UK Economy: Bumping along the bottom
Whilst the UK economy is officially no longer in a recession, writes Eddie Ford, it remains in deep trouble
Much to the relief of the sweating coalition government, the Office for National Statistics released figures on October 25 which showed that the UK economy had grown by one percent in the third quarter of 2012, in contrast to the 0.4% contraction in the previous quarter. Phew. This appears to represent the fastest growth in five years, ending nine months of shrinkage, during which the economy fell under the heavy hammer blows of austerity measures, high inflation and the ongoing euro zone crisis.
According to the ONS survey, service-sector output - which accounts for 80% of the economy - expanded by 1.3% in the third quarter and is now above its pre-recession peak. Making the critical difference. In fact, this service sector increase during the third quarter of 2012 alone was greater than in the entire period between the summer of 2008 and the second quarter of this year - though this is almost certainly a one-off or ‘freak’ occurrence unlikely to be repeated.
Jubilant headlines declared that the double-dip recession was officially over. Rejoice. Naturally, chancellor George Osborne welcomed the news. Though there is still a “long way to go”, he said, the statistics show that the government is “on the right track” - yet another sign that the economy is “healing”.
Some are also trying to take comfort from Bank of England figures, which show that consumers in the UK took on £1.7 billion of debt in September, including the biggest surge in unsecured borrowing in more than four and a half years. Meaning that individuals borrowed £0.9 billion during September (unlike the summer, when borrowing remained static in June-July and net repayments totalled £163 million in August), whilst also spending £0.3 billion on the never-never using credit cards - with an additional £0.5 billion rise in mortgage lending boosting the figures. So the number of mortgages approved in September rose to 94,385 from 90,023 in August and the number of loan approvals for house purchases reached 50,024 - higher than the previous six-month average of 48,832, though still roughly half the long-run average of 90,000 to 95,000.
Of course, the less benign truth is that a run of meagre wage ‘rises’ below the rate of inflation, and a switch in emphasis across commercial and industrial employers to part-time working, has forced low- and middle-income households to increasingly rely on debt in the run-up to Christmas. The same old story - buy, buy, buy and be merry. Nevertheless, the recent crop of statistics provide a more encouraging backdrop for Osborne to deliver his autumn statement in December. Maybe put a little festive smile on his face.
But the reality behind the figures is much less flattering for the government. The ONS and many others pointed out that the growth in GDP had been artificially boosted by two short-term factors: the Olympic Games, which took place in July-August, and the effect of June’s extra bank holiday for the queen’s diamond jubilee celebrations (as well as unusually bad weather, you could argue). For instance, the ONS has estimated that the extra bank holiday wiped 0.5% off growth in the second quarter, meaning there would inevitably be some sort of automatic ‘bounce-back’ effect in the third. It is surely only a matter of time before a rightwing think tank advocates the abolition of all ‘unproductive’ bank holidays, which only encourage laziness and sloth. As for the Olympics, the ONS roughly calculates that ticket sales in the quarter increased GDP by a whopping 0.2%. The report also mentioned in passing the existence of undefined “other effects”, which are “impossible to quantify” - alien transmissions?
Actually, the Olympic statistics are in some respects an accounting sleight of hand. A decision was made, for whatever reason, to include all the Olympics income as counting towards economic output in the third quarter - regardless of when and how it was spent. But there is scant evidence to suggest that the Olympics resulted in the boost to tourism that the organisers and the government hoped for. If anything, some parts of the economy (online shopping, for example) suffered, as people sat on their sofas watching the medal-winning exploits of Jessica Ennis and Bradley Wiggins rather than doing their real patriotic duty - ie, shop, shop, shop.
In other words, the UK economy is at best bumping painfully along the bottom, along with the coalition’s political fortunes. The real ‘growth’ figure for the last quarter - once you remove the Olympics/diamond jubilee factors - comes to a less than impressive 0.3% - the same for the year as a whole. Perhaps not something to rejoice about, after all. Especially when you recall the 0.8% growth predicted by the Office of Budget Responsibility as recently as March. Indeed, in June 2010 the OBR predicted 2.8% growth for this year - which now seems like a fantastic figure. Then again, the OBR had confidently predicted that investment would “rebound” from 0.7% this year to 6.4% next year when in fact over the last year investment has grown just 0.3% and the government’s policy framework is positively deterring major infrastructure projects in energy generation, rail and airport expansion, broadband, etc. Perhaps it should be renamed the Office for Science Fiction Speculation.
But nothing can alter the fact that GDP is still more than three percent short of its pre-crisis peak. The ONS informs us that the economy had contracted by 6.4% between the start of 2008 and the middle of 2009, and had since recovered about half of that lost output. Or, to put it another way, the level of output in the third quarter of 2012 was almost exactly the same as it had been in the third quarter of 2011. It will take a year of genuine and robust growth simply to return the economy to where it was during the period between the run on Northern Rock in September 2007 and the collapse of Lehman Brothers a year later. And it will take at least a decade to make up even half the output lost over the past four and a half years, given that GDP is 13%-14% below where it would have been, had growth continued at its pre-recession trend of 2.5% a year.
Remember too, extremely unpleasant thought though it is, that some 80% of the spending cuts are still to come. We are not at the beginning of the end, as suggested by George Osborne and David Cameron, but instead at the end of the beginning. None other that the International Monetary Fund - well, its managing director at least, Christine Lagarde - admitted earlier this month that the impact that austerity has had on growth (or non-growth) had been drastically “underestimated”. Those pesky fiscal multipliers. Barring a miracle, more demand, not less, will be sucked out of the economy in 2013-14 than in 2012, as the chancellor’s fiscal tightening intensifies. Economics of the madhouse.
All this will be played out in a crisis-ridden global economy, first and foremost the deepening recession in the euro zone. Eurostat announced on October 31 that there are now 18.49 million people out of work in the euro area, with an extra 146,000 joining the ranks of the unemployed in September. Across the European Union as a whole, there are now 25.75 million jobless, up by 169,000 since August. Grimly, numerous business surveys suggest that firms are becoming increasingly reluctant to hire - thus the euro zone unemployment rate looks set to rise even further. Up to breaking point.
On top of all that there is the slowing of growth in China and the possibility that the United States could soon fall off the edge of a ‘fiscal cliff’. As things stand now, America will wake up on January 1 to tax increases and spending cuts worth four percent of GDP - perhaps enough to plunge the entire global economy into deep recession, or worse. Then if Greece gets kicked out of the euro or Spain goes bust ...
Unsurprisingly, the more intelligent bourgeois economists are feeling distinctly gloomy. Howard Archer of IHS Global Insight believes that the UK economy is “far from out of the woods”, with “further relapses highly possible” in the face of still tough domestic and global conditions. Hard to deny. The chief economist at the Institute of Directors, Graeme Leach, is “uncertain where we’re going”, as “you can’t see the road ahead through the rear-view mirror”. More bluntly, Spencer Dale - who also sits on the Bank of England’s monetary policy committee - thinks that the Olympic boost had been “even greater than we had expected” and hence there will be a “very sharp fallback” in growth in the coming fourth quarter. For Dale, the UK was likely to remain stuck in “relatively weak” expansion, with recent increases in energy bills - plus a hike in food prices - likely to put further pressure on households.
Furthermore, government efforts to talk up the economy were sabotaged by news of the closure of the Ford Transit plant in Southampton, as well as cuts at the firm’s plant in Dagenham - with the loss of 1,400 skilled jobs. Factory orders also fell in October,.As revealed by a Confederation of British Industry survey of industrial trends, the total order book balance dropping to -23 this month, from -8 in September. It seems the ‘recovery’ is over even before it began. In the words of a senior economist at the BNP Paribas investment bank, these figures were “shocking” and blew away “any hope” that the UK manufacturing sector would somehow “dodge the bullet” from the chronic weakness in euro zone manufacturing.
To use an analogy that has almost become a cliché - but no less true for that - the British economy is facing years of Japan-like stagnation, a lost decade. Nor can you rule out the chance the UK will shortly suffer its first ever triple-dip recession. What a glorious legacy.
Even if the UK economy did magically undergo a period of rapid growth, the working class will not benefit - maybe the opposite. Or so argues - predicts - the Commission on Living Standards in a report published on October 31. The commission was set up by the Resolution Foundation, run by Gavin Kelly, a former senior advisor to Tony Blair and Gordon Brown. The commission includes the managing director of British Gas, Phil Bentley, the chairman of Lloyds, Win Bischoff, and Paul Johnson, the director of the Institute for Fiscal Studies - not to mention the soon-to-be general secretary of the TUC, Frances O’Grady, and a director of Netmums, Sally Russell.
Hardly a bunch of radical lefty firebrands, you can safely say. Anyway, in their report they pose a direct question: can a tide rise with all boats? Answer - not very likely.
The study outlines how living standards could stagnate for the next 10 years or more, saying it is “now entirely possible” they will be no higher in 2020 than they were in 2000 and that millions of poor and middle-income households may be “bypassed” by any putative economic recovery. Its authors lay the blame on the “demise” of administrative and manufacturing jobs in the UK economy and warn that high unemployment will continue to depress wages. As has happened in many other countries, they expect a “hollowing out” of middle-income jobs in the UK - forecasting that there will be two million new senior and professional posts created by 2020, plus 400,000 “basic service and elementary jobs”. At the same time, maybe 800,000 mid-level administrative and manufacturing jobs could be lost. On “current trends”, we read, the outlook for the bottom half of the working population is “bleak” - even if some form of growth returns.
Interestingly, the report contains an analysis of why incomes were able to carry on rising - for most households - for as long as they did. In their view, incomes in the lower half still grew up until the current financial crisis only because of two factors - higher tax credits and more women going out to work. Therefore, on average, women brought in 14% of earnings in low- to middle-income households in 1968. By 2008 that had risen to 37%, while the male share had fallen to 63%. Over the same period, they contend, the share of the total income - after tax - that came from tax credits or benefits rose from 8% to 18%. Tax credits did even more work in the years just before the crisis. Between 2003 and 2008, employment and other non-government income for these kinds of households fell by £570 a year, on average. That was offset, however, by a £730-a-year rise in tax credits and benefits.
Now, of course, the coalition government is launching an assault on such benefits - they cannot be afforded, apparently. Living standards will drop as a result. Bitingly, the report notes that only the US has seen a larger rise in income inequality than the UK since the 1970s. Therefore we have a relatively high share of workers languishing on very low pay, which for the commission means an hourly wage of less than two-thirds of the median.
The commission’s report quickly follows, of course, an analysis into ‘wellbeing’ published on October 23 by the ONS. This showed that net national income (NNI) per head - considered by many to be a much superior guide to real living standards than GDP, etc - held up in the early stages of the recession, but has continued to drop as a result of the squeeze on family budgets from rising prices, high unemployment and stagnating wages. Living standards have been viciously “slashed”, pure and simple. Income per head, taking inflation into account, had fallen by more than 13% between the first three months of 2008 - when the economy peaked - and the second quarter of 2012. Over the same time frame, GDP per head fell by 7%.
In the opinion of the ONS, the decline in living standards has been more pronounced and longer lasting than in the UK’s two previous recessions in the early 1980s and early 1990s. Stating the obvious really. NNI dropped by around 6% in the slump of the early 1980s, but was back to its pre-recession peak within three years. In the early 1990s, the decline was a more modest 4%, and the lost ground had been recouped in two and a half years - mainly due to unemployment not rising to the same extent as in the previous recession and historically low interest rates reducing mortgage payments for those lucky enough to be on tracker loans. But in contrast to the recovery from the 1990s recession, the study explained, as the economy emerged from the contraction that started in 2008, real household incomes began to fall - a downwards trend that continued into 2012 with the relentless increase in fuel, utility and food bills. Screwed, even under the best scenario.
In conclusion, the Resolution Foundation moots a series of rather unspectacular measures to redistribute income and wealth. These include more state subsidies for cheap or free childcare; cutting the national insurance contributions paid by workers aged 55 or over; ensuring that the government’s forthcoming universal credit system is as generous to second earners in a family as it will be to first earners; switching child tax credit from parents of older children to those with younger ones; reducing council tax bills for cheap properties by increasing the tax on expensive ones, and so on. The changes which actually cost money - god forbid - will be funded, the foundation optimistically claims, by cutting tax relief for top earners and means-testing benefits which are currently universal, such as winter fuel allowance.
Frankly, there is far more chance of George Osborne turning into Father Christmas than measures such as these reversing the recession.