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UK Economy Tracker #8 – 2022 Q1

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Whilst COVID19 was ravaging the world in 2020 & 2021, I felt there was little point in updating my quarterly UK Economy Tracker.  Now the pandemic over in the UK, it’s time to see how much damage the pandemic did to the economy.  Going forward, the future is very uncertain but I hope by placing the latest data in the context of the past, I can discern what pointers I should keep an eye on.

10 Economic Variables for the UK

These are the variables I track for the UK which come in 5 pairs:-

  1. GDP Growth & Wage Inflation
  2. Unemployment Rate & Economically Inactive Rate
  3. Inflation (CPI) & Inflation (RPI)
  4. Government Borrowing & National Debt Ratio
  5. Productivity – Output per Hour & per Job

I see these as the topline summaries of a national economy.  The first pair measures whether the income of a nation is growing and whether that growth is getting into the pockets of the people.  The second pair measures whether we are in work or seeking work.  The third pair measures whether the prices of goods and services we pay for are going up or down.  The fourth pair measures government borrowing and debts and thus pressure on public services that we depend on.  The final pair measures the efficiency in how we earn our keep.

For more information on why I chose to track these statistics and the format of charts I use below, please read my post “UK Economy Tracker Explained“.  You can click on each heading below to be taken to the ONS website where I sourced the data (the 4 letter code denotes which ONS times series was used).  By the way, if you think I am not using the most appropriate time series, please do contact me and let me know!

Summary of UK Economy

The top line picture of the UK economy is one of recovery and aftershocks following the earthquake that was COVID19.  Unemployment is low but inflation is high and the public sector finances are poor.  Growth is high at the moment with a consequent improvement in productivity but the future is very uncertain for both.

This table uses a traffic light colour code from green to brown to place the latest quarter in context when compared to historical values.  The historical context for each statistic can be seen in the charts in each section below.

1a – GDP Growth (IHYR)

Annualised GDP growth is very high at the moment due to the rebound from the COVID19 induced recession.   The size of the UK economy was £2.37 trillion pounds (BKTL statistic) in the 2021/22 financial year and this is higher than before the pandemic but this is without taking inflation into account.  When we account for inflation (denoted as CVM for Constant Value Model by  the ONS) then on an index basis, the UK economy was at 100.9 in Q1 2022 (YBEZ statistic) compared to 100.2 in 2019 Q4.  So the UK has now recovered to pre-pandemic levels, the question is what will happen next.

Prior to the pandemic, the key issue for the UK economy was low growth in the 2010s compared to what was normal growth before that.  Annualised growth averaged 2.0% in 2010s compared to 2.7% seen between the 1991/2 & 2008/9 recessions.  When you compound that differential of 0.7% over 10 years, that adds up to an economy that was around 7% smaller than it would have been if growth in the last decade had matched what occurred before then.

The question now is whether the future will be another recession given world events, low growth like the 2010s or more normal growth like the late 20th century.  I have nothing to guide me I’m afraid which makes the future the very definition of uncertainty.

1b – Real Wage Growth (KAC3 / D7G7 )

Despite COVID19, average real wage growth has been 2% over the last 2 years compared to 1.1% for the 2 years before that.  The difference is that wage growth is much more volatile today which makes it tricky to project into the future.

NB: No data is available in 2000.  Real Wage Growth was probably around 3% then rather than the apparent 0% shown.

Note I do not regard 2015 & 2016 as genuine wage growth since inflation was temporarily near zero in those years as shown in the Consumer Inflation chart in section 3a.

What happens now is likely to depend on how GDP, inflation and unemployment work out and interact with each other.  I note the 1975 & 2008/9 recessions were followed by falling real wages whereas the 1981 & 1991 recessions did not impact real wages.  So it’s a toss a coin which will be the outcome of the 2021 COVID19 recession.

2a – Unemployment Rate (LF2Q)

COVID19 had limited effect on unemployment due to the government’s furlough scheme.  Thus unemployment is still at levels last seen in the early 70s.

Economists often define 3% unemployment as an economy in full employment.  If the UK continues to approach that point, then either we are going to see record levels of vacancies due to there being a lack of available staff or we will see higher wage growth or both.  But if any future wage growth is not accompanied by stronger economic growth then that is going to have an impact.

2b – Economically Inactive Rate (LF2S)

Economic Inactivity is still at record lows despite all the talk of a “Great Resignation“.  Unlike unemployment which rose and fell during the pandemic, economic inactivity rose by 1% and has stayed there.  So the UK’s labour pool is still effectively maxed out when you consider the overall employment rate and its slight abeyance during the pandemic does not sustain a “great resignation” narrative in my opinion.

3a – Consumer Price Inflation (D7G7)

CPI is way above the Bank of England’s target range of +1% to +3% and is at levels last seen in 1991.

When one looks at the longer term picture of RPI (see 3b below), it would appear that inflationary spikes tend to persist for at least 2 years.  So whilst it is not yet clear if inflation has peaked, I think one should assume that it will not be until 2024 until this inflationary period dissipates.

3b – Retail Price Inflation (CZBH)

I continue to track RPI since it allows you to place current inflation into a longer historical context than CPI.  It is however not a national statistic and it may be abolished at some point.  However, it is worth reading this post by Simon Briscoe for a contrary opinion as to why RPI should be retained.

4a – Annualised Government Repayment/Borrowing as % of GDP (J5II as % of BKTL)

The deficit ballooned to record levels during the pandemic as tax takes fell and people’s wages were supported through the furlough scheme.  So far, the recovery has been quite rapid but the budget was not balanced prior to the COVID19 recession and one has to assume that we are still in structural deficit.

A point I’ve made before is the problems with the government finances in the 2010s stem from the fact Gordon Brown chose to run a structural deficit averaging 3.2% of GDP rather than a balanced budget between 2003 & 2007 whilst the economy in growth.  That meant government finances entered the 2008/9 recession on the back foot and the resulting budget deficit was huge.  The slower growth seen in the 2010s then meant it took longer than the 90s to narrow this but the budget deficit had been narrowed to -3.2% by the end of 2016.  That implies the deficit would have been cleared by then had the economy not entered the 2007/8 recession with a deficit.  It also implies we would have entered COVID19 with a balanced budget given what happened between 2017 & 2019.

4b – National Debt as % of GDP (HF6X)

The Debt Ratio is slowly falling.  With higher GDP growth, the debt ratio would start to fall quite quickly and would give the government more breathing space should another recession come soon.  If this doesn’t happen, we could be back in the same situation as 1980/81 when the government decided it could not afford to expand borrowing especially if interest rates start to rise which is almost inevitable given current levels of inflation.

5a – Productivity – Annualised Growth in Output per Hour (LZVD)

The Royal Statistical Society identified the lack of productivity growth in the 2010s as its Statistic of the Decade.  The point that concerned them was the very low growth in productivity since the 08/09 recession.  In fact looking at this chart, it appear that productivity growth was reasonable in 2011 & 2012 but not since then.  I connect this with the relative lack of unemployment for a recession of this magnitude and I can’t help but think that employment overall was simply too high in the UK during the 2010s given the slower GDP growth in that decade.

5b – Productivity – Annualised Growth in Output per Job (A4YN)

The chart above was for productivity expressed as output per hour work.  In a world where people work different hours that would seem to be the best statistic.  However, the alternative statistic of output per job is still worth tracking as it goes back to the 1960s and gives a longer timeframe to compare against.  As it stands, the current volatility in GDP growth means we will see large discrepancies between the two statistics for now.

Guest Statistic – UK Citizen Misery Index

Every quarter, I will try to add a different chart looking at some feature of the economy.  For this post, I am going to use the Citizen Misery Index which I am sure you have not heard of before!

I first heard about the Misery Index back in 2013 from the Economist magazine.  They noted that the 70s was a decade of inflation whilst the 80s was a decade of unemployment.  Both were decades of misery for some or many people and so they came up with the idea of a misery index which was simply the sum of the inflation rate and the unemployment rate.  I have taken this one step further by subtracting the real wage growth.  So if unemployment is high, inflation is high and our wages are falling then clearly we are in the shit!  Conversely low unemployment, low inflation and high wage growth should be paradise.

The chart above has a gap in 2001 due to missing data for wage growth but today our misery is below still the median but it is the highest seen since 2014.  The chart also shows that the 74/75 and 80/81 recessions were ultimately worse for us than the 90/91 and the 08/09 recessions.  Obviously not everyone’s memory goes back that far so it is possible that this chart is misleading.  But it does have the virtue of tying together the economic statistics that are directly related to our personal lives.

 

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