Here we go again.
A return to recession beckons – or rather we continue to bump along the bottom.
The positive figures for the third quarter of last year have proved to be – as sadly many of us predicted – an Olympic blip rather than anything enduring or of substance. There is simply no sign of recovery, other than in parts of the service sector.
Construction is depressed, manufacturing is stuttering and retail spending weak – reflecting the continuing decline in real incomes, even if employment continues to pick up. Meantime a major emerging concern is with regard to productivity and future competitiveness.
I apologise for wittering on about the latest data for Gross Domestic Product, but the figures recently released showing UK performance in the last quarter of 2012 really do matter.
What do they show us this time around? The economy at the end of last year was exactly where it had been a year previously. No movement whatever – nado. The service sector is virtually back where it was at the start of 2008. Not so with the remainder of the economy. There was a big drop in the production industries in the final quarter.
Much of the headlines were grabbed by a sharp decline in oil and gas – mining and quarrying down over 10% in the quarter. That was essentially accounted for by the timing of maintenance.
The really disappointing news was that manufacturing output fell by 1.5% in that three-month period. According to the Office for National Statistics manufacturing weakness in Q4 was widespread with the majority of industries showing a decline. And this is the sector that is supposed to be leading our recovery.
It is also remarkable that the output of the construction industry was 11% lower at the end of 2012 than it was at the end 2011. Separate data show the retail sector suffered its weakest December – the critical month for retailers – for 14 years, apart from the snowbound high street of December 2010.
That leads me to ask three questions. First, why is employment still rising? Second, is improvement in the external environment going to come to our rescue? And third, how should we react domestically?
The employment data are seemingly perverse. Construction employment is falling, and we have seen big name closures in the high street – in addition to many smaller casualties in the shopping areas we all frequent. But the overall level of employment in the UK was more than 500,000 jobs higher last November than 12 months back. What is going on here? Certainly it is excellent news to see the unemployment rate down once more – especially when youth unemployment in Spain has soared to 60%. Nobody wants rising unemployment. But what are these extra jobs here in the UK?
How big a shift is there from full time to part time, meaning that numbers employed rise much more than the number of full time equivalent (FTE) jobs? And if there are real increases in FTE private sector employment in manufacturing, at the same time as output is sinking, then the level of output per caput must be heading south even faster than output itself. To be competitive post-recession, indeed to help us drag ourselves out of this prolonged recessionary phase, we need to be increasing productivity at a decent rate. Rising employment alongside low investment and declining output implies just the reverse. There is something odd going on here or we face real competitiveness problems in the future.
Turning to the rest of the world, there are hints of some reduction in risks and uncertainties, even if no sign of sparkling growth ahead. The US has stopped short of the fiscal cliff and now has a further four years of what should be decent stability under Obama.
The risks of total collapse of the euro system have receded. Everyone seems to believe that the European Central Bank will not let this happen – even if its words have in fact been less clear than the markets interpretation suggests; a return to a modicum of growth in 2013 looks like a plausible expectation.
So we can hope for a touch more stability and less clear evidence of downside risk in the external environment. But that will not be sufficient to drag us upwards – especially if manufacturing productivity is on the wane. It is saying something when even the cautious conservatives at the International Monetary Fund refer to the need for the UK to go slow and steady on austerity. I know that our Chancellor will be ever-reluctant to admit that a change of course is essential. But it is. The present strategy is not working.
I note that the Budget this year is on March 20. That happens to be my birthday – yet again. I can think of no more welcome birthday present than a change of tack, more funds for investment in infrastructure, genuine incentives to private sector investment and even perhaps a short term and temporary incentive to consumption. To hark back to the days of Nigel Lawson and Margaret Thatcher the present policy is certainly hurting but it isn't working!
l Jeremy Peat is director of The David Hume Institute