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Saturday, 21 July 2012

Economic Optimism at the Horizon

The UK's unemployment figures have decreased, but the economy is not recovering. How is it possible?

The country's unemployment rate has gone down for the fourth consecutive month.

The UK economy, at the same time, measured in terms of output and GDP (Gross Domestic Product), has been flat for two years now, and the International Monetary Fund forecasts no or little growth for this and next years.

Economists scratch their heads. These figures "defy the laws of economic gravity", claimed Gerwyn Davies of the Chartered Institute of Personnel and Development.

Several theories have been proposed to explain this dichotomy and apparent paradox.

But I personally find the Royal Bank of Scotland's economist Ross Walker's explanation an interesting one, although I can't say if it's correct or not. He
says the employment numbers – which are perhaps easier to measure than economic output – at the very least ‘present a challenge to notions of technical recession’.

Markit's Chris Williamson, though warning things are about to change, agrees. 'I think employment has been on the increase simply because the economy has been growing faster, and not in recession, than the oRBSfficial GDP data suggest.'
I heard Walker on the BBC Radio 5 Live say something that seemed to point to the greater reliability of employment figures than economic output, for the reason he mention here: that they are easier to measure.

So, according to this logic, if these two indicators point in conflicting directions it's the unemployment numbers that should be believed.

And here he makes other observations:
For a long time we've argued the most important figure is the employment number, which doesn't seem to get much attention for reasons I've never understood and so it's pretty solid. It begs the question if the economy is in recession, why we are creating 180,000 new jobs.

We've had sizeable public sector layoffs and they've been a bit more frontloaded than had been expected when the fiscal consolidation began but we still seem to have reasonably robust private sector employment.

Some of it is part time, but overall it's a little better than expected. The wage figures are obviously still very soft but I think the combination of stronger employment growth and larger than expected falls in inflation are doing more to restore real incomes. They're offsetting the effects of the fairly anaemic nominal income growth.
Official figures published by the Office for National Statistics showed that in June the UK's inflation rate fell to 2.4% as measured by the Consumer Prices Index, while the Retail Prices Index, which includes housing costs, fell to 2.8%.

This is the third month in a row that the annual rate of CPI has fallen, and it is now at its lowest since November 2009, which means that UK prices are increasing at their slowest rate since the end of 2009.

The BBC says:
The rate of inflation, which indicates how fast prices are rising compared with a year earlier, is slowing due to lower food, fuel and clothing prices...

The thing having the biggest effect on household budgets is the fall in fuel prices, said Neil Saunders, a retail analyst at Conlumino.

Petrol prices fell by 4.3 pence per litre on the month, to £1.33 a litre on average. Diesel was down 4.7p to an average of £1.39.

"This has benefited most households although, in our view, it will take time for this to drive tangible changes in behaviour in terms of shopping and spending habits," he said.

Mr Saunders pointed out that wages were still rising more slowly than prices, meaning a continued squeeze on finances.

"However, if inflation continues to drop back at this pace, wage settlements will outstrip inflationary growth by the fourth quarter meaning we will see a return to growth in real disposable income," he said.

Overall, alcohol and transport costs were down by 0.5%.

Food prices were 0.1% lower.
And, if we really want to be optimistic, there is another good sign at the horizon: petrol prices are predicted to drop:
... we expect a global growth in oil production "from 93 million barrels per day today to 110 million barrels per day by 2020", an increase of almost 20 percent, the largest increase in a single decade since the 1980s...

The other obvious happy consequence that is plausible and legitimate to predict is the reduction, and even collapse, in oil prices, similarly to what happened in the 1980s. Then that oil price decrease was a powerful factor driving economic recovery and growth. It may indeed happen again.

For millions of people in Britain fuel prices are the biggest household bill concern, it will be a great relief if car petrol and other fuel prices go down.

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