Sunday, July 22, 2012
Gloomy growth numbers - but not so miserable now
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

On Wednesday we will get figures for gross domestic product in the second quarter. Everybody is braced for a third successive decline and a fresh outbreak of gloom.

The National Institute of Economic and Social Research and RBS, both of which track the components that make up GDP, predict a 0.2% fall, following drops of 0.4% in the final quarter of last year and 0.3% in the first quarter of this year.

It is anybody’s guess what the Office for National Statistics (ONS) will come up with, though the recent pattern has been for it to come in well below independent predictions. If the number is down, expect some “triple-dip” headlines, though they should be reserved for a new recession, not a third successive quarterly decline.

I don’t want to repeat word for word what I said a month ago but the GDP figures still cannot be squared with the strength of the employment data.

Latest labour market statistics show in the most recent three months for which the ONS has data, March-May, employment rose 181,000 to 29.35m, its biggest rise since the three months to July 2010.

Unemployment fell by 65,000 to 2.58m, or 8.1% of the workforce. Though unemployment is higher than a year ago, and the figures may have been flattered by an extra day’s work in May (the late spring bank holiday was shifted to June), these figures were inconsistent with even a mild recession. They speak of a growing economy.

Isn’t the strength of employment just a London effect, an Olympic effect, which will disappear as soon as the five-ringed circus has moved on? Well, no, even apart from G4S’s recruitment woes.

While 62,000 of the 181,000 rise in employment in the March-May period was in London and the south-east, this is broadly in line with the region’s share of the national economy. It is hard to detect much of an Olympic effect in a 64,000 rise in employment in the north-west.

If not the Olympics, isn’t it all part-timers? Again, no. In the March-May period full-time employment rose by 133,000, part-timers by 48,000.

Let me make one thing clear. I am not suggesting we are enjoying a normal recovery. Last September, when the eurozone’s lurch into more serious crisis added to the headwinds, I said the best we could hope for was a flat economy until the middle of this year, after which consumers should get a boost from falling inflation.

It does not take much to tip a broadly flat GDP figure into a negative number, particularly on initial ONS data. For reasons frequently set out here - the inflation squeeze on real incomes, the government’s fiscal tightening, weak credit growth and the eurozone crisis - growth is much harder to come by than in a normal recovery.

The International Monetary Fund’s Article IV assessment of the UK economy, available on its website (www.imf.org) is a good summing up of constraints on growth. Its downward revision of growth this year to just 0.2% arose from the arithmetic of the GDP figures described above.

The labour market figures show us, however, that since the double-dip recession apparently began, in the early autumn of last year, the economy has added a quarter of a million jobs. Unemployment has come down by 100,000 (not as much as the rise in employment because the workforce continues to grow) and total hours worked in the economy have risen by 2%.

Let me put these numbers into perspective. The rise in employment, just since September, is more than in the entire growth years of 2002, 2003, 2006 and 2007, of which only the latter was affected by the crisis.

The rise in hours worked, again only since September, is more than occurred in any year during the economy’s long and undisturbed upturn from 1992 to 2008.

So what is happening? The labour market figures could be wrong, though they include data from different sources. Another measure, workforce jobs, rose by 471,000 between autumn and spring.

It could be employers are having to recruit because productivity - output per worker or output per hour - is so dire. While the University of Cambridge report on “productivity pessimism” by Bill Martin and Bob Rowthorn cited here recently argued that much of the growth in jobs has been in low-productivity sectors, a productivity collapse still looks implausible, not least because a shift from public to private sector jobs should boost productivity.

What can we take away from this? The GDP figures will eventually be revised higher, as always, after they have ceased to be of relevance. Even the battered Bank of England has fallen under their spell, launching another £50 billion of quantitative easing this month, despite its earlier scepticism about the official figures.

The Bank’s own regional agents report growth in the economy in all the sectors they monitor with the exception of construction. Growth appears to have moderated but this is not the same as recession.

What is really happening? Most people do not trouble themselves about the details of GDP figures, and subsequent revisions, though they may respond to the gloomy headlines when the figures are reported.

Headlines are not good at distinguishing between magnitudes. If this week’s figures show a 0.2% fall in the second quarter, GDP will have dropped by a little under 1%, pending revisions, over the course of nine months. That is less than half of the fall that was happening each quarter in the most intense phase of the 2008-9 recession.

People should also focus on the bigger picture. As well as the fall in the unemployment rate to 8.1%, we had an unexpectedly large drop in inflation to 2.4%. Unemployment and inflation are the two most important variables affecting households.

Unemployment, or the fear of it, keeps households from spending. Inflation, when it is too high, squeezes the income needed for that spending. Arthur Okun, the legendary American economist, famously combined the two - the unemployment and inflation rates added together - into his misery index.

Britain’s misery index hit a peak of 13.7 in September last year, made up of an 8.5% unemployment rate and a 5.2% inflation rate. Thanks to gently falling unemployment and rapidly falling inflation, it has now dropped to 10.5. It was last lower in November 2009 when, as we now know, the economy was pulling quite strongly out of its 2008-9 tailspin.

The mood may be gloomy but misery is easing, as far as most households are concerned. The test for the economy, and ultimately the recovery, will be whether this translates itself into spending in the second half of the year.