Squeeze continues - labour market data

Labour market data released today showed the unemployment rate still pretty stubborn, at 7.8%.  Employment continues to grow, including in full time employment.

Wages data were also released.  Excluding bonuses, average wages increased by 1.3% (Q4 2012 vs Q4 2011).  This compares with an inflation rate at the end of the year of 2.7%.  The Office for National Statistics produced the following graph to illustrate the gap between rises in prices and growth in incomes:

ons wages and inflation feb 13

Data out so far suggests household disposable incomes rose last year but that the savings ratio also rose (to Q3).  That suggests households focused on saving and/or paying down debt, rather than spending.  Some economists believed that income available to spend after bills had been paid would rise this year.  That may still happen with the increase in the personal allowance from April.  However, the inflation outlook has changed and generally a higher rate is expected this year now and driven by what the Bank of England calls 'administered and regulated prices' eg utility bills, passenger transport costs, tuition fees etc.

This presents a challenge for economic policy-makers.  Living standards are continuing to fall - and it seems that is due in large part to government policy.  Yet utility and other services have to be paid for somehow.

Stephen Beer, 20/02/2013

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Reasons people give for the downturn

The February ICM/Guardian poll makes sobering reading for Labour

This week the Guardian published its ICM poll, which showed that Labour is 12 points ahead of the Conservative Party (which at 29% is at the same level as Labour's 2010 share of the vote).  However it also contained a question about the economy which does not provide so much good news.

Respondents were asked what they thought was the single most important reason for the renewed downturn apparent in the fourth quarter GDP figures.  the poll showed 29% believed it was due to "Debts which the last Labour government racked up to finance unsustainable spending", 16% ascribed it to "Chill economic winds blowing in from the troubled Eurozone", 21% believed it was due to "Banks refusing to provide loans to firms that they need to invest in their businesses", and 23% ascribed it to "The sharp cuts in public expenditure being introduced by the coalition government" (11% said they didn't know).

I don't think we can draw firm conclusions from those figures but it is nonetheless sobering reading for Labour.  Almost a third of the population holds Labour responsible for the "new economic downturn in the last quarter of 2012" ie this is not a question about the recession post 2008 but the last quarter's reversal (the Guardian article on the poll notes that "the same" question - obviously not quite the same - was asked in May last year and 29% blamed Labour for the downturn then too).

Regular visitors to this site will know that Labour's standing on the economy is a continual focus of mine.  And with some economists becoming more optimistic about the economic outlook, getting credible on the economy will remain a hard task that we need to work at and not a result that will simply land in our lap.

Stephen Beer, 12/02/2013

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IFS Green Budget - what it says about the UK economy

The Institute for Fiscal Studies last week published this year's Green Budget, it's annual preview of the government's Spring budget (due next month).  As usual it is a detailed and comprehensive look at the UK economy and the fiscal constraints and choices facing the Chancellor of the Exchequer.  If read with careful attention to the assumptions made about the economy and prevailing conventional wisdom it is a good guide for economic policy-makers.  It makes for sobering reading.

The IFS uses Oxford Economics for its forecasting and the chapters on the economic outlook. Here are some key points worth noting:
  • 2012 was a lost year for the UK economy because GDP was flat.  However, a 1990s double-dip recession was later revised away as GDP figures were revised upwards.  Throughout the year survey data and economic indicators pointed to a stronger economy than that seen in the figures.
  • The main drag on UK economic performance last year was our trade performance, taking almost 1% of GDP.  This was not only due to poor Eurozone performance.
  • There were signs last year that the domestic economy was picking up.  The pickup in household spending was due to an increase in the saving ratio to 7.3%, its highighest for 15 years.  The outlook for household spending should improve given increased personal allowance and lower inflation.
  • Business investment grew 4% but remains 12% below previous peaks (it fell 24% peak to trough during the recession).  Investment seems to be held back not by small businesses unable to access finance (because they represent a small proportion of overall business investment) but "the slow recovery in business investment appears to be more related to fragile business confidence" in larger firms.  Oxford Economics believes this was due to heightened uncertainty due to the Eurozone debt crisis, the US fiscal cliff negotiations, and the potential for a Chinese hard landing.  Firms instead have sat on larger than normal cash balances.  These three elements currently do not loom so large in the minds of business people.
  • The rapid growth in private sector employment is unlikely to be sustained and meanwhile the IFS believes public sector job losses could exceed the Office for Budget Responsibility forecast.  The OBR forecasts general government employment will fall by 900,000 between 2010/11 and 2017/18 but plans submitted by government departments up to 2014/15 imply a further 200,000 fewer jobs; continue the trend to 2017/18 and that implies a total of 300,000 fewer jobs than predicted by the OBR (ie 1.2m fewer jobs over the whole period).
  • Using March 2008 as the start point, by April this year, "79% of the planned tax increases and 67% of the planned cuts to investment spending will have been implemented, while just 32% of planned cuts to benefit spending and 21% of the cuts to day-to-day spending will have been delivered."
The overall picture is of an economy that may well do much better this year than last, with households feeling better off and businesses feeling more confident.  However, the medium/long term trend rate of growth may be significantly reduced, capital stock in the economy may have deteriorated due to lack of investment, jobs growth may falter and spending cuts have yet to really bite.

Stephen Beer, 11/02/2013

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