The mixed picture for the UK economy continued in Q3. GDP growth is now at its lowest level since the 2008/9 recession but unemployment and inflation continues to be good. The low level of growth though continues to be a drag on government finances.
I track 10 economic variables for the UK which come in 5 pairs. Each quarter I will also publish a guest statistic as well:-
- GDP Growth & Wage Inflation
- Unemployment Rate & Economically Inactive Rate
- Inflation (CPI) & Inflation (RPI)
- Government Borrowing & National Debt Ratio
- Productivity – Output per Hour & per Job
- Guest Statistic – 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 final pair measures the efficiency in how we earn our keep and was denoted the Statistic of the Decade by the Royal Statistical Society in 2019.
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 persistent low growth since the recession 10 years ago which has delayed the return to real wage growth which is now taking place but is still catching up what was lost in the years after the recession. Poor productivity growth is one of the main reasons for this. This has inhibited the government’s ability to clear the deficit due to lower tax takes. Inflation and unemployment is low but the debt ratio is too high and leaves the UK poorly placed should another recession strike soon.
Note the table uses a traffic light colour code green to brown to place the latest quarter in context to historical values. The historical context for each statistic can be seen in the charts in each section below.
Annualised GDP continues to be consistent with the last 9 years since the Great Recession i.e. sluggish . Since the recession ended in Q1 2010, median GDP growth has been +1.8% vs +2.7% before then. In effect, our economy has struggled to return to pre-recession levels of growth unlike the recoveries following previous recessions. Something needs to happen to give the economy a kick up the arse!
Some commentators have noted that GDP growth since the EU referendum vote in Q2 2016 has been slower than the period before (median annualised GDP growth from 2010 Q1 to 2016 Q2 is +2.1% and +1.6% since 2016 Q3). First of all, correlation is not cause and effect and attributing what is a small shift, when compared to the history, entirely to one event is bad practice. Second, it overlooks the fact that growth before the referendum was simply not good enough. I repeat, something needs to change and Brexit could be the kick that the economy needs to wake up or it could send the economy falling flat on its face or it may have no effect at all and something else will have to do the job.
We should also not forget that it has been 42 quarters since the end of the last recession if we use the more normal headline quarterly figures which is the ONS series IHYQ. Since 1955, there have been 7 recessions with that statistic (1956, 1961, 1973, 1975, 1980, 1990 & 2008) and the 6 gaps in between have been respectively 20, 47, 5, 18, 38 and 67 quarters. Therefore we are now in the 3rd longest gap between recessions which has to mean that the underlying probability of another recession soon is only going to grow from now on. Whilst Q4 was flat compared to the growth seen in Q3, there is little sign of a general pick up in growth..
We have now had 6 quarters of genuine wage growth which is at its highest level since June 2008. After taking inflation into account, it would appear that the last four quarters were not as good as 2015 & 2016 but those years are distorted by inflation being near zero as shown in the Consumer Inflation chart in section 3a so I do not regard those 2 years as genuine wage growth.
NB: No data is available in 2000. Real Wage Growth was probably around 3% then rather than the apparent 0% shown.
Will this be sustained? Unemployment is very low (see section 2A) so employers do have an incentive to pay more but in the end, it still requires GDP growth to pick up..
Unemployment is at the lowest levels seen since 1974. The trend has been steadily downwards since the 08/09 recession.
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. But if any future wage growth is not accompanied by stronger economic growth then that is going to have an impact.
Economic Inactivity is still at record lows. So not only is unemployment low but most people are seeking work in the first place which really points to an economy more or less maxed out in terms of its labour pool.
After spiking in 2017, inflation now appears to be stable within the Bank of England’s target range of +1% to +3%.
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.
Government borrowing as a % of GDP in Q2 is not closing as first as first thought. I previously remarked the trend pointed to a balanced budget by early 2020 but increasingly it looks like it will be next year. The government intends to expand public spending which is another reason why the budget may not be balanced. Of course if a recession hits before then, then clearly even that’s not going to happen.
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 for a stimulus 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.
The Royal Statistical Society identified the lack of the productivity growth in the 2010s as its Statistic of the Decade and so I have decided to start tracking this. 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 is simply too high in the UK for the current level of GDP growth. That is why I think the next recession could see a repeat of the 1980s recession which saw very high unemployment.
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, both statistics are showing the same picture of little productivity growth.
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 the median but it has been lower especially in the 10 years before the 08/09 recession. 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.