This note draws together key economic stories from National Statistics produced over the latest month. This is in order to paint a coherent picture of the UK's economic performance using recent economic data.
Contrasting pictures of the strength of the UK economy are on offer from the latest economic statistics. Buoyant labour market figures show employment rising at one of the fastest year-on-year rates since the late 1980s, while output fell by 0.3 per cent in the final quarter of 2012, continuing the stagnation that has been a feature of the past 18 months.
Part of the resulting weakness in productivity is attributable to the first rise in manufacturing employment in 2012 for more than a decade, despite the fact that manufacturing output itself has been falling.
An important factor in understanding UK productivity performance lies in the behaviour of earnings. Average pay growth has been remarkably muted during the period since the 2008-09 recession, and has failed to keep pace with price inflation. The squeeze on households’ real pay, even though price inflation has remained within the Bank of England’s target range for the past nine months, has had a negative impact on household expenditure.
The drop in GDP of 0.3 per cent between the third and fourth quarters of 2012 was influenced by two factors in particular - the impact of the London 2012 Olympic and Paralympic Games, which boosted activity in the previous period, and by continuing contraction of oil and gas output.
The Olympics is estimated to have boosted GDP growth in the third quarter. Although the full impact of the Olympics cannot be identified with any precision, the sale of Olympics and Paralympics tickets is by itself estimated to have increased growth in the quarter by 0.2 percentage points. By comparison with this strengthened third quarter figure, ticket sales have therefore reduced growth in the fourth quarter by a similar amount.
Output of the mining & quarrying sector (comprising predominantly North Sea oil and gas extraction) fell by over 10 per cent in the final quarter of 2012, and although less than 3 per cent of total GDP, it took 0.2 percentage points off GDP growth. The weakness of North Sea output reflects extended and later than usual maintenance of oil installations, as well as the longer term impact of declining reserves. Output of the mining & quarrying sector is now less than 40 per cent of its peak in 1999, equivalent to an annual rate of decline of more than 6 per cent a year. Manufacturing output also fell sharply in the fourth quarter to a level 2 per cent lower than a year earlier.
Services sector output as a whole was unchanged between the two latest quarters, with expansion in some sectors (transport, storage & communications; business services & finance) offset by contraction in others (distribution, hotels & restaurants). The impact of Olympic ticket sales is evident in the output of the “government & other services” sub-sector, which contracted by 0.7 per cent in the fourth quarter following growth of 1.6 per cent in the previous period.
The weak preliminary GDP estimate in the fourth quarter therefore continues the recent pattern of stagnation. Although quarterly growth rates have been volatile during 2012, in part because of the impact of the additional bank holiday for the Queen’s Diamond Jubilee as well as the Olympics, the level of GDP in the latest quarter is broadly unchanged from its level in the second half of 2011. GDP is still 3.2 per cent below its peak at the start of 2009.
The impact of the marked decline in North Sea production can be seen in Figure 1. Excluding the oil and gas sector, the economy has recovered by more than 4 per cent since the trough in the second quarter of 2009, but is still 2.3 per cent smaller than at the 2008 peak.
The latest labour market statistics present a more positive picture of the economy. Total employment in the three months to November grew by 1.9 per cent compared with a year earlier. And weekly hours worked grew even faster, by 2.3 per cent over the same period.
Figure 2 shows that for most of the past 40 years, GDP growth has grown consistently faster than employment. The combination of buoyant employment growth and stagnant output has not previously been experienced during this period.
The contrast between output and employment growth is starker still in the manufacturing sector, where the number of jobs has risen in 2012 for the first time since the mid-1990s – since then the number of manufacturing jobs has fallen by 40 per cent. The recent rise in jobs comes in spite of a 1.8 per cent fall in manufacturing output between 2011 and 2012.
As a result, manufacturing productivity (output per job) in the third quarter was more than 4 per cent lower than a year earlier. The variation in productivity varies widely between different parts of the manufacturing sector, with especially large falls in “textiles, wearing apparel and leather products”, “chemical and pharmaceutical products”, and “rubber and plastics products, etc”, all of which have seen the combination of sharp falls in output and rising employment over the past year. In contrast, the “transport equipment” sector has seen output rising faster than employment.
Annual consumer price inflation (CPI) held at 2.7 per cent in December for the third month in a row, and has remained within the Bank of England’s inflation boundary for the past 9 months, following two periods during and after the recession when it briefly touched 5 per cent.
Consumer price inflation breached the 3 per cent upper limit of the Bank of England’s target range during 2008 and early 2009. This was driven by rising global commodity prices, including food and energy prices. This shows in Figure 5 as the large contributions to CPI from food & beverages and housing, water & fuel (which includes domestic energy bills).
A further episode of above target inflation occurred throughout 2010 and 2011 and the first part of 2012. Here too global price pressures were in part to blame, including the impact of high energy prices on the cost of motor fuel. Inflation was also boosted by successive increases in the rate of VAT in January 2010 and January 2011.
The slight rise in inflation to 2.7 per cent in the last three months includes the jump in university tuition fees as well as some of the announced increases in domestic gas and electricity bills in December 2012.
Since 2008 the rate of inflation has been consistently higher than the annual rise in average weekly earnings, as Figure 6 shows. Over the past five years, real earnings have therefore fallen by more than 7 per cent.
The squeeze on real incomes comes on top of other effects of the recession, including greater job insecurity, households’ desire to reduce their debts, and a general sense of caution about the outlook for the UK and world economies in the light of factors such as the euro crisis. Rising prices relative to wage growth has a negative impact on household consumption as it reduces the physical quantity of goods and services that people can buy with the same level of income.
Rising inflation may also have a differential impact across different parts of the income distribution. For instance, low-income households typically spend a greater proportion of their disposable income on essential goods and services. The recent strength of inflation in the prices of many essential goods, including food and energy, may therefore have a disproportionate impact on poorer households.
The squeeze on household spending can be seen in the latest retail sales statistics. Sales volumes in December 2012 are a mere 1.4 per cent higher than they were in January 2008. December sales figures, shown in Figure 7, were particularly muted, growing at the slowest rate since 1998, apart from 2010 when the unusually heavy snow deterred shoppers. Consumers also seem to be changing preferences, purchasing more from value brands or outlets. The Bank of England recently reported that retailers have seen stronger sales of own-brand products rather than branded goods as the mid-market suffers.
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