Sunday, June 24, 2012
Bright spots in a very peculiar recession
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

We have become suspicious of good news. Analysts poke at any encouraging data, convinced either that it will not last or that it does not change the gloomier big picture.

Maybe that is the way it should be. There have been so many disappointments in the past few years perhaps downbeat should be our default position. You can see it in the stock market. Every time it gets a bit of wind in its sails, too often it is because another storm is approaching, usually these days from the eurozone’s direction.

There is also the old rule about not taking one month’s figures in isolation. Sometimes we should look a gift horse in the mouth; next month it will throw us.

Having said all that, the latest clutch of economic numbers were remarkably good. It started with a drop in consumer price inflation from 3% to 2.8%, and in retail price inflation from 3.5% to 3.1%.

Nor was this a one-month flash in the pan. Inflation came in below expectations (including those of the Bank of England) in both April and May.

It is hard to overstate the importance of this fall in inflation. High inflation, unusual in the aftermath of recession, has given us the unintended squeeze on real incomes that provides the biggest reason for the weakness of consumer spending. Spending has never been as depressed at this stage of a recovery as it is now.

The squeeze has not gone away. Regular pay is rising by an annual 1.8%, according to official figures, a percentage point below the annual rise in prices. But the gap is closing. In September inflation was 5.2% and regular pay was rising by 1.7%.

Back then, unless you were a FTSE 100 chief executive or in another favoured minority, your pay was almost certainly rising by less than prices. As the inflation hurdle falls, the bigger the proportion of people who can peer over it, in the happy position of having a rising real income.

Indeed, some of this may be showing through in another bit of upbeat news. Retail sales volumes jumped 1.4% in May compared with April. Some of that was due to the unwinding of the distortion due to panic buying of petrol and diesel a few weeks ago but, even adjusting for that, sales volumes rose by 0.9%.

In the latest three months, leaving aside petrol purchases (which is how the retail numbers used to be reported) there was a 0.9% rise compared with the previous three months and 1.9% compared with a year earlier. In May alone, sales volumes were 3% higher than in May 2011.

The dreadful June weather may give us a temporary setback but the evidence is of a bit of spending power creeping back in, and not before time.

There is other mildly encouraging news. The CBI said that manufacturers’ order books had improved, as had industry’s output expectations. The latest trade figures had raised fears of a collapse in exports but the CBI reported both a strengthening of export order books and that they are well above their long-run average.

There was also a pick-up in mortgage lending, with the Council of Mortgage Lenders reporting gross advances of £12.2 billion last month, 24% up on April and 11% higher than in May last year.

I have saved the best until last. Ever since Britain dived into recession more than four years ago, there has been a puzzling discrepancy between the statistics for the whole economy - gross domestic product - and for the labour market.

Employment fell by far less than expected in the 2008-9 recession, by 2.5% as GDP dropped by 7.1%, and it recovered as the economy returned to growth. Currently, while GDP is more than 4% below its pre-recession peak, employment is less than 1% below its pre-crisis peak.

The mystery has deepened with the latest figures. In the latest three months (February-April), employment rose by 166,000 to 29.28m, according to the Office for National Statistics, and this was the biggest three monthly rise since August 2010.

In the first quarter of the year, for which the ONS has a breakdown between public and private sector employment, there was a 205,000 rise in private sector jobs, only partly offset by a 39,000 drop in the number of people employed in the public sector.

The gap between private sector job creation and public sector cuts was dramatic in the first quarter but it was part of a longer-run trend. In the past two years there has been an 843,000 rise in private sector jobs, against a 424,000 private sector fall.

Those who scoffed at the idea that the private sector would compensate for public sector job losses were wrong. They have, by as near to two for one as you will get.

The first quarter, of course, was when - measured by GDP - Britain officially went back into recession, a 0.3% fall following a similar drop in the final three months of 2011. The economy has shrunk, on the GDP figures, by 0.1% over the past year and grown by a mere 1.4% over the past two.

I have been trying to resolve this discrepancy. Part of the weakness in the recent GDP figures has been due to energy: the gas and electricity we as households use (which fell as a result of the mild winter) and North Sea output. It is plausible such weakness does not have many employment implications.

A bigger reason for the apparent return to recession was falling construction output. Construction is a big employer, just over 2m people working in the industry. But the employment numbers do not speak of a sector in freefall. Employment in the first quarter, 2.04m, was fractionally down but it was higher than a year earlier.

In manufacturing , the EEF, which represents the sector, points out that manufacturing employment rose 38,000 or 1.5% in the first quarter, its biggest percentage rise since records began in 1978. Yet GDP figures suggest this is another struggling sector.

Of course it is possible to argue that productivity growth has slumped to the point where even in a non-growth environment employment grows. Is that remotely plausible? I can accept productivity growth is weak. I cannot believe it is negative, particularly when a shift from public to private sector employment should boost it.

The truth is that a 320,000 rise in private sector employment and a 1.9% increase in hours worked in the economy over the past 12 months is not consistent with a shrinking economy. A rise of 843,000 in private sector jobs over two years is inconsistent with economic growth of just 1.4% over that period.

In the past, governments have struggled to convince voters growth is happening when employment is weak. Now it is the other way round. I fear we are once more being led astray by the GDP figures and by the economy’s increasingly implausible slide into a double-dip recession. These numbers do not add up.