Sunday, September 15, 2019
Some good news - but we're not out of the woods yet
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Many things might be going wrong for the government at the moment but, so far at least, it appears to be being spared the prospect of an immediate recession. We will not know for sure until November whether the economy has avoided two successive quarters of falling gross domestic product (GDP), the usual definition of recession, and who knows who will be in power then. But so far, so good.

So far, so good, for the Bank of England too, which is now unlikely to be called into action this week, following Mario Draghi's parting shot at the European Central Bank on Thursday. The highlights of his stimulus package were a 0.1 point cut in the deposit rate to -0.5% and the resumption of quantitative easing, at 20bn euros a month from November, for as long as it takes. The Bank can wait.

The chances of avoiding recession, which the arithmetic always made unlikely after the second quarter fall in GDP, improved further with the latest monthly figures. Not only that but the headline numbers from the latest labour market statistics, including a 3.8% unemployment rate, the lowest since 1974, and a joint record employment rate of 76.1%, were, not for the first time, encouraging.

I shall return to the job market in a moment. Let me first explain the recession point for the those who missed it. There was a time when ministers, like the rest of us, only had to worry about the GDP figures on a quarterly basis. But the Office for National Statistics has, since May last year, been publishing monthly figures, having watched the National Institute of Economic and Social Research (NIESR), a leading economic think tank, do so for a number of years.

On the face of it, the latest monthly figures, for July, were nothing to write home about. After falling by 0.2% in the second quarter, GDP was merely flat in the three months to July. That suggests, on the face of it, that it is still touch and go whether or not there is a recession.

The significance, however, was what happened to GDP in the month of July alone, when it rose by 0.3% compared with June. That, in turn, put it 0.4% higher than the average for the second quarter. It means that the numbers for August and September would have to show very hefty falls to produce a third quarter fall in GDP.

It could still happen. Uncertainty has been heightened since the change of prime minister in late July and business and consumer confidence have suffered. But, despite downbeat business surveys in recent weeks, it looks at present unlikely.

That is a tribute to the resilience of the economy, suggesting that you can throw a lot at it before it succumbs. There is a lot of truth in the idea that for the overwhelming majority of individuals, and small and medium-sized firms, what happens in Westminster, extraordinary though it has been, stays there. People get on with things.

We should not relax too much. It remains the case that the economy is fragile, and that it would not take too much to push it over the edge. Too many survey measures are at their weakest since 2012, when the eurozone crisis also almost pushed us into recession, or even at their weakest since the dark days since 2009.

For a long time, the strength of the labour market, which has been remarkable, has been at odds with the weakness of economic growth. Rising employment and weak growth have meant stagnant or falling productivity. It is good news that more people are in jobs and unemployment low but the economy has paid the price for it in lost productivity.

Now, despite the encouraging headlines, the labour market looks to be coming more into line with the economy’s growth performance. It is important to be consistent in the use of statistics. When I wrote recently about the long fall in real average earnings being almost over, I was using the regular pay figures. Last week’s 4% earnings number was for total pay, including bonuses, which is more volatile. Regular pay growth actually slipped, from 3.9% to 3.8%.

There are large swathes of the economy, including wholesaling, retailing, hotels, and restaurants, together with manufacturing, where pay is rising at well below the average rate, and where there has been no meaningful acceleration in the past year or so. The pick-up in pay is led by finance and business services, and construction, sectors in which the bonuses have also been biggest, and by the timing of public sector pay settlements. Ministers should be careful about over-celebrating the pay figures.

Employment growth, while still positive, has also clearly slowed, to just 31,000 over the latest three months. Again, this disguises big differences between sectors. Employment is falling, for example, in retailing and manufacturing, but rising in the public sector, not least because of Brexit preparations. After years of shrinkage, the civil service is growing again. Adjusted for reclassifications, public sector employment has risen by 77,000 over the latest 12 months.

There is also an odd feature in the latest employment figures, in that the number of male employees has fallen marginally over the past 12 months. All the rise in the number of men in work, 86,000, was accounted for by self-employment. Female employment continues to rise more strongly, by 369,000 over the past year, but the Office for National Statistics cautions that some of this is due to the rise in the state pension age for women. Well over half of the rise in female employment is in the 50-plus age group.

It is the vacancy statistics that provide the biggest pause. Are they the canary in the coalmine? Having risen strongly since 2012, in line with the growth in employment, they have been falling since early this year. There are still a lot of vacancies in the economy, 812,000, but they are down by 6% since the start of the year, and have been falling month on month.

There may be an innocent explanation for this. If employers are finding it hard to recruit because of shortages of labour and skills, they may no longer post vacancies, though these days doing so is much less costly than in the past, because of online recruitment. Indeed, that is one reason why ion recent years there has been a step-change in the number of recorded vacancies.

The fall in the number of vacancies, however, chimes with other evidence that suggests firms have become more cautious about recruitment, including that from surveys. Although overall employment has continued to grow in recent months, the number of employees is lower now than at the turn of the year. Self-employment has taken up the slack, as is often the case when the labour market softens.

Things could be a lot worse. Though Britain does not have the lowest unemployment rate in the EU – six countries are lower – many others would give their eye teeth for the performance of this country’s labour market. Similarly, while the economy’s second quarter performance was the weakest in Europe, the modest third quarter bounce in prospect should ensure we do not get the wooden spoon again.

The economy, however, is still very fragile, and likely to remain so. Avoiding recession, for now, is one thing. Returning to the kind of growth that we would expect in normal circumstances is a much bigger challenge.