XpertHR economic commentary June 2012: The austerity trap

Don't hold your breath for recovery
The double-dip recession is ongoing.

The UK economy shrank by 0.3% in the first quarter of 2012, according to latest revised estimates of growth in gross domestic product (GDP) from the Office for National Statistics (ONS).

This marks a downward revision from the preliminary estimate of a 0.2% contraction in GDP in Q1 2012, signalling that the double-dip recession is even deeper than previously thought.

XpertHR pay specialist Jo Doonar notes (XpertHR subscription required) that "looking at data for each sector, there is no good news," with construction registering a particularly sharp contraction of 3% in Q1 2012.

The XpertHR Employment Intelligence blog's round-up of expert GDP forecasts for 2012 and beyond suggests that it may not be a good idea to hold your breath for recovery.

Olympics to the rescue?
In the nearer term, could the 2012 Olympics serve to boost growth in the second and third quarters of 2012?

And if so by how much?

• Growth in the current quarter could benefit from an "Olympic bounce," as it will be boosted by deferred revenue from advance Olympic ticket sales a year ago, in Q2 2011. ING estimated last year that Olympic ticket sales were 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 (if any) this deferred revenue will have on growth in Q2 2012. ONS publishes its preliminary estimate for Q2 2012 GDP growth on Wednesday 25 July 2012.
• Growth in the third quarter of 2012 is likely to be boosted to some extent by the Olympics themselves. The Bank of England estimates that the London 2012 Olympics will cause "output to be around 0.2% higher in the third quarter than it otherwise would have been," the Guardian reports. It says that this could "spare the UK a fourth successive quarter of negative growth and bring the double-dip recession to an end." However, other economic commentators are not getting their hopes up. Howard Archer of IHS Global Insight believes we are unlikely to see "anything more than a blip" in growth resulting from the 2012 Olympics. Moody's expects that "the Games glow will wear off quickly." ONS publishes its preliminary estimate for Q3 2012 GDP growth on Thursday 25 October 2012.
  

The Coalition Government's growth strategy: Work hard, do more with less
Last month saw the Government promise a renewed focus on getting the economy back on track:

• Chancellor George Osborne said that he is "straining every effort" to tackle the UK's economic problems.
• Foreign Secretary William Hague issued some stern words for UK employers: "There's only one growth strategy - work hard! And do more with less - that's the 21st century."
• Arguably contradicting Hague, David Cameron set out the Coalition Government's "plan for growth - short, medium and long-term" in his May 2012 speech on the economy.
• Nick Clegg "signalled that the coalition has plans for a 'massive' increase in state-backed infrastructure investment but denied that the fresh emphasis on growth represented a 'plan B'," the Guardian reports.
  

Is the Coalition Government waging a 'war on how we work'?
The Coalition Government is also proposing widespread change to the employment law system, ostensibly as part of its strategy to boost growth.

However, the Coalition Government's approach to employment law reform could also be viewed as a "war on how we work," argues Sunday Telegraph Business Editor Kamal Ahmed.

Ahmed says that these reforms are ultimately intended to enshrine a view that - at its simplest - "employers should be allowed to get on with managing their companies."

Recent weeks have seen a number of major announcements on employment law reform:

• The Queen's Speech included a raft of business legislation, which the Government said was aimed at "creating the right conditions for businesses to grow and succeed". These include measures to "overhaul the employment tribunal system, cut unnecessary red tape for businesses and reform directors' pay." XpertHR provides detailed guidance on the Queen's Speech and its implications for employment law and on the specific reforms relating to employment tribunals.
• Venture capitalist Adrian Beecroft's Report on Employment Law, which proposes many radical reforms intended to boost growth (and from which the concept of compensated no-fault dismissals originated) finally saw the light of day. The report generated widespread controversy, including upheaval within the Coalition Government.
• The Enterprise and Regulatory Reform Bill included details of proposed measures aimed at "improving the employment tribunal system". You can read analyses of the Bill from XpertHR, Personnel Today's Laura Chamberlain and from lawyer Laurie Anstis. Barrister Anya Palmer, meanwhile, argues that one proposal within the Bill, if enacted, would pave "the way for a major reduction in employment rights" in the future. Palmer points out that the Bill "contains a provision that would give the Government a very broad power to slash compensation for unfair dismissal to a third of its present level at any time in the future, without further debate." She says that this provision may not come into effect in the near future, but notes that "it's not unreasonable to suppose that if the Conservatives won the next election they would promptly reduce the limit across the board."
  

Work Foundation Director Ian Brinkley questions what impact the employment law reforms set out in the Queen's Speech might have on growth:

Even if relatively few workers are adversely affected by the reforms, there is a danger that they will create an impression that employment in general is being made more insecure. This would not be helpful in the current climate with the clear link between job insecurity and the confidence to consume. [...] Overall, the conclusion has to be that making it easier to dismiss will have no significant impact on job generation and is irrelevant to the wider question of how to stimulate growth.

The legacy of the Coalition Government
The Guardian's Phillip Inman argues that the proposed employment law reforms set out in the Queen's Speech can be viewed as part of an ongoing project shared by a number of European governments to pursue "growth built on cuts in workers' terms and conditions".

This view would appear to be borne out by William Hague's statement that radical reform to the labour market and the welfare system will be the legacy of the Coalition Government:

[W]e are recreating the work ethic for everybody in Britain. I think that these reforms will be seen in the 2020's as being as important to this country as the trade Union reforms and privatisations were of the 1980s. This is as fundamental as that. This is the purpose of the Coalition Government.

Austerity and tough labour market reforms have 'devastating' economic consequences, says ILO
But rather than promoting renewed growth and job creation, the combination of extensive economic austerity measures and "tough" labour market reforms is having "devastating consequences" on many economies around the world, according to the International Labour Organization (ILO).

The ILO's World of Work Report 2012 says:

These steps are being taken in the hope that financial markets will react positively, thereby boosting confidence, growth and job creation. However, these expectations have not been met.

Neither renewed economic growth nor reinvigorated jobs markets has materialised in many countries enacting austerity measures, particularly those in Southern Europe, says the ILO.

The ILO argues that this represents clear evidence of an "austerity trap."

Caught in the austerity trap?
The ILO defines the "austerity trap" as a vicious circle in which austerity and tough labour market reforms hinder growth while weakening the labour market, resulting in a perceived need for further austerity measures, in turn exacerbating these problems.

The ILO says:

The fundamental reason for these failures is that these policies [...] are unable to stimulate private investment. The austerity trap has sprung. Austerity has, in fact, resulted in weaker economic growth, increased volatility and a worsening of banks' balance sheets leading to a further contraction of credit, lower investment and, consequently, more job losses. Ironically, this has adversely affected government budgets, thus increasing the demands for further austerity.

Harsh economic conditions, elevated unemployment and rising income inequality also mean that "the risk of social unrest" has increased in "a majority of countries," separate ILO research suggests.

There are signs that European governments could now be reconsidering their approach to austerity measures. The May 2012 Eurogroup Working Group (EWG) meeting of EU leaders "marked a shift from collective austerity to pro-growth measures following the election of the Socialist François Hollande as French President," the Independent reports.

Unemployment crisis across Europe...
Unemployment is on the rise across Europe, with the Eurozone jobless rate hitting 10.9% in March 2012. This is its highest level since the euro was formed in 1999, according to the BBC.

These unemployment data appear to conform to the pattern suggested by the ILO, with higher unemployment rates in the countries which have enacted the most severe austerity measures.

...while unemployment eases slightly in UK
Closer to home, the latest official data showed surprise falls in key measures of unemployment:

• The headline unemployment rate (on the ILO definition) was 8.2% over the three months to March 2012, down 0.2 percentage points when compared with the rate seen in the previous rolling quarter (8.4%).
• The ILO unemployment level was 2.63 million in March 2012, down 45,000 on the previous quarter.
• The youth unemployment rate stood at 21.9%, down 0.3 percentage points on the quarter (22.2%).
  

However, more detailed analysis reveals that the fall in the headline rate of unemployment was almost entirely the result of the ongoing rise of part-time work, at the expense of full-time jobs. ONS says:

The number of part-time workers increased by 118,000 on the quarter to reach 7.99 million (the highest figure since comparable records began in 1992) but the number of full-time workers fell by 13,000 to reach 21.24 million.

Indeed, ONS also reports that the number of people working part-time "because they could not find a full-time job" hit a record high of 1.42 million in March. The number of self-employed people also rose to a record high, of 4.16 million.

As we noted in April, the rise in part-time working is not necessarily "a good thing".

UK unemployment has yet to peak, forecasts suggest
Despite these falls in headline unemployment rates, forecasts suggest that unemployment has yet to peak:

• The CBI expects unemployment to peak at 8.9% in Q1 2013. Unemployment will average 8.6% in 2012 and 8.8% in 2013.
  
• The European Commission says "the [UK] unemployment rate is [...] likely to increase slightly in 2012, to peak at 8.5% before edging back to 8.4% in 2013."
• Evenbase paints a bleak picture of prospects for the UK labour market in 2012: "People remain gloomy about their current job situations, especially those in older demographics; the number of vacancies is dropping; and most of the positive recruitment trends that we traditionally see in January and February have proved hard to find."
• Lloyds expects "unemployment to peak at close to 9% by early next year."
  
• NIESR: "The unemployment rate will rise to about 9% this year and remain high throughout the forecast period. Elevated unemployment for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs."

Inflation shows welcome fall...
Latest ONS data showed a welcome fall in all measures of inflation:

• Consumer prices index (CPI) inflation stood at 3.0% in April 2012 (down by 0.5 percentage points from 3.5% a month ago). CPI consequently finds itself back within the Government's symmetrical target rate of one percentage point either side 2% (i.e. within the range 1% to 3%).
• Retail prices index (RPI) inflation ran at 3.5% over the 12 months to April 2012. This is down 0.1 percentages point from 3.6% in March. 
  

Back in March, we noted concern among commentators at just how far and how fast inflation might fall during 2012.

Even with the latest falls, inflation is currently proving more "sticky" than had previously been expected. There are also some concerns about potential rises in inflation (with Centrica for example warning of a possible 15% gas price hike this winter).

There are mixed views as to the future path of inflation:

• The European Commission expects inflation in the UK to continue to fall. It says: "[T]he forecast is for inflation to fall almost continuously throughout the next two years to an average of 2.9% in 2012 and 2.0% in 2013."
• But Ben Broadbent said the Bank of England now expects CPI inflation "to bobble around close to [its current] level [of 3%] for much of the rest of the year. We still anticipate a decline ... but it looks to be taking slightly longer than we had first thought."

For more on inflation:

• XpertHR's latest biannual economic outlook article (XpertHR subscription required) includes detailed analysis of what ongoing elevated inflation means for the Bank of England Monetary Policy Committee's (MPC) decisions on interest rates.
• Click here for XpertHR's latest monthly analysis of expert inflation forecasts (XpertHR subscription required).
  

...but gap between inflation and pay awards widens
Despite this fall in inflation, the gap between inflation and pay awards has widened.

The value of the median whole economy pay award fell to 2% over the three months to 30 April 2012 (XpertHR subscription required, according to the XpertHR pay databank.

This means the gap between the headline pay award (at 2%) and RPI inflation (at 3.5%) spans 1.5 percentage points. This compares with the one percentage point gap between the headline pay award and RPI inflation one month ago.

XpertHR Pay and Benefits Editor Sheila Attwood notes that the fall in the headline pay award seen in the latest reading from the XpertHR pay databank is in part driven by the changing nature of the survey sample on which it is based:

The headline figure masks the big difference between pay bargaining in the public and private sectors. In the three months to March 2012, when the median pay deal was 2.6%, the sample was entirely private sector. The April figure includes a lot of public sector deals, which have a median zero increase, while the private sector median is at 2.5%.

HR rises to the challenge of doing more with less
If we were to take William Hague's exhortation to "do more with less" as the abiding lesson for UK employers in the age of austerity, where would that leave HR?

Latest XpertHR research suggests that UK HR departments are coping well in the current challenging climate.

XpertHR's 10th annual benchmarking survey of HR roles and responsibilities provides insights into the work, composition and performance of UK HR departments in 2012. The survey is based on responses from 334 organisations with a combined workforce of 360,604 employees.


HR departments feel they have reacted well to the challenges of the past year and performed effectively:

• Two-thirds of organisations have measured the effectiveness of their HR function over the past year.
• Among this group, seven in 10 rate the effectiveness of their HR department as above average or higher.
  

The survey also identifies some key characteristics of effective HR departments. These include:

• having a documented HR strategy in place; and
• having a lower ratio of employees to HR staff.

The shrinking UK HR department

The survey also suggests that HR is indeed having to do more with less:

• Nearly three in 10 respondents to the survey reported that their organisation's HR activities budget (which includes all HR department running costs plus recruitment, training and other HR activities, but excludes budget for employee salaries other than HR staff) has decreased over the past two years (XpertHR Benchmarking subscription required).
• UK HR departments have also been shrinking over recent years. The average number of full-time equivalent HR professionals in a typical UK HR department is 9.4 in 2012. This is down from 10.5 in 2011 and from 11.0 in 2010.
  

See also:

• Economic outlook: Uncertainty as to when growth will return Pay specialist Jo Doonar presents XpertHR's latest biannual overview of the UK economic outlook (XpertHR subscription required).
• 10 years of HR roles and responsibilities Complete the form to download XpertHR's report on how the HR function has changed over the past decade.
• 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).