XpertHR economic commentary October 2012: A lack of oomph

Osborne to deliver Autumn Statement 2012 on Wednesday 5 December 2012
Osborne has announced that he will deliver his Autumn Statement 2012 somewhat later in the year than usual, on Wednesday 5 December 2012.

The Office for Budget Responsibility (OBR) will publish its latest report on the UK's economic and fiscal outlook - including updated estimates for UK economic growth - on the same day.

Coalition Goverment plans 'Plan A plus plus plus'
With Osbornomics failing to deliver a full economic recovery and public sector borrowing increasing rather than decreasing, the Coalition Government could be tweaking its economic strategy to create what the Telegraph has dubbed "Plan A plus plus plus."

It says that "the new plan, which will stick to the Government's original commitment of putting debt levels back on a sustainable path, will also focus on growth measures." It would seem likely that this new plan will be unveiled in the Autumn Statement 2012.

So what might "Plan A plus plus plus" consist of?

• The Autumn Statement 2012 could see Osborne abandoning his "golden rule" on cutting the national debt. Bank of England Governor Mervyn King has effectively given Osborne a "green light" to do this, the Telegraph reports. It says that King "suggested that it would acceptable for Osborne to break his pledge on debt reduction due to the state of the world economy."
• The Chancellor is also rumoured to be planning "a small stimulus" package to be announced in the Autumn Statement 2012.
• Osborne could announce plans to raise the income tax threshold to £10,000.
  

Ahead of the Autumn Statement 2012, Business Secretary Vince Cable has announced a number of measures designed to boost the economy. These include:

• Introducing a set of proposals designed "to streamline employment law" in order to "boost business." XpertHR provides full details of these proposals. They include: a consultation on "how [the Coalition Government] might reduce the cap on compensation for unfair dismissal claims; a consultation on settlement agreements, designed "to help end employment relationships in a fair and consensual way;" and "proposals to streamline employment tribunals by making it easier for judges to dismiss weak cases." Cable also took the opportunity to kill off venture capitalist Adrian Beecroft's no-fault dismissal proposals. Economist John Philpott questions what impact these proposals might realistically be expected to have on the economy. Philpott commented via Twitter that the proposed "#ukemplaw changes may be 'Beecroft lite' but still have no basis in evidence and won't cut joblessness - a sadly regressive policy move."
• "Exempt[ing] hundreds of thousands of businesses from burdensome health & safety inspections" (as the BIS puts it) with effect from April 2013.
• Launching a "business bank", intended to boost lending to businesses.   
  

UK economy 'becalmed' as double-dip recession continues

The UK economy is "becalmed," according to the EconomicsHelp blog:

If the global economy stalls, it will prove very difficult for a stagnant UK economy to buck the global trend. The UK economy is a like a boat becalmed on a lake, hoping someone will come and blow it along. It is little comfort that the UK boat is not sinking like some in Europe.

The UK economy shrank by 0.4% in the second quarter of 2012, latest revised estimates of growth in gross domestic product (GDP) from the Office for National Statistics (ONS) reveal. This represents a very slight improvement on the previous estimate, which showed a 0.5% contraction in Q2 2012.

However, there is good news on the horizon. The double-dip recession is expected to end in the third quarter of 2012.

The London 2012 Olympics and Paralympics (and also the deferred value of 2011 ticket sales for these events) look set to boost growth in Q3 2012, returning the UK economy to positive growth.

ONS publishes its preliminary estimate of Q3 2012 GDP growth towards the end of this month (on Thursday 25 October 2012).

GDP forecasts round-up October 2012: Temporary rebound in prospect
So what can we expect from economic growth in Q3 2012 and beyond?

Markit Chief Economist Chris Williamson provides an overview of growth prospects:

[T]he UK economy may be on course to return to growth in the third quarter, ending the double-dip recession and hopefully helping to revive business and consumer confidence. [...] However, it is likely that the underlying trend remains one of very weak growth, or even economic stagnation. [...] the rebound that we are seeing in the data now will of course also only be temporary.

This view that any economic boost from the London 2012 Olympics and Paralympics will prove to be a blip is widespread, our latest monthly round-up of GDP forecasts shows:

• Economist David Blanchflower says (via Twitter), that the main GDP "concern is not Q3 which may well be positive but Q4 which is likely to be negative growth down 1.1% last 3qtrs where recession deniers now?"
  
• Ernst & Young ITEM Club says: "We still expect a substantial rebound in Q3, as the impact of the extra bank holiday unwinds. With a minor boost likely to come from hosting the Olympics, we should see growth more than offset any losses in Q2."
  
• The Institute of Chartered Accountants in England and Wales (ICAEW) says that "the economy is set to contract in 2012 and growth will be subdued in 2013." It expects the economy to shrink by 0.5% in 2012, followed by GDP growth of 0.9% in 2013.
• The OECD has slashed its UK GDP forecast for 2012 from 0.5% to -0.7%.     
  
• The Olympics effect will result in the UK economy growing by 0.6% in Q3 2012, according to a Reuters poll of 50 economists. However, the economists believe that the economy will contract by 0.3% over the course of 2012 as a whole, before rebounding to show growth of 1.2% during 2013.
  

What's behind the UK labour market's 'near miraculous' performance?


The UK labour market continues to defy economic gravity, with employment levels showing strong growth despite the ongoing recession, latest ONS data suggest:

• The UK economy added 236,000 new jobs over three months between May and July 2012. John Philpott says this is "near miraculous for an economy in a double-dip recession."
  
• The headline unemployment rate (on the ILO measure) fell back to 8.1% over the three months to July 2012, down from 8.3% in June.
• ONS acknowledges that these figures could reflect "additional short-term employment connected with the Olympics."
  

Despite these positive developments, "there is still a long way to go before unemployment returns to normal levels," argues Work Foundation Director Ian Brinkley:

Digging beneath the totals, the figures show some weaknesses. The majority of the new jobs were either part-time or self-employed. While any increase in employment is encouraging, a full labour market recovery must offer more full-time employee jobs.

Latest ONS data back this up:

• Part-time jobs recorded their "highest figure [8.12 million] since comparable records began in 1992" over the three months to July 2012.
• "The number of employees and self-employed people who were working part-time because they could not find a full-time job increased by 24,000 on the quarter to reach 1.42 million, the highest figure since comparable records began in 1992," says ONS.
  

Is the shift to a flexible labour market damaging UK economic prospects?
"[T]he buoyant employment figures are a symptom rather than a counterbalance of this general economic malaise," writes Julian Knight in the Independent.

Knight argues that the trend for rising part-time work and self employment "reflects people moving from employment with a legal safety net to no safety net whatsoever. Risk is being shifted from employers to the 'employee.'"

This shifting of risk from employer to employee is endangering economic recovery. Knight quotes former German deputy finance minister and UNCTAD chief economist Heiner Flassbeck:

The UK and other Western economies are actually suffering due to flexible labour markets rather than benefiting. Wages are not rising and the shift in work from full to part-time means many consumers don't have the same disposable income. Our economies depend on consumption, and this isn't coming about because of the suppression of wages by the working of the labour market.

Rising oil prices pose inflation risk
The price of oil - often referred to as the world's most important commodity - spiked during the summer months, raising concerns that it will drive up inflation over the coming months.

Oil prices rose sharply in response to "the impact of Hurricane Isaac, upcoming refinery maintenance schedules and refinery fires in North and South America."

The Guardian summarises some of the threats to economic recovery posed by spiking oil prices:

• "A rising oil price will spook the Bank of England, which has relied in its inflation forecasts on a fall in oil prices linked to falling demand across the world." This could prevent the Bank of England from extending its programme of quantitative easing to boost the economy.
• "Higher pump prices will also add to concerns that the UK will join continental Europe in a stagflation trap as inflation rises while growth remains flat."
  

However, rising oil prices have yet to feed through fully into official inflation data.

Latest figures from ONS actually show a slight easing in inflation after the previous month's surprise rise:

• Retail prices index (RPI) inflation rose by 2.9% over the year to August 2012. This is down by 0.3 percentage points from 3.2% in July.
• Consumer prices index (CPI) inflation ran at 2.5% in August 2012, down 0.1 percentage point on the July 2012 rate of 2.6%. CPI therefore remains higher than the Government's official target rate of 2%.
  

Market analyst Ranvir Singh warns that writing off the threat of rising inflation in the light of the latest ONS data would be "dangerously complacent." Singh says:

[T]he inflationary pressures which threaten to push up prices at the tail end of 2012 are clear to see. With Brent crude approaching a four-month high and prices at the pump creeping steadily up, it may be August's easing of CPI that is the blip, not July's spike.

National minimum wage adult rate increases by 1.8% to £6.19 per hour
Today (Monday 1 October 2012) sees the national minimum wage rates for 2012/2013 come into effect.

The national minimum wage rates for 2012/2013 are as follows:

• The national minimum wage adult rate increases to £6.19 per hour for 2012/2013. This represents an increase of 1.8% from the 2011/2012 national minimum wage adult rate, which currently stands at £6.08 per hour (from 1 October 2011 to 30 September 2012). The 2012/2013 national minimum wage adult rate (at £6.19 per hour) is therefore set 11p per hour higher than the 2011/2012 rate of £6.08 per hour.
• The national minimum wage rates paid to younger workers are frozen for 2012/2013. The national minimum wage "youth development rate" (for workers aged 18 to 20) remains at £4.98 per hour for 2012/2013, while the national minimum wage youth rate (for workers aged 16 and 17) is held at £3.68 per hour for 2012/2013. The CIPD was among the parties recommending that national minimum wage rates for younger workers be frozen in 2012/2013.
• The apprentice minimum wage rate rises from £2.60 per hour to £2.65 per hour (an increase of 5p per hour, or 1.9%).
• Access the complete National Minimum Wage (Amendment) Regulations 2012, via the legislation.gov.uk website.
  

It remains to be seen what impact the latest changes to national minimum wage rates might have on whole economy pay awards.

The median whole economy pay award stands at 2.4% over the three months to 31 August 2012 (subscription required), according to latest data from the XpertHR pay databank.

Trade unions 'provide a threat to our economy,' says Cameron
The UK's trade unions are cranking into gear for their next wave of action in response to the Coalition Government's strategy of economic austerity measures.

This month sees a TUC-organised mass demonstration in central London (on Saturday 20 October 2012). This could prove an overture to more concerted action over the remainder of 2012 and into 2013:

• Co-ordinated public strikes could be in store for 2013. At last month's Trades Union Congress in Brighton, unions "backed co-ordinated strike action by public sector workers over pay and opened up a new front in the industrial confrontation with the government after last year's pensions dispute," the Guardian reports. It says that this motion "could lead to nearly 1.5 million employees in the health and local government sectors staging walkouts next spring if negotiations over pay break down."
  
• The UK could see its first General Strike since 1926. Unions also voted at the Trades Union Congress to consider the "practicalities" of staging a General Strike. The last General Strike in the UK was in 1926.
  

David Cameron said that by "threatening a general strike" the unions "provide a threat to our economy. [...] They threatened a strike to stop our fuel supplies, they threatened a strike to disrupt the Olympics, now they threaten a strike to wreck the economy."

Union membership declines, but labour disputes show resurgence
But how much of a threat do the trade unions pose to the economy?

Trade union membership levels are in long-term decline, according to BIS data.

BIS reports that "around 6.4 million employees in the UK were trade union members in 2011, down by 143,000 from 2010." However, it notes that union membership levels in the private sector "rose slightly" in 2011.

John Philpott argues that falling membership levels mean the unions are "relatively impotent, even though those who know and welcome this still like to talk up the threat of union militancy whenever politically convenient to do so."

But while union membership levels are falling, labour disputes are showing a resurgence:

• Last year saw the highest number of working days lost to labour disputes in more than two decades. This trend was driven by a renewed militancy in the public sector, according to detailed analysis of labour disputes data for 2011, compiled by ONS.
• The resurgence in labour disputes seen in 2011 is continuing this year, latest ONS data on labour disputes in 2012 suggest: "In July 2012, there were 9,000 working days lost from 17 stoppages. In the twelve months to July 2012, there were 1.24 million working days lost from 129 stoppages."
  

Appetite for co-operation?
Despite this upward trend over recent years, levels of labour disputes remain low by historical standards, NHS Employers Director Dean Royles notes in an article entitled Unions Are Part Of The Solution.

He says that "despite the rhetoric that surrounds any TUC conference, most trade unions no longer see industrial action as a first response. Their members wouldn't wear it. They want dialogue and involvement and transparency from public and private sector employers."

Royles says that he seeks to foster this appetite for co-operation in his own dealings with the unions. He finds this "a much more effective way of helping to change and shape our context. It will build trust and I hope create the opportunity for mature debate and discussion at what will be a challenging time."

See also:

• XpertHR Benchmarking 
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• XpertHR Salary Surveys
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