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The British Economy: Before the Storm

PhD Stefka Slavova

The author is a Board Director at the EBRD and holds a PhD in Economics from the London School of Economics[1]

Last week newly released data from the Office for National Statistics showed some alarming figures on business investment in the UK. In the fourth quarter of 2011 investment by UK firms in capital expenditure– such as buildings and machinery – was down by £1.7 billion to £28.7 billion, or by 5.6% when compared to the third quarter of 2011. It is worth noting that these are seasonally-adjusted numbers and that the drop does not seem too large on first glance. However, if we were to look at the trend in business investment figures since 2008, we see a downward movement. Business investment in Q4 of 2008 stood at £33.2 billion but has not quite been able to recover and has been hovering around 29 billion since mid-2009.

Why is this trend important and what does it mean for the coveted economic recovery that the David Cameron’s government has been trying hard to achieve ever since it took office in May 2010? First, let us look at the latest unemployment numbers. Everywhere people and politicians care about jobs. Governments try hard to implement labour market policies and stimulate the real economy so that the private sector generates enough jobs. Job creation is what makes electorates happy and wins elections.

The latest numbers from the Office for National Statistics, released in mid-February, reveal that the overall UK unemployment rate went up 0.1 on the previous quarter and stood at 8.4% in October-December 2011, the highest it has been since 1995. The total number of unemployed across the UK was 2.67 million, which was 48,000 more than the third quarter of 2011. These are figures that must cause concern in Mr. Cameron’s government. In comparison, among the G-8 group of economies, Japan recorded unemployment of 4.6% over the same period, Germany – 5.5% and Canada – 7.6%. The United States had a comparable 8.3% unemployment but on a downward trend. Only France and Italy were worse than the UK – with rates of unemployment of 9.9% and 8.9% respectively.

Within the Eurozone, of course, the picture was much worse, with an overall unemployment rate of 10.4%, but reaching 22.9% in Spain – the EU’s highest, followed by Greece with 19.2% and Portugal with 13.6%.

 A regional breakdown shows that within the UK, Wales and Scotland fared worse than England (with rates of 9.0 and 8.6% respectively) while Northern Ireland did better – with unemployment lowest within the UK at 7.2%. The rate for England was the same as the UK average, 8.4%. If we look at age groups, we find that among young people aged 18 to 24 the unemployment rate over the fourth quarter of 2011 across the UK was 20.1%, up from less than 18% two years earlier. It would be even higher if we include in this group those aged 16 and 17 without a job (and not in full-time education). These are numbers that are high and rising and should be taken very seriously. The breakdown of unemployment by age group in Table 1 reveals that unemployment is the highest among 16- and 17-year-olds, who are out of school or in school but looking to find a job, followed by 18-to-24 year-olds. Young people (defined as 16 to 24 years of age) earn on average much lower than those aged 25 and above and are typically in low-skilled jobs.

Table 1: Unemployment in the UK, by age group


Unemployment rate, Oct – Dec 2011

16 and over
















Source: Office for National Statistics, UK

Youth unemployment (i.e. the rate of unemployment of people aged 16 to 24, who are out of school or in school but also looking for a job) is something that has become a hot topic around the world. In large measure, the pro-democracy movements of the Arab World in early 2011 were triggered by the inability of previous regimes to create jobs for many educated young people. One of the tasks of policymakers in Egypt, Morocco, Tunisia and elsewhere in the Middle East and North Africa is to create the conditions for private companies to absorb an ever increasing pool of young graduates who enter the job market each year and are expecting good-quality, well-paid jobs. The same challenge faces politicians elsewhere in Europe, as well as increasingly so in the UK. Many attribute the youth riots in London and other UK cities last August to a growing number of young people out of work and facing gloomy prospects of finding employment.

In absolute numbers, there were 1,038,000 unemployed young people (aged 16 to 24) in the UK in the fourth quarter of 2011. Of these, 307,000 were in full-time education but were formally searching for a job and had not found one. The remaining 731,000 were not in school or university and were looking for a job but had not found one. These are the ones that the government should be actively trying to help with training schemes and other means.

How about the elusive economic recovery? Given the historically high unemployment figures above, what is happening to GDP and its domestic expenditure components: consumption, investment and government spending?

Recent estimates, published on 24 February 2012, show that GDP in volume terms decreased by 0.2% in the fourth quarter of 2011. Manufacturing output fell by 0.8% and construction industry output – by 0.5%. In the service industries output remained unchanged. These numbers indicate that the economy is still sluggish and, judging from the GDP numbers, the recovery is not here yet.

If there is some breath of recovery, it is in final consumption expenditure by households, i.e. what households spend for their private consumption. Thus, household final consumption expenditure rose by 0.5% in the fourth quarter of 2011, compared with a decrease of 0.1% in the previous quarter. After falling in four consecutive quarters, for the whole year 2011 households spent 0.8% less than what they spent in 2010.

Another measure of consumption are retail sales. The latest data, for January 2012, show that retail sales are picking up. The value of UK retail sales in January 2012 was 4.4% higher compared to January 2011. Retail sales in January were also 0.9% higher compared to December 2011. This is all based on seasonally-adjusted values of sales, which smooth out peaks and troughs due to Christmas and January slumps. In absolute terms, £24.6 billion was spent in the retail sector in January 2012, compared to £42.1 billion in December 2011 (non-seasonally adjusted). It is likely that the UK retail sector will continue doing well especially with a boost to tourist arrivals in the summer related to the Royal Diamond Jubilee and the London Olympics.

Finally, government final consumption expenditure – what the government spends on goods and services – increased marginally by 1.0% in the fourth quarter of 2011 and only by 0.3% for the whole year. This modest growth is expected in a regime of government budget cuts and attempts to rationalise government spending.

As mentioned at the beginning, investment by business was down in the last quarter of 2011 and this is also reflected in the gross fixed capital formation, which fell by 2.8% in the fourth quarter of 2011 and by 1.7% over the whole 2011.

These results are sadly not beckoning a recovery. Last week the Economist newspaper analysed the fall in inflation to 3.6% in January, compared to 4.2% in December and over 5% earlier in 2011 and the lessening likelihood that the Bank of England will continue further quantitative easing (QE), especially if inflation continues to fall. At the same time, analysts demonstrate that QE has not really made finance available to British businesses[2]. Small companies are starved of loans, yet they have been the main generator of jobs. Some research shows that small businesses have created at least 41% of all new jobs in Britain since 2001.

As the Economist quotes, 2011 was a year of perfect storm of low wages growth, high inflation and tax increases. The question is, has the storm really begun?

[1] The views expressed in this paper are the author’s only and do not represent any official EBRD opinion or position.

[2] “Credit Easing – What Could the Chancellor Do?” by Jonathan Ashworth and Charles Goodhart, Morgan Stanley Research Europe, October 21, 2011.

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  • Tagi:

    Wielka Brytania, sytuacja makroekonomiczna, UK

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