them to act now to avoid 'dangerous' delays in agreeing reform to elderly services."

No country for young men
As well as the pressures posed by high and rising youth unemployment, today's young people are also experiencing an "unprecedented" deterioration in living standards.

This is according to analysis of official data on 730,000 UK households from 1961 to 2009/2010 from The Data Archive, conducted by the Financial Times. The FT finds that "Britain is no country for young men."

The FT analysis reveals that "real disposable household incomes of people in their 20s have stagnated over the past 10 years just as older households are capturing a much greater share of the nation's wealth. This means that "the living standards of Britons in their 20s have been overtaken by those of their 60-something grandparents for the first time."

The UK has consequently seen "an extraordinary reversal in economic fortunes," in which "the elderly prosper while the young flounder."

An inheritance of perpetual austerity?
Taken together, the ongoing youth unemployment crisis, falling living standards and the long-term implications of the UK's ageing population could mean that today's young people will have an inheritance of perpetual austerity to look forward to.

See also:

• XpertHR Private Sector Pay Forecast Benchmarker See how your organisation measures up against the latest pay forecast benchmarking data from XpertHR, and against latest expert inflation forecasts compiled by XpertHR (XpertHR subscription required).
• XpertHR Pay Intelligence: Economics Catch up on all the recent economics-related posts on this blog.
• XpertHR Benchmarking: Pay and Benefits Access a wealth of interactive benchmarking data on pay and benefits, via XpertHR Benchmarking.
• XpertHR Pay and Benefits Visit XpertHR's Pay and Benefits zone.