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UK Economy Tracker #9 – 2022 Q2

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UK Inflation has risen sharply since the start of 2022 and dominates the media and politics today.  It is now having knock on effects, most notably on wage rises which are lagging behind inflation.  The aftermath of the COVID19 induced recession continues to be considerable economic uncertainty.

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
  6. Citizen Misery Index

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 fifth pair measures the efficiency in how we earn our keep and I end with an index (first suggested by the Economist) that combines 3 of these statistics.

For more information on why I chose to track these statistics, the format of charts I use below and the dark green to dark brown colour coding system, 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 used for each statistic to generate the colour codes are the summary statistics that accompany the charts in each section.

1a – GDP Growth (IHYR)

Annualised GDP growth is back in line with historical norms following the rebound from the COVID19 induced recession.   Note the headline GDP growth normally reported in the media is the IHYQ statistic which measures quarter to quarter growth instead and was -0.1% in the latest quarter.  I prefer to use year on year comparisons as much possible hence why I use IHYR.

As of Q2 2022, the size of the UK economy is £2.42 trillion pounds per year (BKTL statistic) which 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 ONS) then on an index basis, the UK economy was at 100.9 in Q2 2022 (YBEZ statistic) compared to 100.2 in 2019 Q4.  So the UK has recovered to pre-pandemic levels but now 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 (A3WW)

Average Weekly Earnings were £611 (KAB9 statistic) which is up 5.1% (KAC3 statistic) on the same quarter of last year but inflation was 7.9% (L55O statistic) hence why real wage growth is negative.

Note, real wage growth is not KAC3-L55O, it is (100+KAC3)/(100+L55O)-1.  This works out as -2.7% here and ONS then perform a seasonal adjustment to arrive at the -2.5% shown in the chart.  What I used to show in previous quarters was this calculation without the seasonal adjustment but using the D7G7 statistic (CPI) for inflation instead of L55O (CPIH).

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

Real wage growth has been in the news a bit recently.  This BBC article quoted from the ONS quarterly bulletin which noted the fall in real wages was a new record.  However, the chart above shows the recent fall in recent wages is nowhere near a record so what is going on here?

The main reason is that ONS track average weekly earnings in two ways.  The £611 pw quoted earlier includes bonuses but if bonuses are excluded the average weekly wage would be £568 pw (KAI7 statistic).  In the 2008/09 recession, bonuses fell by an average of 30% which is what creates the large negative spike in the chart above in Q1 2009.  If I exclude bonuses and only look at regular pay, then real wage growth in Q2 2022 would be -3% instead (A2FA statistic) which would be larger than the previous record of -2.4% in 2011.  Personally, I believe it makes more sense to include bonuses but I accept there will be occasions when it makes sense to exclude bonuses.

A more pertinent criticism of the above BBC article is that it ignores what happened before 2000.  The A3WW series used here only started in 2001 and the relevant inflation statistics only began in 1989.  In the chart above, I chose to recreate real wage growth prior to 2000 by using the former MD9S series for average weekly earnings and the RPI series CZBH for inflation (see section 3b below).  Neither are directly comparable with their replacements after 2000 but combined I believe the derived real wage growth is reasonable.  In particular, they show that real wages fell by much larger amounts in the mid 70s compared to the latest quarter.

The BBC article also contains an error in the chart they used.  They showed CPI for inflation (see section 3a below) but ONS make it clear in their bulletin they CPIH instead.  This is confusing to say the least since CPI is currently 9.2% compared to 7.9% for CPIH.  The difference comes from how housing costs are accounted for with CPI giving little weight to these whilst CPIH giving greater weight.  The bottom line is there are potentially 4 ways to measure real wage growth so when you see this issue mentioned in the media, make sure you are clear on how it is being measured!  Until this quarter I was using wages including bonuses & CPI but I have now replaced CPI with CPIH after realising ONS were using this.

Looking ahead, what happens next with real wage growth 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 aftermath of the 2020/21 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.

However, it is worth noting an interesting dynamic that is getting more attention.  The 50-64 year old age group accounts for almost 2/3 of the rise in economic inactivity.  Early retirement is the main reason given and it is suspected that this is Long Covid related.  I can recommend this excellent podcast produced by ONS which includes a discussion of this topic.  It will be interesting to see if this dynamic is sustained.

3a – Consumer Price Inflation (D7G7)

CPI is way above the Bank of England’s target range of +1% to +3% and is highest ever recorded since this index began in 1989.

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.

6. UK Citizen Misery Index

The Citizen Misery Index is at its highest level since 1984.

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.  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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