Economic commentary - April 2009

Unemployment is now through the 2 million mark for the first time in more than a decade; inflation has vanished for the first time in half a century; pay freezes are at the highest level ever recorded. Could things get much worse?

Strange though it may seem, there are now a few well-informed voices willing to say that there may be some reason to be a little more optimistic - if only to create the sort of climate in which recovery might begin. Talking the economy up, as it is known.

Fresh from taking on the chief executive of Starbucks over the state of the UK economy, business secretary Lord Mandelson recently told a meeting of business leaders that "as of today, I'm going to take on the doomsters and only talk Britain up".

Mandelson, it might be argued, is never knowingly under-spun. The same cannot be said of Ben Bernanke, the new chairman of the US central bank, who, in his first televised interview, was even brave enough to talk about the "green shoots" of economic revival.

And on the day the Office for National Statistics released the bad news about unemployment, Larry Elliot, the Guardian's economics editor, weighed in with something of an endorsement of Bernanke's views, suggesting that the case might even be easier to make in the UK.

Cautioning that this did not mean that "happy days are here again", he concluded:

"The last thing governments need now is for a mood of all-pervasive gloom to blunt the impact of the most colossal stimulus package the global economy has ever received. Unless this really is the final collapse of capitalism, that stimulus package will eventually work. And it will work all the sooner if we occasionally remind ourselves that even after the darkest night the sun comes up in the morning."

But let's not forget the figures. Figures released by IRS, CELRE's partner organisation within the XpertHR Group show that the number of pay freezes in the first couple of months of 2009 are running at their highest level since IRS set up its pay settlements databank in 1984.

In part this is because inflation (or, perhaps, deflation - but more of that later) is now at such an historic low. Back in 1991 when we last experienced recession, wages rises of 8% or more were barely enough to keep wages at level pegging. Then, pay freezes meant a real pay cut.

According to IRS, the headline rate for pay awards fell to 2.6% in the three months to the end of February 2009 - falling below the 3% mark for the first time in six years.

But, as the chart shows, there is a wide spread of awards. With nearly one in three awards of the 156 awards analysed now resulting in pay freezes, the lower quartile stands at zero; but the upper quartile remains as high as 3.8%.

Figures released by the Office for National Statistics in March showed that the number of unemployed people, the unemployment rate and the claimant count have all increased.

The unemployment rate was 6.5% for the three months to January, up 0.5 percentage points over the previous quarter and up 1.3 points over the year. The number of unemployed people increased by 165,000 over the quarter and by 421,000 over the year, to reach 2.03 million.

There were 482,000 job vacancies in the three months to February 2009, down 74,000 over the previous quarter and down 203,000 over the year ­- the lowest figure since comparable records began in 2001.

The Retail Prices Index, however, failed - by a whisker - to fall below zero last month, settling instead at zero - neither inflation nor deflation; and the Consumer Prices Index even edged up from 3.0% to 3.2%. There is more here on how inflation measures are calculated.

The Office for National Statistics said there had been upward pressure on the prices of food (particularly fresh vegetables), transport costs, clothing and footware. The rising costs of computer games also contributed to the rise in CPI inflation.

RPI's failure to fall below zero caught commentators by surprise. Most had expected it to do so when January's figures were published; but a second reprieve in the February data did not deter economists from speculating on what a period of falling prices would mean for the UK.

Should we describe such a situation as deflation? No, argue two Bank of England economists in an article (PDF format) for the Bank's Quarterly Bulletin published shortly before inflation fell to zero. 

Deflation, they say, is "a sustained period of negative inflation" with all sorts of harmful consequences - not a mere short-term or corrective measure which might actually prove beneficial. Wisely, they hold back from suggesting which we may now be approaching.

At the time of writing, stock markets around the world appear to have have become a little less volatile after the heavy falls of 2008 and early 2009 - albeit at massively lower levels than before the crisis broke. Whether this can be sustained remains to be seen.

It is also worth keeping in mind that stock market recovery is usually seen as a very early sign of wider recovery. Any positive impact on the wider economy will come much, much later and will be far slower to have an impact on output - still less jobs - than the onset of recession.