Tuesday, April 29, 2014

The latest data indicate that, in the first quarter of this year, GDP grew by 0.8%. This implies a very healthy 3.1% growth over the course of the last year.

The performance across sectors is uneven, with particularly strong growth in manufacturing and in distribution. Manufacturing grew by 1.3% over the quarter, and by 3.5% over the year. This is clearly good news in that it addresses concerns that the UK had, before the recession, become over-reliant on services. Strong growth in manufacturing helps raises incomes, but with developments in technology making this sector increasingly capital-intensive, the progress of the sector may not be reflected in such strong employment growth. The extent to which this concern is well founded will require monitoring as the recovery progresses. The strength of recovery in the distribution sector (which includes, amongst other things, retail and wholesale industries) reinforces the extent to which this has, at least until very recently, been a recovery led by consumer spending. Recent forecasts from, amongst others, the EY ITEM group, suggest that investment is set to rise significantly this year. If it does - and there is still surely a question mark surrounding their precise forecasts - then that will strengthen the underpinnings of a recovery that has, till now, been built on rather fragile foundations.

Other metrics of the recovery, including house price changes, suggest that experience across the regions is very patchy. Data on output growth by region are produced with long lags and are not considered to be terribly reliable, but the evidence that this recovery is spatially uneven suggests that the very encouraging aggregate statistics may serve to conceal what is, in reality, a much more nuanced picture. The data on underemployment released by the Work Foundation likewise suggest that the impact of output growth on the labour market is very different to – and less comforting than - what we have experienced in the past.

Nevertheless these most recent data offer much hope that the economy is indeed recovering.

Wednesday, April 16, 2014

This morning's release of the latest labour market statistics provides a dose of good news all around. The unemployment rate has fallen below 7%, and earnings are rising at 1.9% over the year. The rate of earnings growth is particularly pronounced in manufacturing, where it is 2.8%, possibly reflecting the onset of skills shortages. In finance and business services, meanwhile, earnings have grown at only 0.3%, possibly reflecting in part the decline of bonuses.

The detailed data still paint a more nuanced picture. Take productivity as an example. Output per job rose by 1.3% over the year to quarter 4 in 2013. This is a marked improvement on the 0.5% achieved the previous quarter, and certainly better than the declining productivity that was still being experienced in the first quarter of last year. However, improvement in output per hour has been considerably less impressive. This was still falling as recently as the third quarter of last year. The final quarter figures are a little more encouraging (suggesting 0.7% growth on a year earlier), but remain fairly muted.

Another aspect of the labour market which has been interesting in recent years is the dramatic rise of self-employment. Between December-February and the previous quarter, self-employment rose by some 146000, and the total now stands at more than 4.5 million. The latest figure represents a 7.1% change over the year. Self-employed workers now comprise 14.8% of the workforce. We know that much of the increase in self-employment has taken place amongst older demographic groups, and it remains unclear how much of the rise is due to entrepreneurial development as opposed to people running out of labour market options. Clearly more research is needed on this.

In sum, therefore, the statistics are encouraging. But the labour market is clearly changing rapidly, and an exclusive focus on the headline metrics risks being more than usually misleading.

Tuesday, April 15, 2014

The rate of growth of consumer prices in the UK has again slowed - to an annual rate of 1.6% in March. This has raised hopes that real wages, which have fallen and then stagnated over recent years, may finally have turned a corner. Earnings data become available tomorrow, but - since they are produced with a longer lag than the price data - will cover the three months to February. But clearly, if real wages do turn out to be on the rise, a major component of any explanation will be the slow increase in prices.

The low rate of price inflation thus merits some consideration. Since August of last year, the value of the pound relative to other major currencies has increased. Against the euro, it has risen over 5%, while against the US dollar it has risen by well over 20%. This has led to cheaper imports, putting downward pressure on price inflation. The fundamental basis for this appreciation is unclear - while confidence in the economy's ability to deliver growth has clearly increased, the current account balance has deteriorated sharply over the last two years.

If nominal earnings do indeed soon rise faster than prices, then that would suggest a turnaround in productivity - and that would of course be welcome. But the growth rate of productivity looks set to remain slow, well shy of its trend, for some time to come. The supply side issues underpinning low productivity still need to be addressed urgently. The labour market is still some way off returning to normal.

Tuesday, April 08, 2014

The latest figures for industrial production (up to February) have been released today. These allow me to report the latest forecast from my neural network model. The forecast is now for a less dramatic (but still pronounced) spike in output than previously predicted. The forecasts in the graph below cover a 24 month period, and suggest that, from early 2015, the rate of growth of output will slow down sharply. While the recent run of good news on the economy is cause for some celebration, caution about the medium term is still warranted.

Tuesday, April 01, 2014

The latest data on labour productivity show some positive movement. In the fourth quarter of last year, productivity grew by 0.3%, representing a 0.7% change over the course of the year.

A positive outcome on productivity is, of course, welcome following the dismal performance over the last few years. Nevertheless, this rate of growth remains below half of the long run trend.

The news coincides with the release of an important report from the Institute for Public Policy Research. This shows (Fig. 8.9, p.104) that British investment in training over the last few years has lagged way behind that of competitors. Without addressing the shortfall in human capital, productivity will remain a challenging feature of the UK economy, and will continue to pose a threat to the recovery.