By Jeremy Smith
On Wednesday this week, the ONS will publish its first estimate of the Q2 GDP numbers for the UK. After the IMF’s gloomy country mission report last week, a lot of attention will be paid to these.
In his Economonitor blog of today, “UK: Gloomy Growth Numbers – But Not So Miserable Now”, Sunday Times economist David Smith argues that it is hard to reconcile the recent positive growth in employment– including full-time employment – with the generally gloomy forecasts for GDP growth or ungrowth. He believes that the GDP figures for this year will in due course be revised upwards. Is his faith justified? He says:
“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.”
But there may not be a contradiction here after all – and he himself puts his finger on it:
“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.”
In PRIME, we have been looking at “the inflation squeeze on real incomes”, which has in 2011 and 2012 been very considerable. Unemployment, though down 65,000 Q on Q, remains extremely high, still at 8.1%, and the number (2.58 million) is still 130,000 higher than a year ago. For those in work, the “squeeze” has continued even as CPI inflation has come down.
According to the ONS Labour Market Statistics for July 2012, average total pay in both private sector and public sectors, in the 3 months to May, rose by 1.5% on a year earlier. CPI annual inflation for those 3 months was 3.5%, 3% and 2.8% respectively, let’s say 3.1% average… that means in effect an annualised cut in the value of wages or salaries of around 1.6%. Under the RPI, let us recall, inflation is still higher, by about an extra 0.3%.
The increase in employment in the 3 months (March-May) of 181,000 – 133,000 full-time – represents an increase of 0.6% for this period over the previous quarter, which if maintained for a year would come in at 2.4%. But in fact, employment for the same 3 month period in 2011 was 29.28 million, which means that over a whole year, employment has scarcely grown (just 0.1%), whilst the purcasing power of wages declined (against inflation) by at least 1.6%.
If we look at just the last 6 months, overall employment has grown by 235,000 which is an increase of 0.81%, an annual rate of 1.62%.
In summary, the overall total spending power of individual working people has declined significantly during the last year.
The increase in employment over the last 6 months, and around 0.6% compared to the previous 3 months and 0.8% over the last 6 months, might have been expected to have increased overall workers’ spending capacity in the economy to a limited extent, other things being equal. But in reality, this has probably not occurred, since wage and salaries as a whole are rising at a rate significantly below the annual rate of inflation measured by the CPI, and even further below that measured by the RPI.
Therefore, it is unlikely that the 2nd Quarter GDP figures will be enhanced by the impact of increased employment over the last 6 months (up 1.62% annualised), offset by a similar rate of annual decline (also around 1.6%) in real wages across the whole workforce.
“Governments must borrow more (especially at current interest rates), bypass the banks and invest directly in infrastructure in order to create meaningful growth.”
The number of people coming up with this is astonishing. We should be investing in infrastructure *regardless* of the stage of the business cycle. This isn’t the 1930s. We don’t build infrastructure via men with shovels any more. Infrastructure is highly skilled and uses high-level plant that may very well have an alternative bid in the private sector. And of course infrastructure spending is spent in a particular place – the Olympics has shown that.
Meaningful growth comes from people having enough to spend to signal demands to the production system. So the government just needs to increase the amount of spending in the economy. The investment then comes from the second line private sector investment effects in a more distributed manner.
The policy of austerity appears to me to be more politically motivated (reducing the size of the state) rather than sound economics. Why is it that Keynes is not on the horzon let alone the political agenda? The Conservatives are following similar austerity programmes which Angela Merkel insists must come as a condition with the EU bailout and and we all know how successful the PIIGS economies are responding as a consequence.
Governments must borrow more (especially at current interest rates), bypass the banks and invest directly in infrastructure in order to create meaningful growth.