A Confusing Tale of Two Economies (with apologies to Charles Dickens).

What is going on in the UK economy is currently hard to understand. Are we doing well or badly? There are many conflicting pieces of evidence and, in some ways, it is like an abstract painting – different people can look at it and see different pictures.

Consider the labour market – in the last three months of 2018, employment rate reached 76.1%, or 32.71 million, the highest since 1971, rising by 220,000 workers, of which 144,000 were female. Over the same period, unemployment fell to 1.34 million or 3.9%, the first time it has dropped below 4% since 1975. While some people see this as a positive sign of economic progress, others present three reasons why the data actually shows an economic problem for the UK.

Firstly, there is a view that the rise in employment is because of an increase in zero hours contracts, with workers working far less than they would like, suggesting that we have rising under-employment instead of unemployment. Secondly some suggest, similarly, that self-employment has been responsible for some of the fall in unemployment, with many of the newly-self-employed working less than they would like. Finally, others argue that the reason for falling unemployment is that employers have cut back on investment, preferring to meet additional demand by hiring more workers, knowing that they can get rid of them if the economy stagnates after Brexit. This last explanation dovetails well with the UK’s poor productivity record, with productivity actually falling by 0.2% in the last quarter of 2018.

Turning now to earnings and inflation; with unemployment so low, we would expect both earnings and inflation to be rising rapidly. In fact, last month, average earnings growth fell from 3.5% to 3.4% and the CPI only increased from 1.8% to 1.9%, due to prices for some food and alcoholic drink items increasing more in price this year than they did a year ago, and core inflation (which ignores the price of food and energy because they are highly volatile) fell by 0.1% to 1.8% in February. Nevertheless, some economists regard this as only a temporary respite, suggesting inflation will rise to 2.5% in the next few months because of higher oil prices and rising wages, with a further jump possible if tariffs rise after Brexit (whenever that is!).

Turning now to GDP, it grew by 0.2% in the three months to January 2019 with the service sector expanding while manufacturing and construction contracted. This meant that growth for 2018, was only 1.4%, the slowest rate for 10 years. Also suggesting that the outlook is poor was a survey of consumer confidence showing that it had fallen over the last year and data showing that we currently have the lowest annual house price growth in the UK for six years. However, government borrowing is at a 17 year low because of rising tax receipts – £200m in February 2019 compared to £1.2bn in February, 2018, meaning that the government is on course to meet its target for structural borrowing to be below 2% of GDP in the financial year 2020/21. Further confusing evidence of our economic situation is provided by the latest UN Annual Happiness Report, which shows the UK has risen from 19th  to 15th out of 156 countries surveyed, with Finland, once again at the top of the table, followed by Denmark, Norway, Iceland and the Netherlands.

It is not surprising that economists find it hard to assess how the economy is doing since some of the indicators discussed above reflect what has happened in the past, rather than what is currently happening. (Imagine steering a car by only looking in the rear-view mirror). Unemployment, for example, shows the state of the economy six months to a year ago since firms do not immediately hire or fire workers when their orders change. Other indicators, such as GDP are subject to frequent revisions as more accurate data becomes available. Therefore some economists prefer more informal guides to the economy. David Smith, Economics Editor of The Sunday Times, uses the number of skips in his road, since more skips suggest more building and home improvements and therefore greater economic activity.  In an attempt to improve our awareness of the current state of the economy, the ONS is introducing new economic indicators such as the volume of road traffic and businesses’ value-added tax returns which will, hopefully, provide a more up-to-date picture of the economy.

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