The headline of the third quarter of 2018 is that the UK continues to be sluggish but going in the right direction. There is no question, the economy needs a pickup soon to place itself on a stronger footing ahead of a rising probability of another recession in the near future.
I track 8 economic variables for the UK which come in 4 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
- Guest Stat – 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 price we pay is going up or down. The last pair measures government borrowing and debts and thus pressure on public services that we depend on.
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 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. This has inhibited wage growth and the government’s ability to clear the deficit. 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 8 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 +1.7% 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 37 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 currently bang in the middle of this range of numbers which has to mean that the underlying probability of another recession soon is only going to grow from now on.
The UK has had its first quarter of real wage growth for nearly 2 years. Whilst welcome, this does not make up for the previous 10 years though it is worth noting that this is genuine growth rather than the more artificial growth seen in the 2015 & 1206.
NB: No data is available in 2000. Real Wage Growth was probably around 3% then rather than the apparent 0% shown.
It is worth comparing this chart with the Consumer Inflation chart in section 3a below. That points to the apparent wage growth in 2015 & 2016 being entirely due to inflation being near zero rather than any sustained wage growth. The disappearance of that growth over the last 2 years is due to inflation rising. So one can make the case that real wage growth is effectively flat to negative ever since the 08/09 recession and that is most probably a result of GDP growth just not being good enough.
A small rise in the latest quarter should not obscure the fact that unemployment is at its lowest level since 1975 and 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 continues to be 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 is now falling again and remains 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.
Government borrowing continues to fall as a % of GDP and at current trends, the government should be able to balance the budget by the end of next year.
The Debt Ratio is finally starting to fall as the budget deficit falls below GDP growth. With higher GDP growth though, 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.
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. Perhaps the one statistic that could be added to this index is something about the tax burden but perhaps that might be the guest statistic next quarter!