Low growth; more jobs?
Over the ten complete quarters that the current UK government has been in power, economic growth has been minus 3%, but total employment has risen by 1%. For the last calendar year, the data show the size of the economy as unchanged but total employment up by over 550,000 or about 1.6%. In contrast to the jobless recoveries seen in many Western countries after the 2001 downturn, the UK is experiencing a job-creating recession that is the cause of great head-scratching amongst economists.
Productivity is defined as total output divided by the amount of labour used to produce that output. It is increasing productivity that produces the increases in the standard of living within an economy. Historically, productivity growth in the UK economy has averaged about 1.5% per annum, but over the last ten quarters, the UK’s productivity has been averaging minus 1.5% per annum – indicating that the overall standard of living in the UK is declining.
Two sectors in particular account for much of the fall in productivity. First, North Sea oil output has been in decline for some time now, and requires more effort and resource to produce that declining output. Secondly, the banking sector (which delivered dramatic productivity growth before 2008) has seen a dramatic fall in output, with little change in total employment. Many highly-paid bankers have lost their jobs, but the banks have had to hire just as many people in the compliance, risk and legal areas to deal with the aftermath of the banking crisis.
It is also undeniably true that the UK labour market has become very flexible with many businesses making much more use of variable pay structures through bonus systems, meaning that labour costs can be initially lowered by reducing the variable element of compensation, rather than immediately reducing the size of the workforce. There are also many examples of businesses where workers have agreed to lower wages and benefits, to maintain their jobs. Average wage growth in the UK has been below inflation for the last four years, so real wages have been falling steadily.
The statistics of the numbers of people employed also show a steep increase in the numbers of self- employed. However, many of these are actually working very few hours, and so the official data show them as employed but in fact with very little economic output.
Elsewhere, surveys indicate that there is a degree of labour hoarding going on within companies, who fear that by reducing their workforce, they may lose key skills that they might not be able to replace in an upturn. This however becomes progressively more difficult to maintain as time passes. It also acts as a potential overhang to the unemployment rate and restrains business and consumer confidence.
The paradox of a job-creating recession reinforces the views and sentiments that were set out in our 2013 investment outlook: 2013 – Limited Growth and New Monetary Policy Regimes. The UK economy is likely to continue to struggle in 2013. However, the combination of (i) a governing coalition in the second half of its life and needing some positive economic news, and (ii) the summer arrival of a newly-imported Governor of the Bank of England, who is generally regarded as being much softer on inflation than Lord King, could well lead to a new direction in economic policy, which would bring long-term inflationary consequences. We continue to recommend positions in index-linked gilts and gold for most investors, to act as a portfolio insurance policy against these inflationary possibilities.