December’s economic update


Tony Dolphin is the chief economist at the IPPR and a regular contributor to The Guardian and New Statesman.

During the autumn statement last month, George Osborne claimed that the UK economy was slowly on the mend; however, the latest data indicates the opposite may be true, despite the economic expansion in the third quarter (Q3) of 2012.

It is looking increasingly likely that the UK returned to negative growth in the final quarter of last year. As the public finances continue to worsen, the chancellor was forced to admit that his second target – getting the public sector debt down by 2015-16 – will not be met.

In response to the growing government debt, the three major credit rating agencies have put the UK on negative outlook, threatening its triple A rating. Meanwhile, inflation pressures continue, with CPI at 2.7% – well above the Bank of England target rate of 2%.

This increase in prices without an equivalent rise in earnings has meant that living standards continue to drop. Reacting to weak earnings growth, consumers held back on spending in the pre and post-Christmas shopping period, leading to continued dampened retail sales. There have been only a few silver linings. The labour market continues to improve, and the manufacturing CIPS survey shows a jump in economic activity – its highest level in 15 months.

Indicator

Latest

Comment
Real GDP

↑ (Q3)

Up 0.9% – revised down slightly from initial estimate of 1.0% the UK economy came out of recession in Q3
Employment

↑ (Aug-Oct)

Up 40,000 in last three months – part time employment down by 4,000 while full time up by 44,000 – employment rate stands at 71.2%, up 0.1%
Unemployment

↑ (Aug-Oct)

Down 82,000 to 2.51 million or 7.8% – lowest level in over a year, largely because of decline in youth unemployment,  but long term unemployment remains a challenge
Retail sales

→ (November)

Volume remains unchanged over the month and amount spent down by 0.1%, however over the year volume sales up by 0.9% and the amount spent up by 1.5%
Consumer confidence

↓ (December)

Consumer confidence drops back following increase in November
Manufacturing output

↓ (October)

Down 2.1% over the year, down 1.3% over the latest month – drop in output was steeper than anticipated
Business confidence (CIPS)

↓ (November)

Manufacturing indicator shows expansion in activity, meanwhile services contract for first time in two years, and construction indicator remains below 50
Consumer price inflation

→ (November)

Stands at 2.7% – no change from previous month
Average earnings growth

↓ (Aug-Oct)

Real earnings continue to fall – regular pay up by 1.7% over the last year while total pay up 1.8%, both remain below inflation
Exports

↓  (Aug-Oct)

Export volume fell by 2.5% in the latest three months, and 1% over the month
Public sector net borrowing

↓ (November)

Borrowing in November was £17.5 billion, up from £16.3 billion in November 2011
Monetary policy

→ (December)

Interest rates still at record low of 0.5% and quantitative easing at £375 billion

↑ = Strong, improving, positive for growth

→ = Moderate, little change

↓ = Weak, deteriorating, potentially negative for growth

Commentary

The OBR, among other bodies, has predicted the UK will likely contract in the last three months of 2012. The flat lining economy, the worsening public finances and the weak global economic outlook further reinforces the need for a clear and bold strategy for growth. The Autumn Statement left much to be desired in this respect, with a strong focus on its austerity programme and not enough in the way of measures to boost growth.

The end of the year was also marked with a series of downgraded GDP growth forecasts, and speculation as to whether the UK will keep its triple A rating in 2013. Overall, consumer and business confidence have taken a hit in response to the seemingly never ending austerity, and a continued Eurozone crisis. In fact, some have suggested the UK may sink into a triple dip recession.

Given the dismal economic performance of 2012 and the absence of a coherent growth strategy, it comes as no surprise many expect more of the same and remain pessimistic for the year ahead. The poor outlook increases the pressure facing the treasury and the Bank of England to revive the economy. The incoming Bank of England governor, Mark Carney, recently stated that under particular circumstances policymakers might consider using altogether new monetary policy tools. In particular, instead of inflation targeting, central banks may consider targeting nominal GDP. This approach would be a significant departure from the Bank’s monetary policy framework, but may provide the much needed stimulus.

  1. GDP rose by 0.9% in Q3 – lifting the economy out of recession: Revised GDP estimates show the UK economy has emerged from the recession, growing by 0.9%. However, most of the growth is explained by one off measures – the Olympic Games and the ‘bounce-back’ from the extra bank holiday in Q2.
  2. Employment up – private sector continues to create jobs: Growth in the labour market offers some good news, especially given the weak economy. An additional 40,000 jobs were created in the three months to October – taking the employment rate to 71.2%. Partially responsible for the strong labour market growth over the past year has been private sector job creation.  The private sector has more than compensated for public sector job losses. From September 2011 to September 2012, the number of jobs created by the private sector was 823,000, while the public sector cut 324,000 jobs.
  3. Unemployment continues to fall: Unemployment fell by 82,000, the largest quarterly drop in over 10 years. Despite the continued improvement, long-term unemployment remains at its highest level since 1996, with a total of 904,000 people out of work for over a year. And although there have been improvements in youth unemployment – it fell by 72,000 – more than a quarter of a million young people have been without work for more than a year. This leaves a significant portion of the youth population at risk of scarring.
  4. Retail sales fail to pick up in November: Consumers cut back on spending, in what is likely a move to save for the pre and post-Christmas shopping. As a result, compared to October, there was no change in the volume of goods purchased and the amount spent increased by a modest 0.1% over the month. As energy prices continue to exert upward pressure on inflation, consumers are reluctant to spend money as prices outpace wage growth. This continued weak trend in consumption is likely to have a negative impact on GDP figures for the final quarter of the year.
  5.  Consumer confidence down in December: Consumer confidence  dropped by seven points in the run up to Christmas. The slump in confidence is largely because people are less confident about their financial situation, and the economic outlook.

    Retail-Sales-Growth-(volume)

    Retail Sales Growth (volume)

  6. Manufacturing output is weak: Manufacturing output fell by a greater than expected amount in the latest month, with output down 1.3% versus the expected 0.2%. Output dropped in 10 out of 13 sectors. On the year, manufacturing output fell 2.1% compared to the same time last year. This is largely because the weak global and national economic outlook has dampened demand for British manufactured goods. The latest weak figures increase the likelihood of a contraction in the last quarter of 2012.
  7. Business confidence surveys show mixed picture: The purchasing  managers’ manufacturing survey indicates an expansion at 51.4 in the last month of 2012, the highest level in 15 months. Domestic demand largely contributed to this rise, as well as modest improvements in the global economy. Despite this stronger than expected increase, overall, the sector contracted in the fourth quarter of the year. The construction index further contracted, slipping from 49.7 in November to 48.3 in December. There was bad news for the service industry, the index dropped below 50 for the first time since 2010 indicating a contraction. Although there are some signs of improvement, overall, the CIPS indicate that the economy continues to fail to secure a strong recovery.

    Manufacturing-output-year-on-year

    Manufacturing output (% y/y)

  8. Price inflation remains unchanged at 2.7%: Inflation pressures continue as CPI inflation remained at 2.7%, above the target inflation of 2%. Although at the aggregate level CPI remains unchanged, once disaggregated there have been shifts in prices. The greatest upward pressure to inflation was food and non-alcoholic beverages, and housing and household services, while the greatest downward pressure came from cheaper petrol. Living standards continue to erode as inflation remains above earnings
  9. Wage inflation remains stuck below inflation: Total pay increased by  1.8% and regular pay was 1.7% over the year to the three months ending in October 2012. Real earnings continue to deteriorate as inflation remains above 2%, while wage inflation remains below 2%, compromising living standards.

    Total-Pay-growth-and-CPI

    Total Pay growth (%, y/y) and CPI

  10. Export growth slows following surprise boost in September: Exports continue to fluctuate. Export growth has slowed over the latest month, dropping by 1%. This was largely a result of external global forces – China’s reduced demand, the continued Eurozone crisis, the uncertainty over the US fiscal cliff. Looking at the data over the latest three months – a more reliable figure – exports have fallen by 2.5%. The poor performance further reinforces speculation that the UK will likely contract in the fourth quarter.
  11. Government borrowing continues to rise: Public sector net borrowing was £17.5 billion in November 2012, up from £16.3 billion in November 2011. Borrowing for the current fiscal year so far stands at £95 billion (excluding financial interventions), £10.6 billion higher than over the same period last year (April – November 2012). This is disappointing for the government who have prioritised reducing public sector borrowing, and getting the deficit down. Additionally, the poor public finance figures will likely influence whether credit rating agencies will strip the UK of its triple A rating this year.
  12. Monetary policy: The Monetary Policy Committee left interest rates at 0.5% in December and the scale of quantitative easing at £375 billion.  The committee voted against another round of quantitative easing, as inflation remains above the Bank of England target of 2%.
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  • LordBlagger

    So why have you left off all the big debts?

    5,010 billion owed by the state for pensions and that was two years ago.

    How much has that gone up by?

    It’s a triple lock, so its worse than inflation.

    Entitlements have also risen.

    100 bn a year min on the debts.

    The state is bankrupt. The state has taken the money and won’t pay the pension promises because it can’t.

    That’s making people destitute.

  • Newsbot9

    Because your capitalists don’t admit them, yes. Your stolen wealth dribbles down when you feel like it.

    Why are you talking about a small debt, again? And “entitlements”? Ah yes, the poor are still alive, keep fighting that.

    You’re bankrupt, not the state. You are arguing against pensions, not the state. You have halved salaries as a share of GDP since the 1970′s, not the state. You keep on lying, murderer, keep trying to kill the British people you hate so much! Go home! (You, personally, you fat leech)

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