XpertHR economic commentary September 2012: Triple-dip recession in prospect?

XpertHR’s September 2012 economic commentary looks at theories that the UK economy could face a triple-dip recession.

As the UK gets back to work after the summer holiday season, the double-dip recession drags on.

Prospects for a full recovery are edging ever further into the future. Bank of England Governor Mervyn King warns that a return to “full fitness” for the UK economy is a “a goal that may lie some years ahead”.

Indeed, some commentators suggest that a “triple-dip recession” is now a real risk for the UK economy.

Recent weeks have seen calls from the IMF, the IPPR, and NIESR to moderate the pace of spending cuts in order to boost growth.

But the Coalition Government is not for turning on austerity.

Prime Minister David Cameron reaffirmed his commitment to austerity and told Sky News that Chancellor George Osborne would not fall victim to “reshuffle bingo.”

The Telegraph reports that “the Coalition is preparing an economic regeneration Bill and is anxious to proceed with new infrastructure projects.” However, it is not yet known when this Bill will be unveiled.

XpertHR’s economic commentary for September 2012 assesses prospects for growth and the possibility of a “triple-dip recession.” We also look at the likely resurgence in trade union activity in autumn 2012, and report on latest readings on key economic indicators, including inflation, pay awards and unemployment.

Double-dip recession continues, despite upward revision to Q2 GDP

The UK economy “remains mired in the longest double-dip recession since the second world war.”

The economy contracted by 0.5% in the second quarter of 2012, according to latest revised estimates on growth in gross domestic product (GDP) from the Office for National Statistics (ONS). This is an upward revision from the initial estimate of a 0.7% contraction, reflecting a slightly less sharp dip in construction sector output than previously thought.

However, the fall in GDP between the first and second quarters of 2012 remains “the biggest drop since the first quarter of 2009 – when the economy was hit by the immediate aftermath of the financial crisis,” Reuters reports.

Growth is likely to be stronger in the third quarter 2012.

This is because the Q3 GDP data will be boosted by the impact of the London 2012 Olympics, and by the combined value of all Olympic ticket sales revenues from both 2011 and 2012.

A Reuters poll of 60 economists suggests that GDP growth could rebound to 0.7% in Q3 2012.

ONS publishes its preliminary estimate of GDP growth in the third quarter of 2012 next month (on Thursday 25 October 2012).

Prospects for growth: Hopes of Olympics boost fading fast?

But could the London 2012 Olympics prove to be a damp squib in economic terms?

Anecdotal evidence suggests that the economic impact of the London 2012 Olympics could be underwhelming:

• “[F]ears of the Gridlock Games [...] transformed into complaints about the Ghost Town Olympics.” This is the New York Times‘ pithy summation of the lack of expected overcrowding during the London 2012 Olympics.

• In London itself, many retailers reported lower footfalls and subdued trade in the first week of the Olympics, although some saw a rebound in the second week.
• CBI analysis suggests that the air of “celebration” generated by the Olympics “did not extend to the high street,” with more UK retailers reporting a fall in sales than an increase.

Any economic boost from the London 2012 Olympics is likely to be short-lived. Mervyn King warns that “the impact [of the Olympics] on confidence may give the economy a boost. But ultimately the games cannot alter the underlying economic situation we face.”

Bank of England forecasts ‘six-year long depression’

This view that recovery could be an ever longer time coming was also reflected in the Bank of England’s latest quarterly Inflation Report.

“The outlook for UK growth remains unusually uncertain,” says the report. The Bank of England slashed its forecast for UK GDP growth in 2012 from around 0.8% to around zero. It identifies the ongoing crisis in the eurozone as the biggest threat to recovery.

Sky Economics Editor Ed Conway notes that the Bank of England’s GDP forecast downgrade “is an enormous revision by anyone standards.” Conway reports that “the upshot is that the economy won’t recover to its pre-crisis peak until 2014, making this a six-year long depression.”

GDP forecasts round-up: ‘Little on the horizon’

Here is our latest monthly round-up of GDP forecasts from economic commentators and professional bodies:

• Economist David Blanchflower: “[A]t best I am expecting [growth in] the third quarter to be zero. Once the temporary jobs [generated by the Olympics] cease, output will fall again, suggesting that the fourth quarter may well be negative also. I have now downgraded my forecast for 2012 from -0.5% to -1.5%.”
• The British Chambers of Commerce (BCC) has revised its expectations for UK GDP growth in 2012 down from 0.1% to -0.4%. It has also reduced its 2013 forecasts from 1.9% to 1.2%.

• The CBI says: “Our 2012 GDP forecast for the UK has been cut to minus 0.3%, from plus 0.6% previously.” It expects “an increasing sense of unease to build through the remaining months of 2012, as uncertainty around the likely evolution of events in the euro area increases.” The CBI predicts that growth will resume in earnest in 2013. However, it has slashed its forecast for GDP growth in 2013 from 2.0% to 1.2%, “reflecting the elevated level of uncertainty.”

• Larry Elliott notes that “for the economy to register even zero growth in 2012 as a whole output needs to rise 1% [in the third] quarter and remain at that level in the final quarter.”
• KPMG Chief Economist Andrew Smith is concerned that the Bank of England’s gloomy predictions for flat GDP growth in 2012 “could prove optimistic: output will have to pick up sharply from now on if 2012 is not to be another recession year. Economic data will have been distorted by the Jubilee holiday and the Olympics, but there seems little on the horizon to lift the economy. Austerity measures have a long way to go at home and Europe, our main export market, is stagnating at best.”
• NIESR predicts that “the economy will contract by 0.5% this year, but grow by 1.3% in 2013,” but cautions that “there are downside risks from the Euro area.” NIESR also notes that “focusing on a ‘double dip’ distracts from the more important trend; the level of output has effectively been flat over the past two years. This is largely due to domestic economic factors; private sector adjustment has been exacerbated by fiscal consolidation and a dysfunctional financial system.”

Triple-dip recession risk

The UK economy could “hit a ‘triple-dip’ recession within the next two years.”

This is according to the latest survey of Chief Financial Officers (CFOs) compiled by Deloitte.

A triple-dip recession scenario would see any recovery in UK economic growth over the coming year go into reverse, plunging the economy back into negative territory.

The survey finds confidence in the economy plummeting.

The data reveal “the third major dip in CFO confidence in the last five years [and] the sharpest decline in corporate confidence” in the survey’s five-year history. The main factors here are “worries about recession and a breakup of the euro.” According to Deloitte:

CFOs and finance directors now see an almost one-in-two chance of the recession continuing to the end of this year or for the economy to hit a ‘triple-dip’ recession within the next two years.

Concerns that austerity measures could be preventing recovery are also expressed in research from the IPPR:

The government is taking demand out of the economy through its deficit reduction programme. [...] The Coalition’s measures to tackle its budget deficit were predicated on the assumption that they would lead to greater confidence and certainty about the future; in fact, they have had the opposite effect. As a result, the private sector is not inclined to increase its spending.

Inflation shows unexpected rise

“Considerable uncertainty surrounds the inflation outlook.” This is according to the Bank of England Inflation Report.

This uncertainty is well illustrated by the latest inflation data, which showed an unexpected rise, completely at odds with the Bank of England’s prediction one week previously that “inflation is likely to fall further in the coming months,” driven down by “lower energy prices and some broader-based weakness in price pressures.”

Here are the latest inflation readings from ONS:

• Retail prices index (RPI) inflation rose by 3.2% over the 12 months to July 2012. This was up 0.4 percentage points from 2.8% in June.
• Consumer prices index (CPI) inflation rose by 2.6% in July 2012, up 0.2 percentage points on the previous month’s figure (2.4%).
• ONS ascribes the latest rises in inflation to the rising costs of “transport (particularly air fares) and clothing & footwear.”

As Sky’s Ed Conway points out in the tweet reproduced below, these inflation figures wrongfooted the Bank of England:

Following this surprise uplift in inflation, it remains to be seen if the Bank of England’s prediction that inflation “is more likely than not to be around or a little below [the official CPI target rate of 2%] for much of the forecast period” will now prove accurate.

There are concerns that further upward inflationary pressure could come from rising global food prices in response to the drought conditions affecting the US, which have ruined many crops. Global food prices rose by 10% in July 2012 alone, according to data from the World Bank.

Gap between pay awards and inflation continues to narrow

The headline whole economy pay award as measured by the XpertHR pay databank stands at 2.5% for the three months to 31 July 2012. This is up from the 2% headline award recorded for the previous three month period, reflecting the fact that the latest sample is dominated by pay deals in the private sector (Subscription required).

XpertHR pay specialist Rachel Sharp comments:

This increase means that – in spite of the unexpected rise in retail prices index inflation to 3.2% in July 2012 – the headline pay award is lagging inflation by just 0.7 percentage points, the closest the measures have been since pay deals fell behind inflation in December 2009.

Union activity on the rise as TUC plans mass demonstration in London for Saturday 20 October 2012

As autumn 2012 approaches, the UK’s trade union movement is gearing up for concerted action against what Unison’s Dave Prentis dubs the Coalition Government’s “mindless austerity agenda.” 

The trade unions’ agenda is wide-ranging, with pay expected to become “the next industrial battleground” and pensions also expected to figure prominently.

The unions are also adopting an increasingly collaborative approach. Incoming TUC General Secretary Frances O’Grady says that the TUC wants to build “an alliance not just of trade unionists and our normal allies but good employers too.” She continues:

The TUC’s new slogan ‘a future that works’ sets a profound challenge. Austerity and rapid deficit reduction is failing in its own terms, but even at its best it is short-sighted, muddle-through politics with no vision of a new economic model.

Next month sees a TUC-organised mass demonstration in central London (on Saturday 20 October 2012).

O’Grady predicts a significant turn-out:

Our demonstration on 20 October will bring hundreds of thousands on to London streets once again to show the depth of opposition.

Pay is emerging as a key issue for the TUC. O’Grady says:

British workers are now suffering the biggest decline in their living standards in generations. There has been a huge growth in vulnerable and insecure employment. Joblessness is not as high as many of us feared, but the number of workers in involuntary part-time employment, casual work or precarious self-employment is at record levels.

Recent statements of renewed militancy and an increasingly collaborative approach from other unions include the following:

• The Unison and GMB unions are combining efforts to create what the Guardian describes as an “anti-austerity alliance.” Unison General Secretary Dave Prentis says: “It makes absolute sense for us to join forces, and speak with one voice against this mindless austerity agenda which is only dragging the country down.”
• PCS General Secretary Mark Serwotka says: “[W]e need unity across the trade unions, in campaigning organisations and in parliament. That unity is built around opposing this Tory-led government’s attacks on the people we represent.”

UK labour market is ‘puzzlingly robust,’ says Bank of England

“Employment growth remains puzzlingly robust.” This is according to the Bank of England Inflation Report.

This trend continues in latest labour market data release from ONS:

• Employment levels showed sharp growth over the three months to June 2012, says ONS: “The employment rate for those aged from 16 to 64 was 71.0%, up 0.4 on the quarter. There were 29.48 million people in employment aged 16 and over, up 201,000 on the quarter.”
• It is worth noting that the rise in employment levels was in part boosted by the number of part-time workers reaching a record high of 8.07 million. 
• Not all of those working part-time are doing so out of choice. ONS says: “The number of employees and self-employed people who were working part-time because they could not find a full-time job increased by 16,000 on the quarter to reach 1.42 million, the highest figure since comparable records began in 1992.”

Unemployment showed a fall, but remains elevated:

• The headline unemployment rate (on the ILO definition) stood at 8.0% over the three months to June 2012, down 0.2 percentage points on the previous rolling three-month period (8.2%).
• ONS says: “The number of people unemployed for over one year was 882,000, little changed on the previous quarter.”

The impact of ongoing high unemployment should not be underestimated. The IPPR notes that “the human cost of the crisis is most heavily felt through its effect on unemployment. Overall, there are more than one million additional people unemployed now than there were before the recession began.”

Looking ahead, a return to rapidly rising unemployment seems likely. Any short-term boost to the labour market from jobs created for the Olympics is likely to be reversed:

• The CBI predicts that unemployment will average 8.1% over the course of 2012, rising to 8.4% over 2013.
• The British Chambers of Commerce (BCC) expects unemployment to peak at 8.5% in 2013.
• NIESR forecasts that “unemployment will peak at 8.6% in 2013.”

Can the UK’s unusual ‘mix of deep recession and shallow job losses’ last?

The UK economy’s “mix of deep recession and shallow job losses is unusual,” says The Economist. It notes that the job market has proven “remarkably resilient” given the ongoing collapse in demand and the lack of growth.

The Economist argues that over recent years, “labour hoarding has been commoner than hiring. Firms have clung to staff because skilled workers will be hard to recruit once things return to normal.”

New CIPD research finds evidence of “labour hoarding”:  

[T]he precarious nature of the current market is highlighted by the finding that almost a third (31%) of private sector firms have maintained staff levels higher than is required by their current level of output during the past year. The main reason for holding on to labour is to maintain the skills base within the organisation (as reported by 62% of these employers).

Growth urgently needed to prevent further job losses in UK and eurozone

So how long might this trend toward labour hoarding be expected to last?

Studies from Deloitte and the ILO suggest that a new wave of job cuts could be in the offing, unless sustained economic growth materialises in the near future.

Deloitte’s CFO survey suggests that the lack of encouraging economic news means that many organisations are now looking to cut jobs in the coming months.

Mark FitzPatrick of Deloitte comments:

As when the economy slid into recession in late 2008, corporates are reacting by cutting costs and bolstering cash flow. Companies are more focussed than they were 12 months ago on defensive balance sheet strategies, such as reducing leverage and disposing of assets. They are less likely to be making acquisitions or undertaking capital expenditure. On balance, CFOs see hiring, capital spending and discretionary spending declining over the next year.

This situation is not confined to the UK. Labour markets across the eurozone are in the same precarious situation, according to ILO research.

The ILO sees evidence of ongoing labour hoarding across the eurozone, even in light of the current “heavy unemployment crisis affecting the single-currency area.”

But it warns that if economic conditions do not improve, “work retention may become unsustainable, leading to significant job losses.”

A further 4.5 million jobs stand to be lost in the eurozone alone over the next four years if economic stability and recovery do not materialise. ILO Director-General Juan Somavia says:

It’s not only the eurozone that’s in trouble, the entire global economy is at risk of contagion.

In this scenario, a triple-dip recession for the UK would seem all but inevitable.

See also:

• Pay Prospects 2012/2013 Take part in XpertHR’s annual benchmarking survey of private sector pay prospects.
• XpertHR Benchmarking Find out more about XpertHR’s unique interactive HR benchmarking data service.
• The image at the top of this post is a detail from an image sourced via Wikimedia Commons.