In many respects the UK economy advances on Easter in good shape. The upwards revision of year on year economic growth to 3% certainly provides some cheer to accompany the Easter Eggs. However under the surface there are issues which seem likely to haunt us the first of which accompanied the economic growth upgrade. It came with a more recent sugar-coating.
Exports of goods rose by 5.9% in Quarter 4 2014, due to an increase in manufactured goods, particularly material manufactures. Exports of services rose by 2.9% in Quarter 4 2014.
But even such welcome news did not allow us to escape this development.
In 2014, the UK’s current account deficit was £97.9 billion, up from a deficit of £76.7 billion in 2013. The deficit in 2014 equated to 5.5% of GDP at current market prices. This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948.
Let us hope that the latest figures are the beginnings of an improvement as we start from an appalling position and certainly need it! However it is not the only issue that provides a mine or two in the water for the UK economy and today my intention is to look at productivity which yesterday provided its own version.
UK Labour Productivity
The opening salvo was a disappointment as it had looked as if productivity was improving and so after upgrades to the UK’s quarterly and annual growth estimates one might reasonably have expected it to have improved too. On that line of logic the numbers were the equivalent of a cold shower.
UK labour productivity as measured by output per hour fell by 0.2% in the fourth quarter of 2014 compared with the previous quarter.
If we consider this the disturbing conclusion is that even in what is now a mature phase of the current expansion productivity is reported as falling. As we look deeper we see that in fact it has improved little in the boom and barely since the credit crunch first hit us.
In 2014 as a whole, labour productivity was little changed
from 2013, and slightly lower than in 2007, prior to the economic downturn.
I must admit as well as being troubled by this I have my doubts about it. How exactly has the economy grown if we are now seeing no productivity gains and more recently a decline? Historically we are breaking new ground at least for most of our lifetimes.
These estimates show that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period.
Let us clarify what is meant
The Labour productivity numbers are defined on an output per hour basis so to get the latest reading we saw output rise by 0.6% but hours worked rose by 0.8%. On a worker or jobs basis productivity improved by 0.3%.
Why is it such a big deal?
The UK Economic Review for January sums it up in one sentence.
UK labour productivity rose by 0.6% in Q3 2014, the strongest rise seen since Q2 2011 (when productivity rose by 1.3%). This coincides with an increase in real wage growth.
Over the medium and long-term productivity and real wages are highly positively correlated. On that basis the apparent good news of the autumn of 2014 has now been replaced by bad news. It is a particular disappointment as the previous improvement was recorded as being broad-based.
The Bank of England could be wrong-footed yet again
This was a subject about which Bank of England Governor Mark Carney was particularly bullish at February’s Inflation Report.
The combination of rising wages and falling energy and food prices will help household finances and boost the growth of real take home pay this year to its fastest rate in a decade.
we expect the strongest real income growth in over
a decade actually
I think the thing that we have seen in recent months is the
start of the turn of wages, and consistent with the change in
slack in the labour market.
Does he do a karaoke version of this from Yazz?
Now we may not known
Where our next meal is coming from
The only way is up, baby
For you and me, baby
The only way is up
For you and me
The link between this and productivity growth was queried and the Governor passed this particular hand grenade to Ben Broadbent to answer.
We have it (productivity) improving, but we have that rate of growth only just getting back, by the end of the forecast, to the average of the pre-crisis growth rates. So yes, it’s faster than we’ve seen in the three or four years since the crisis and therefore earnings growth is also faster.
So the “improving” apparently includes a 0.2% drop in the last quarter of 2014 and flatlining for the year as a whole! Still as I have pointed out many times on this website the Bank of England is wrong much more often than it is right.
The problem that is measuring services
There is a clear issue with the largest sector of our economy which is the service sector. We simply do not measure it accurately enough and therefore this puts doubt on all the derivatives of the recorded performance one of which is labour productivity. The CityUK Independent Economists Group put it thus.
The UK is particularly competitive in services trade; it has the second-largest services trade surplus and the second-highest level of services exports in the G8, after the US. UK services exports accounting for 7% of world service exports.
So we are very good at something but simultaneously are struggling in terms of productivity. The official data for the last quarter of 2014 backed this up as our services exports rose by 2.9% further boosting an already highly positive area and yet productivity growth is supposedly poor. Surely we should be losing and not gaining market share after such a poor effort?!
The second Bank of England Quarterly Bulletin of 2014 told us this.
Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below
the level implied by its pre-crisis trend.
In spite of that weasel phrase “pre-crisis trend” -when will official bodies realise how otiose that phrase now is?- it posed a question that many have struggled to answer. Also it would appear that even backroom economists at the Bank of England are not good at predicting the future!
Indeed, these are good reasons to be optimistic about the outlook for UK productivity growth.
Mind you they may have felt pressure to repeat the views of Governor Carney who is establishing something of a track record of being wrong. From Christmas 2013.
The fundamentals are promising. Given the flexibility of its labour market, the continued openness of the economy and the credibility of macro policy, it is hard to think of any reason why there should have been a persistent deterioration in the rate of potential growth in Britain.
Actually whilst the recorded data says no to Governor Carney I do have some sympathy with his first two points as long as we can skip the hype of “the credibility of macro policy” after all back then wasn’t he promising to raise Base Rates if the unemployment rate fell below 7%? That unemployment rate is now 5.7% and the Base Rate rise never took place although like the boy who cried wolf Mark Carney continues to promise it.
The performance of the UK services-sector simply does not fit with the reported troubles in productivity. It is time for us to have a long hard look at the way we record the data as we may find that some is missing. As our export/import data in this area is of a shocking quality we may find that our current account balance improves too. Surely for example, all those people in Tech City in the Islington area many of whom have come from abroad to take part in the innovation must be doing something? I suspect that it is our ability to measure their output which is the problem. Our services sector still has inflation and no doubt wage rises but we record it dreadfully. I hope our current fears will not be another version of the 1967 devaluation of the UK Pound £ which on much later revisions was discovered to be unnecessary!