Economic commentary - July 2009

As July 2009 gets underway, it is increasingly possible to detect a mood of cautious optimism regarding the state of the UK economy. But caution is definitely key, says XpertHR benchmarking editor Michael Carty.

Over recent weeks, former Chancellor Norman Lamont's October 1991 reference to "the green shoots of economic spring" (external website) (which he no doubt now wishes he had copyrighted) has become common parlance among economic commentators looking for positive signs.

The chorus of cautious optimism seems to be augmented daily by tentative voices speculating that the worst of the recession might soon - or, according to a select few, already - be over.

But we are by no means out of the woods yet. Many key economic indicators are in a dire and still-deteriorating state, with pay awards in particular suffering an unprecedented collapse.

Economic commentary overview: the cautiously optimistic...

A significant note of optimism on prospects for the global economy came from the G8 finance ministers' meeting in Lecce, Italy, in mid-June 2009. In a joint statement (PDF format, 31.6K) (external website), they acknowledge that "[w]e are in the middle of the worst economic crisis since the Great Depression." But they argue that the concerted international programme of fiscal stimulus is working. They say:

"There are signs of stabilisation in our economies, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence, but the situation remains uncertain and significant risks remain to economic and financial stability."

Focusing on the UK economy, Chancellor Alistair Darling echoed these sentiments (external website) in a brief interview with Reuters at Lecce. Darling said:

"I remain confident that what I said in the Budget holds, that we'll start to see a return to growth towards the end of this year. A lot will depend on other countries making progress on cleaning up their balance sheets; volatility in commodity prices, oil for example. So I think there are reasons to be cautious."

...the sunny...

Perhaps the sunniest prognosis in June 2009 comes from the National Institute of Economic and Social Research (external website) (NIESR). NIESR argues that the 2009 recession is already over, with the UK economy set to return to growth later this year (PDF format, 145K) (external website). In its view, gross domestic product (GDP) data "point to March as having been the trough of the depression, with output rising in April and May."

...and the outright gloomy

Over in the black corner, the most sobering assessment comes from economist Paul Krugman. In an interview with the Observer, the Nobel Prize winner argues that for all the signs that the recession might be easing, the global economy remains in a precarious position (external website). As Krugman puts it:

"The risk for long stagnation [on a global scale] is really high."

Krugman sees significant parallels between the current state of the global economy and conditions in Japan at the start of the 1990s which prefigured that country's extended period of stagnation.

But even Krugman finds some reasons to be, well, if not more positive, then slightly less negative. In his view:

"The risk of a full, all-out Great Depression - utter collapse of everything - has receded a lot in the past few months. [...] [T]he possibility of an apocalypse a few months ago [...] seems to have receded, so it makes sense for the markets to come up, but that's not saying that the economy is going to be great. If you do the comparison not with where they were three months ago, but where they were two years ago, then the markets still seem awfully depressed."

Nonetheless, Krugman thinks the recession might now be bottoming out:

"We've hit that lower bound [...] Now, everything after that is more or less speculation."
Encouragingly for UK employers, Krugman believes that the "UK economy looks the best in Europe at the moment. [...] Britain actually may have stopped contracting - that's the most positive thing one can say."

He even sounds a rare note of praise for Gordon Brown's contribution during his stint at Number 11:

"I still think his economic policies have been pretty good. [...] The fact of the matter is that Britain did manage to stabilise the banking situation. I'm not ecstatic, but I'm not sure I know what I could have done better."

Economic indicators paint a bleak picture

But whichever degree of cautious optimism you find most compelling, there is no question that many of the key economic data published in June 2009 paint a bleak picture. These include the following:

• Gross domestic product (GDP) is in an even worse state than was already estimated (external website), following the release of latest official GDP data yesterday (Tuesday 30 June 2009). The UK economy is now believed to have contracted by 2.4 percentage points in the first quarter of 2009, a downward revision of 0.5 percentage points on the previous estimated rate of growth for that quarter (-1.9%) published only a month ago. In a sobering analysis of these data (external website), BBC economics editor Stephanie Flanders observes that a "tiny revision to the growth figure for the second quarter of last year also means that the recession also started earlier than thought".
• Retail prices index (RPI) inflation showed a surprising (albeit very small) increase, but remains firmly parked in negative territory at -1.2% in May 2009, up 0.1 percentage point from -1.3% in April.
• Unemployment continues its inexorable rise, with latest data showing that the ILO rate hit 7.2% during the period February to April 2009. Commentators are unanimous in predicting that worse is to come: the TUC expects unemployment to keep rising well into 2010 (external website); the CBI expects unemployment to peak at three million in 2010; and the CIPD warns that unemployment will rise dramatically over the next five years, as the Government starts to make swingeing public sector job cuts.
• Pay awards continued to plumb new depths, according to our colleagues at IRS. The [headline whole economy pay award hit a historic low for a second consecutive month], with the median pay award slumping further to 1.3% over the three months to 31 May 2009 (although the median pay award for the preceding rolling quarter has also now been revised down from 1.5% to 1.3%). Pay freezes or cuts now account for more than one-third (35%) of all pay awards monitored by IRS, rising to two-fifths (40%) in the private sector.

The 'upside' of downward mobility in pay awards

Employers concerned at the prospect of 'selling' the idea of pay freezes or pay cuts to disgruntled employees should take note of recent comments from Bank of England Monetary Policy Committee (MPC) member Andrew Sentance.

Sentance argued that the current downward mobility in pay awards is not uniformly negative. He believes it indicates that the UK labour market is increasingly flexible, which will help to shore it up during the recession and to recover swiftly once economic growth returns.

The CBI echoed these sentiments in its overview of UK employment trends in 2009 (PDF format, 1.6MB) (external website). More than half (55%) of the 704 employers surveyed say they plan to freeze pay at the next pay round. The CBI argues that this reflects a collaborative and innovative response to the recession from both employers and employees, who are "working together to protect businesses and jobs" by cutting costs.

Not to be outdone, IRS notes that when measured against negative RPI inflation - the most commonly used inflation measure for pay setters - the current, unprecedentedly weak pay figures actually compare more favourably to rises in the cost of living than they did a year ago, when the value of higher pay rises was undermined by high inflation. The latest IRS headline pay award, at 1.3%, is effectively 2.4 percentage points above the current rate of RPI (-1.1%).

Keep on the sunny side?

So, a salutary lesson there. Look hard enough for signs of positive encouragement even in seemingly the worst of news (and record lows in pay awards, matched by record highs in pay freezes would constitute just that for many), and you will find them.

Cautious optimism is the mood of the day with regards to the UK's economic prospects, but whether such an outlook is justified remains to be seen.

Key bargaining statistics on pay, prices and employment for July 2009