Wednesday, January 22, 2014

The unemployment rate has been falling fairly steadily since its peak in the last quarter of 2011. Until the last three months of last year, this fall was unspectacular; at its peak the unemployment rate was 8.4%, and as recently as the three month period to last September it was still as high as 7.6%. The latest figures released today show that, in the three month period to November, the rate fell to 7.1%.

The latest data on GDP growth pertain to the third quarter of last year, and suggest a quarter-on-quarter growth of 0.8%. This is high - it suggests an annualised growth rate of 3.2%, well above the consensus forecast. In that quarter, growth within the construction sector was particularly striking. With GDP growth now apparently above the trend rate, it is not altogether surprising that unemployment should fall.

Yet questions remain about the source of this growth. Business investment grew in the third quarter of last year, but this only partially made up for a fall in the previous quarter, and the total level of such investment remained below the figure realised a year earlier. Investments in dwellings and other buildings likewise accelerated in the third quarter, but this only partially made up for recent falls. Consumer expenditure, meanwhile, has been rising steadily since the depths of the recession in 2008, and has accelerated sharply since the beginning of 2013.

The fall in unemployment and rise in output both represent very welcome news. As more people find jobs, the increase in consumption becomes more sustainable and the recovery becomes more secure. A key challenge that remains, however, is to raise productivity back to pre-recession levels and hence to restore real wage growth.

Monday, January 20, 2014

The ITEM (Independent Treasury Economic Model) club (supported by Enrst and Young) have issued their latest forecast for the UK economy. They conclude that growth in 2014 will accelerate to 2.7%, but caution that the recovery is very much led by consumer spending and that, until real wages rise, interest rates should be held at their current low level.

It would be hard to disagree with the ITEM club - at least as a short term forecast. Their predictions for the years beyond 2014 show the reversion to a steady state growth rate of around 2.5% that is characteristic of models of the type that they use - and recent experience suggests that we should be sceptical of that.

But the note of caution that is sounded here, suggesting that the recovery is fragile while it remains so heavily dependent on consumer spending, is well made. If growth does indeed accelerate to 2.7% this year, an outcome in 2015 of 2.4% (which is what the ITEM club is currently predicting) would be a rather better outcome than I would expect.