EEF blog

In our Economic Prospects report we said that we expect consumer spending to be weak this year, as a slow recovery in the labour market and below-inflation wage growth continue to subdue demand. One of the indicators we are watching is the consumer confidence index, which was released today.

GfK NOP's Consumer Confidence Index fell to -30 in July

Movements in GfK NOP’s consumer confidence index are not always mirrored by similar movements in consumption, but the index does give an indication of consumers’ mood and inclination to spend at any one time. Today’s release shows that confidence fell across all sub-indices and, therefore, would suggest that consumption is likely to remain subdued. Concerns about personal financial situation in the next twelve months worsened, but the biggest drop, of 9 points, was in people’s expectations of the performance of the economy over the next 12 months.

As we laid out in our Economic Prospects report last week, in the face of government cuts, and muted consumer spending, growth in the latter half of 2011 will be reliant on exports and investment.

Today the Bank of England released its agents’ report, which makes a couple of pertinent points about these two drivers of growth.

Firstly, they note that investment intentions are strengthening, even if total investment has slowed a little. Significantly, investment is stronger in those firms where growth is driven by exports. This would suggest that investment growth in this recovery will be closely tied to export growth, especially given expectations that domestic consumption will remain weak.

There is good news, then, as the agents report:

“Manufacturing exports continued to grow at a brisk pace”

Though they did note that:

“for some the rate was slowing slightly”

And this chimes with what we’ve heard from companies lately. On the whole exports are quite strong, even to Europe. In line with what the Bank of England have said, much of this demand is driven by the stronger German and French economies.

It seems, therefore, that the impact of European Sovereign debt crises on UK firms has so far been relatively contained. There hasn’t yet been that “Lehman’s moment” when the debt-crisis trips and becomes a fully-blown Europe-wide (or even world-wide) economic crisis.

But if the crisis does spill over, given our reliance on exports for growth, the risks are real. The fortunes of our major export partners, in particular, Germany and France, are very much tied to those of their fellow Eurozone members. 

In the third of our posts this week on Economic Prospects for the year ahead, we turn to the international outlook - key to globally focused and exposed sectors, such as manufacturing.  However, we do so against a backdrop of a further round of eurozone crisis meetings as the debate on what to do about Greece (...Ireland and Portugal) looks set to spread to other periphery economies.  We'll return to some of the many and potentially sigificant downside risks to our forecast tomorrow.

Our starting point is a strong recovery in global economic activity through 2010 and a decent 2011q1, where the IMF estimated growth of over 4% in the first three months of this year.  While emerging economies continued to lead the pack in the first quarter, some advanced economies – notably France and Germany – posted solid quarter-on-quarter growth of 1% and 1.5% respectively. 

However, in the first half of this year there have been a number of significant events that economic forecasts couldn’t have accounted for – the Japanese earthquake and consequences for global supply chains and production and the spreading social and political tension across the Middle East region.

Even looking through these events the economic data that has begun to emerge for the second quarter of this year raises question marks about whether the global recovery is having a temporary wobble or whether the outlook is for a more prolonged period of weaker growth. 

Any forecast for the eurozone this year will inevitably mask huge variations in performance. 

In Germany, output is now back to pre-recession levels.  With business and consumer confidence indicators continuing to improve in Germany and France, growth for the year as a whole is expected to come at 3.5% and 2.2% respectively.  Elsewhere in the eurozone - and looking particularly at the fringes - the challenge of fiscal retrenchment will continue and medium-term prospects for growth look fairly dismal.   

In the US, the picture is looking less rosy than only a few quarters ago when growth was fairly broad based across the economy.  Recently the US has seen some softening of consumer spending and production, house prices are still falling and consumer confidence levels remain well below those recorded pre-recession.  This has led to a downward revision in our central forecast since the start of the year to 2.5% growth in 2011 and 2.9% in 2012.  And today the Fed chairman indicated that further monetary policy support was still on the table.

Looking to emerging Asian economies the problems have not been growth but inflation.  Commodity prices, including food, have been on a strong upward trend through this year.  With concerns of overheating, China, India and Brazil have embarked on significant monetary tightening since 2010 which will inevitably come at the expense of growth this year. China and India should still post respectable growth of 9% and 7.6% respectively.  China has set a less ambitious target for growth for the duration of its next five year plan, with a greater emphasis on boosting consumer spending as much of the much needed rebalancing process.    

Over the next six months it will become clearer whether the BRIC economies will be able to manipulate a soft landing, Europe can take decisive action on Greek debt woes, Middle East tensions will be contained and the US can maintain momentum behind the recovery and create jobs without another round of stimulus measures.  The UK’s drive for economic rebalancing means the performance of the wider global economy counts.  The multiple risks on the horizon could yet combine to create some very strong headwinds for the global recovery.  

In Economic Prospects – our mid-year economic review – we lay out where we expect growth in the UK economy will come from in the latter half of 2011.

What do today’s labour market statistics add to this picture?

On first look, the headline figures do not suggest there has been much change in the labour market, in line with our expectations that the labour market will remain fairly static over the course of the year. The good news is that employment edged up a little, but the ILO unemployment rate has stayed put at 7.7%.

Yesterday I mentioned would be watching a couple of indicators which may give some more information about the underlying health of the labour market.

The first of these was claimant count outflows. The total number of people claiming Job Seekers’ Allowance rose in June, but so too did the number of outflows.
This is positive because it points to labour market ‘churn’ rather than stagnation. As it is released at the same time as data showing the numbers unemployed fell against the ILO measure (albeit on a slightly different timeframe), it could point to a healthier labour market than the headline claimant count figure suggests.

The second indicator is the number of people in part-time work who would prefer to be in full-time work. Unfortunately this number rose by 6.8% to 1,254,000 in the three months to May. This is the highest number since the series began in 1992. This has implications for domestic demand as more people working fewer hours than they would like could lead to further consumer squeeze.

In Economic Prospects – our mid-year economic review – we lay out where we expect growth in the UK economy will come from in the latter half of 2011.

What do today’s labour market statistics add to this picture?

On first look, the headline figures do not suggest there has been much change in the labour market, in line with our expectations that the labour market will remain fairly static over the course of the year. The good news is that employment edged up a little, but despite a slight fall in numbers, the ILO unemployment rate has stayed put at 7.7%.

Yesterday I mentioned would be watching a couple of indicators which may give some more information about the underlying health of the labour market.

The first of these was claimant count outflows. The total number of people claiming Job Seekers’ Allowance rose in June, but so too did the number of outflows.
The latter point is positive because it points to labour market ‘churn’ rather than stagnation. As it is released at the same time as data showing the numbers unemployed  fell against the ILO measure (albeit on a slightly different timeframe), it could point to a slightly healthier labour market than the headline claimant count figure suggests.

The second indicator is the number of people in part-time work who would prefer to be in full-time work. Unfortunately this number rose by 6.8% to 1,254,000 in the three months to May. This is the highest number since the series began in 1992. This has implications for domestic demand as more people working fewer hours than they would like could lead to further consumer squeeze.

In Economic Prospects – our mid-year economic review, which we will publish later this week – we lay out where we expect growth in the UK economy will come from in the latter half of 2011.

Yesterday I said that net trade should add to growth across 2011, though it was unlikely to make the same contribution that we saw in the first quarter.

Data released today by ONS sheds some light on that.

In May exports in goods and services rose to hit record levels (in terms of value).

The problem is that imports for goods and services also hit record levels. This means that the trade deficit widened in May – not great news if net exports are going to add to growth in this quarter

However, there are a couple things to note:

1) Trade figures are notoriously volatile, and subject to revision, so it can be helpful to examine them over a slightly longer period: in the three months to May the trade deficit narrowed.

2) Fast import growth suggests that there is at least strong economic activity. Imports of consumer goods rose, which might imply that consumer demand is holding up.

Clearly, though, consistent improvements in the trade balance will be needed to ensure the UK economy rebalances. Partly, this depends on the health of the international economy, so, over the rest of this week we will be blogging about the international economy, and the risks around global growth.

The next blog is our series focuses on what the remainder of this year holds for the UK economy.   

The consensus view has now converged towards fairly mediocre GDP growth in q2.  Given the disruptions following the disaster and Japan and the many bank holidays over this period, whatever the first release tell us later this month, it won’t be much about the underlying health of the recovery. 

So looking to q3 and beyond our central forecast for the UK economy is a continuation of the modest recovery we have seen in the first half of 2011. Weak growth in consumer spending and contractions in government spending will be somewhat offset by stronger contributions from investment and net trade as the economy continues to rebalance.   

Consumer spending is being dragged down by falling real wages on the back of high inflation and subdued wage growth. After growth in the range of 0.2% to 0.3% quarter-on-quarter for the rest of the year, private consumption is expected to pick up gradually in 2012, although annual rates of growth even in 2012 will be meagre compared with the decade leading up to the recession.   

Spending by government will also be a drag on growth.  The start of the fiscal year in April means reductions in government consumption begin to bite with quarter on quarter contractions forecast for the remainder of 2011 and right through 2012. 

Growth in exports in goods and services is forecast to exceed 7% annually in both 2011 and 2012, well ahead of imports growth at 2.3% and 3.8% respectively, ensuring that net trade adds to overall growth in both years.  However, we will not see a net trade contribution of the magnitude posted in the first three months of this year. 

Since the recovery began in 2009q4, it has been characterised by continuing uncertainty and fluctuating outturns in the official data. Reflecting this, our central projection faces both downside and upside risks.  

On the downside, the risks are largely international ones.  Further rises in commodity prices offer the potential for feeding through to higher inflation, particularly concerning if this moves inflation expectations up. The eurozone crisis has intensified, with the once unthinkable possibility of a Greek default looking likely and uncertain consequences for the UK.  Further afield, recent cooling in commodity prices may indicate a weakening in demand from China, a key source of growth in UK exports. 

On the positive side a stronger performance than currently expected in the labour market could help boost modest expectations for consumer spending in 2011.  And an easing in credit conditions, particularly for smaller firms, may see investment intentions materialise into greater actual investment. 

Tomorrow we’ll be homing in on three areas to key an eye in on in the coming quarter – the indicators that will tell us whether the recovery is still on track or knocked off course.