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TUC Economic Quarterly: #1, June 2013

Issue date

Number 1 - June 2013

This quarterly TUC report provides an analysis of UK economic and labour market developments over the three months to June 2013.

Summary

  • Growth has been weak and rebalancing is not occurring. There has been very little progress on deficit reduction.
  • The Labour market is essentially stagnant; and we are now in our fourth year of real wage falls.
  • Government cuts have an especially severe impact on the construction sector.

GDP by sector, Q1 2008 - Q3 2013

graph

Economy

GDP

GDP remains around 2.6% below its pre-recession peak but there is substantial variation at the sector level. Service sector output is now above its 2008 level whilst industrial production is down almost 15% and construction output down almost 20%.

As can be seen in the chart, production output fell heavily in 2008/09 and has never really recovered whilst construction output enjoyed a strong bounce back in late 2009/early 2010 before falling away again in 2012 (see spotlight feature on construction).

The much hoped for 'rebalancing' of the economy shows no signs of occurring at the sector level, if anything the economy is more unbalanced sectorally in early 2013 that it was on the eve of the crisis.

On current growth forecasts it will be late 2014 before the economy is back to 2008 levels of GDP, making this a slower recovery than in the 1990s, the 1980s, the 1970s or even the 1930s.

The recovery to date has come in two phases, between mid 2009 and late 2010 (when policy was still supportive) the economy grew by around 2.5%, in the two years since growth has been just 1.6% as fiscal tightening slowed the recovery.

GDP by sector, Q2 2012 - Q1 2013

graph

Looking at GDP by expenditure the picture is once again of an economy that is failing to rebalance. The Government initially hoped that growth would be driven by net trade and increasing exports. However over the past year private consumption was a much bigger driving of growth than either of these two desired factors.

In the latest OBR forecasts exports and business investment are set to provide around one third of all growth in the next four years, as opposed to an initial forecast of two thirds.

Not only is growth now forecast to be much weaker than previously anticipated, the composition of that growth is now set to be very different.

Rebalancing

Imports, exports and trade balance, Q1 2008 - Q1 2013

graph

The trade deficit is roughly half the size that it was in early 2008 but this has been driven by falling imports rather than rising exports. UK exports are roughly where they were in Q1 2008, whilst imports are down 5%. This suggests the improvement in the trade balance is more down to a weakness of domestic demand (and hence consumers and business buying less foreign goods) than an improvement in the UK's trading performance. It is noticeable that the big improvement in the trade balance came during the depths of the recession.

Since early 2011 the trade balance has worsened with imports rising around 2% and exports falling by around 3%. The impact of the Eurocrisis has certainly hit UK exports with the Eurozone being our single largest trading partner. However other European countries have managed to grow their exports through this period (not just Germany but also Spain and Italy) suggesting that to simply blame Europe for our trade balance misses the point.

Business investment, Q1 2008 - Q1 2013

graph

Private business investment was supposed to be a large driver of the recovery and the initial OBR forecast saw growth of around 10% in 2011 and 2012. The Chancellor's entire theory of 'expansionary fiscal contraction' was premised on the idea that deficit reduction would provide a boost to business capital spending.

This has sadly not been the case. Whilst private business investment has increased, it remains some 9% below its pre-recession level and growth of just 3% since late 2010 is well below initial expectations.

Various theories have been offered to explain this lacklustre performance - from tight credit conditions to a lack of animal spirits. The simplest explanation though is the poor state of the economy, given weak domestic and external demand it is entirely understandable why business would be cautious about investing in the future.

The poor state of business investment, especially when coupled with the government's own cuts to its capital spending, provide cause for concern. Weak investment not only reduces demand in the short term but may also have a serious impact on growth and productivity in the future.

Taken together the UK's poor trade performance and the low level of business investment once again show no signs of economic rebalancing.

The deficit

Surplus on current budget (4 quarter rolling amount) Q4 2011 - Q1 2013

graph

Deficit reduction is the stated core purpose of the Coalition Government. Measuring the success of deficit reduction policies, even in their own terms, is no longer straight forward. The picture is now distorted by the impact of QE on the public finances and various one off factors such as the treatment of the Royal Mail Pension Fund, the Special Liquidity Scheme and the sale of various nationalised banks.

The Government's preferred measure is the structural deficit, but this can only be estimated not measured and the official estimates are only produced twice a year.

The most straightforward measure of the deficit is the surplus on the current budget, this excludes capital spending and most one off factors. The chart above uses a four quarter rolling average to show the surplus or deficit on the current budget over the previous year.

As can be seen the deficit widened sustainably in 2008 and 2009, closed somewhat in 2011 and then widened again in 2012. It is now roughly where it was in late 2009 and the deficit is around 15% below its peak. The Government's often repeated line that it has reduced the deficit by a third can only be claimed because of large (and damaging) cuts to capital spending. In terms of day to day taxes and spending, very little progress has been made.

The main factor explaining the much slower than anticipated reduction of the deficit has been a weakness of tax receipts. Slower growth has meant lower incomes and profits and consequently lower tax income for the government.

Labour market

For most of the past year the labour market saw rising employment and falling unemployment despite a stagnant economy. But since the end of last year and the beginning of this year the jobs growth has stalled; it may now be the case that the weakness of the wider economy is catching up with the labour market.

The most recent labour market data released in June does initially give some instant positive headlines. A fall of 5,000 in unemployment; and record employment levels. However once you start looking at the labour market from a longer term perspective the picture is not quite as good as these figures may suggest.

Employment and unemployment

The most recent labour market statistics cover the three months from February to April 2013, and most comparisons are with the data from November to December 2013.

There are 29.76m people in employment, an increase of 24,000 on the quarter; the employment levels are the highest ever recorded. However, as the level does not take in to account the rising working population the employment rate actually fell by 0.1 per cent points. The employment rate is still 1.5 percentage points below pre-recession levels.

Unemployment on the International Labour Organisation measure fell by 5,000 on the quarter to 2.51m and the unemployment rate remained unchanged at 7.8%. The unemployment rate is still 2.6 percentage points above its pre-recession level.

The period of strong improvement which began in late Summer/Autumn 2011 all but finished after a year. The picture now is of a stagnant labour market; the unemployment rate has essentially been stable for six months and the employment rate for four months.

Employment and Unemployment rates since early 2011

graph

graph

The current unemployment rate remains the same as it was in November - January for men and women, 8.2% and 7.3% respectively. The employment rates remain virtually the same with a small change from 76.5% to 76.3% for men, and for women a shift from 66.6% to 66.7%.

Long-term unemployment continues to rise:

898,000 people have been unemployed for over 12 months, an increase of 11,000 over the quarter;

458,000 people have been unemployed for over two years, an increase of 7,000.

Over the last quarter youth unemployment fell by 43,000, however it still remains high at 950,000.

TUC analysis shows that young people aged 18-24 have seen the sharpest fall in their job prospects of all age groups. They are 10 per cent less likely to be in work today than on the eve of the recession. Our analysis shows it would take another 395,000 jobs to get young people's employment rate back to pre-recession levels.

The news for older workers is much more positive. The likelihood of 50-64 year olds being in work is 2.2 per cent higher today than it was in 2008. Recent TUC research has found that women over 50 have seen the fastest rise in their employment rates, though this is partly down to the state pension age rising in recent years.

The most recent labour market statistics also show the number of people aged 65 and over has reached the 1 million mark for the first time; this is partly through more people staying in work and also more people of this age group in the population. This is a long term trend that began at the turn of the century and was not affected by the recession.

Employment rate for 65+

graph

When the February - April 2013 data are compared with February-April 2011 they show an increase of 528,000 in employment levels, however quite a few of these jobs have been atypical. Fewer than half of the rise has been in employee positions, while nearly a quarter of the rise is accounted for by part-time posts and more than 10 per cent of the increase is accounted for by unpaid family workers or places on government schemes. In addition there have been increases in involuntary temporary work of 54,000 and involuntary part-time work of 202,000.

The latest figures show 141,000 people were made redundant over the quarter; this is a rise of 9,000 from November to January 2013.

The more positive news is that there were 516,000 vacancies for March to May 2013 up by 19,000 and the highest since October -December 2008. The number of unemployed people per job vacancy now stands at 4.9 this is the lowest figure since Jan-March 2009.

Regional variations

In this quarter, the employment rate fell in the North East, East of England, London, South East, and the Midlands; the Midlands saw the largest falls, 0.6% in the East Midlands and 1.2% in the West Midlands.

The unemployment rate rose in the North East, South West, East Midlands and the West Midlands, the West Midlands was also hit with the highest increase of 0.8%.

Regional employment and unemployment rates

February to April 2013 data

Employment

Unemployment

Aged 16+

(000's)

Aged 16-64

(rate)

Aged 16+

(000's)

Aged 16+

(rate)

North East

1159

66.6

131

10.1

North West

3183

69.7

273

7.9

Yorkshire & Humber

2507

70.4

244

8.9

East Midlands

2112

71

179

7.8

West Midlands

2490

69.9

259

9.4

East of England

2899

74.5

208

6.7

London

3937

70.2

366

8.5

South East

4221

74.8

297

6.6

South West

2550

74.7

168

6.2

England

25059

71.6

2124

7.8

Wales

1364

69.4

125

8.4

Scotland

2530

72.2

194

7.1

Northern Ireland

803

67.1

68

7.8

Change in regional employment and unemployment rates over the last quarter

Employment

Unemployment

Change since Nov 2012 - Jan 2013 data

Aged 16+

(000's

Aged 16-64

(rate)

Aged 16+

(000's

Aged 16-64

(rate)

North East

-8

-0.6

4

0.3

North West

6

0.1

-28

-0.8

Yorkshire & Humber

11

0.1

-2

-0.1

East Midlands

-10

-0.6

1

0.1

West Midlands

-43

-1.2

19

0.8

East of England

-7

-0.4

1

0

London

4

-0.1

1

0

South East

-4

-0.1

-2

0

South West

6

0

12

0.4

England

-44

-0.2

6

0

Wales

10

0.4

0

0

Scotland

47

1.1

-6

-0.3

Northern Ireland

11

0.8

-5

-0.6

Earnings growth and pay settlements

The pay figures continue to be very poor. Average total pay (which includes bonuses) rose by 1.3%. Although this is still below inflation it initially looks as if it is an improvement when compared with last month's figure of 0.6%. However, this is deceptive as it seems from the data that bonuses were delayed to avoid the 50% tax rate. When bonus pay is included the rate of annual increase jumped from minus 2.6 % in March to plus 15 percent in April. As this is a one off factor average weekly earnings will fall back in next month's figures.

Regular pay for employees rose by 0.9% which confirms that the squeeze on real wages continues with RPI at 3.1% and CPI at 2.7%.

As the graph below demonstrates the squeeze on real wages is getting worse.

Average Weekly Earnings, RPI & Real Wages

graph

Real wages (average earnings minus RPI inflation) have been falling consistently since 2010. In 2012 the squeeze began to ease and by September last year real wages were declining by 0.8 per cent at an annual rate, however from March the decline was back up to 2.9 per cent.

As can be seen from the graph, over the past six months whilst earnings growth has fallen from 1.8 per cent in September to 0.8 per cent in March, RPI picked up from 2.6 per cent to 3.3 per cent. However the decline in real wages in recent months has been driven more by weakness in nominal earnings than by rises in the price level.

In reaction to the latest inflation figures, TUC analysis found that we are now in our fourth year of falling real wages, something which hasn't happened since the 1870s. This is further evidence of the weakness of our labour market.

Putting this labour market and pay data all together a worrying picture of the UK economy is starting to emerge. The TUC's Economic Report in February warned that the UK risked becoming a 'lower wage, low productivity economy'. There is evidence that this may now be becoming the case.

Spotlight Feature

Construction

As noted previously construction output is down almost 20% on pre-recession levels and collapsed in 2012 after a bounce back in 2010.

This has had a major impact on GDP. The chart below shows actual GDP growth over 2012 and what growth would have been if construction output had been flat.

GDP growth (quarter on quarter) Q1 2012 - Q1 2013

graph

As can be seen, with flat construction output the UK would have growth around 1.2%, three times as fast as the 0.4% it actually managed. In other words the fall in construction output was a major driver of economic weakness over 2012.

Two thirds of the fall in construction output is because of public sector construction cuts. New public housing building is down 20% since mid 2010, whilst non-housing, non-infrastructure spending is down by around 40% (i.e. school and hospital building, etc). These cuts to public sector capital spending have directly reduced construction output and hence GDP.

The cost in terms of jobs has been large with the construction sector losing 89,000 over this period.

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