Sunday, August 19, 2012
Booming, slumping or flatlining? Take your choice
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

boomandbust.bmp

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

Normally, even when economists fall down on forecasting they are pretty good at explaining things after the event. Now they are just left scratching their heads.

The latest very good job market figures has them scratching even more. How can economy that is supposed to be back in recession have generated 201,000 new jobs in the April-June quarter?

We will get the Office for National Statistics’ second take on that quarter this week, amid expectations that the initial 0.7% fall in gross domestic product will be revised. That alone will not solve the puzzle.

Nor will apparently simple explanations relating to the Olympics. Though there was a 99,000 rise in London employment in the second quarter, there was a proportionately bigger 69,000 increase in the smaller north-west region. Unemployment fell in most parts of the country.

The answer, I think, is in three parts. Gross domestic product is not as weak as current official figures suggest and will be significantly revised. There is no way GDP in the second quarter of this year was lower than two years ago.

The composition of GDP is also important. Even on unrevised data, service sector output has grown in the past two years, while manufacturing has been flat. The average has been dragged down by a 27% drop in “mining and quarrying” (mainly North Sea oil and gas), an 8% drop in construction and falling electricity output.

The 499,000 rise in employment over the past two years thus partly reflects those parts of the economy that are growing, including much of the service sector, combined with what seems to be an absence of job cuts in those that are shrinking.

Maybe the North Sea is a genuine example of fast-falling productivity, in that the oil and gas becomes progressively harder to get out but the numbers of people involved in doing it do not fall.

Second, as some labour economists point out, the job market may just be more efficient: better at getting people in to the available vacancies that is used to be. From the start of the crisis five years ago, the labour market has shown its flexibility. Employment, at just under 29.5m, is within 100,000 of its pre-crisis peak but its composition has changed in favour of part-timers and the self-employment.

Third, for employers, weak wages - and falling real wages - may have enabled them to keep people on when in a different environment they would have cut back. It has meant that they have recruited when at another time they might have held back. For firms, the wage bill is often as important as the headcount, if not more so.

The puzzle will not be fully resolved for some time but in the meantime there is another concern. The employment figures were not the only strong numbers last week. The weakness of demand has been the big obsession yet the latest retail sales figures suggested it is coming back.

Retail sales rose by 0.3% last month, which was better than expected. More interesting was that June’s apparent washout, initially reported as a 0.1% sales rise, was revised up to 0.8%.

Retail sales volumes in July were up by 2.8% on a year earlier, or 3.3% excluding petrol and diesel. Not only are they strong, but they are exactly following the script.

My argument has always been that the biggest reason for weak consumer demand was the unintended squeeze on households from high inflation.

That squeeze is easing fast - even a small upward blip in July did not prevent inflation, at 2.6%, being half its rate last September - and spending is picking up in consequence. Consumers have been late to the party but they now appear ready to join it.

Why the concern? Because the political debate is dominated by the very weak data, notably GDP. This is not entirely a bad thing. Some things being urged on the government because the economy is apparently not growing are sensible.

If it can find room within its broad fiscal plans to spend more on infrastructure and boost housebuilding that would be good. If funding for lending restores credit growth to small and medium-sized firms and home-buyers, that will be good too.

When they were asked recently to suggest ways of boosting growth, these were the suggestions of some of the signatories to a letter to The Sunday Times in February 2010, which supported deficit reduction.

But some of the things being urged on the chancellor from others, such as a fully-fledged Plan B of abandoning deficit cuts, would not be sensible at all and are a direct product of the apparent “no growth” economy.

The same is true of the Bank of England and quantitative easing. Would there be a case for greatly expanding the QE programme, as the Bank is doing with its near-doubling to £375 billion, in the context of a more rounded picture, taking in the strength of employment and retail sales, as well as the weakness of GDP, construction and parts of industry?

I think not. The Bank is aware of the problems with the GDP data - or should be - but is still rather too willing to use them as its guiding light.

Most of all, the risk is that the gloomy “double-dip” view undermines business and consumer confidence. That does not appear to be happening to firms as far as recruitment is concerned, but it may be constraining investment.

Consumer confidence has been weak in recent months even as retail spending has risen, so perhaps we can make too much of a gloomy mood. But it does not help.

One day, all this will be resolved. Norman Lamont, chancellor in the early 1990s, suffered when his “green shoots of recovery” of autumn 1991 were apparently snuffed out by a drop in GDP in early 1992. He was asked to step down in May 1993, with the economy seemingly struggling in vain to get up to cruising altitude.

The latest official figures show, however, there was no drop back in GDP in early 1992 and that the economy grew by a strong 3.1% in 1993. The numbers change, but usually too late.