What Recovery?

(Guardian) – Alistair Darling’s insistence that the economy would still be stuck in recession without a leg-up from the Treasury was boosted today by news that public spending and the car scrappage scheme had been essential to generating a recovery in the final quarter of 2009.

While GDP growth at the end of last year was a better than expected 0.4%, according to the Office for National Statistics – up from its previous estimate of 0.3% – analysts said the detailed new figures revealed that taxpayers’ support had been critical in generating the first quarter of expansion since spring 2008.

"The two sources of growth were government consumption, which will come under pressure after the election, and the household sector," said Danny Gabay, of the City consultancy Fathom. And while household spending expanded by a healthy looking 0.4% in the fourth quarter, much of that appeared to be due to the car scrappage scheme, which is about to end. When spending on transport was excluded, Gabay pointed out, household spending did not grow at all.

Graham Turner, of GFC Economics, said: "The breakdown of the GDP numbers highlights the precarious nature of the UK recovery, with many areas of consumer spending still under pressure, and the economy critically dependent on government support."

At last week’s budget, and in his televised debate with his Conservative and Liberal Democrat shadows George Osborne and Vince Cable on Monday night, the chancellor tried to make the government’s role in securing the fledgling recovery a sharp dividing line with the other parties, and today’s data lent support to that view.

However, although the fourth quarter showed stronger growth than first thought, the ONS painted a picture of an economy that remained dangerously fragile, and at risk of a "double dip" – a return to contraction – in the first quarter of 2010. That news would come in late April, deep into an election campaign, shattering Darling’s claim that the worst is over.

The shadow business secretary, Ken Clarke, seized on the news that despite hopes of an export-led bounce in the economy, the trade deficit actually worsened in the final quarter.

"The economic recovery will have to come from exports. But Britain’s trade gap has widened to £21bn, despite a weak sterling," he said. "We need a more balanced economy based on investment and exports to ensure sustainable growth."

Labour’s election strategists will also have been alarmed that workers’ pay declined last year, by 0.5% — the first fall on record, underlining the heavy toll the crash has taken on the public’s finances, and raising doubts about the prospects of the "feel good factor" returning before voters go to the polls.

Many consumers responded by paying off some of their debts, and setting aside more money for a rainy day. The household savings ratio was 7% over the year as a whole – more than four times the 1.5% seen in 2008, when shoppers were still happily increasing their debts to pay for a home makeover or a holiday.

There was also evidence of the considerable impact of the Bank of England’s unprecedented rate cuts in helping consumers to offset the fall in their incomes. In total, interest payments by households fell by £26bn over the year; though that was partly offset by an £18bn decline in the interest received by savers on their deposits.

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GDP Growth Revised Upwards

(Telegraph) – GORDON BROWN’S ELECTION PROSPECTS have been boosted after official figures showed that Britain’s economy expanded by more than expected in the final quarter of 2009.

The Office for National Statistics said that the UK’s gross domestic product – the broadest measure of overall economic performance – increased by 0.3pc in the final three months of 2009, rather than the 0.1pc expansion it had previously estimated. The revision was higher than most economists had expected, and supports suspicions in the City that the economy is in fact starting to bounce back from its deepest recession in living memory.

The expansion is nevertheless slightly lower than economists had anticipated before last month’s release of the first estimate for growth, which sparked fears that Britain could be subject to a double-dip back into recession this year. It will also spark suspicions in Whitehall that the Prime Minister may call a snap election on the back of the news – though most think the polls will be in May.

The ONS said the revision was largely due to a stronger performance from the services sector, which accounts for 75pc of UK economic output. It said the UK recorded the strongest growth in services output and household expenditure since the first quarter of 2008 – in other words since the recession began. It was also supported by a smaller-than-previously-thought decline in inventories, as companies slowed the rate at which they have been feeding off stockpiles.

The ONS added that the revision was largely due to a strong December performance – the figures for which were not available at the time of the first estimate of growth last month.

“Overall, the upward revision is welcome,” said Jonathan Loynes of Capital Economics. “But does not alter the picture of a very fragile recovery.”

Fears Over Economic Recovery As Business Spending Slashed

(Guardian) – INVESTMENT BY UK BUSINESSES on new buildings and equipment plunged by a record amount over the past year, casting fresh doubts over the strength of Britain’s recovery from recession.

The Office for National Statistics reported this morning that business investment fell by 5.8% between October and December 2009 compared with the previous three months, worse than City analysts had predicted. The decline means that business investment was 24.1% lower at the end of 2009 than at the start – the worst annual decline since records began in 1967.

The fall was particularly acute in the manufacturing sector, where business investment plunged by 35.3% during 2009.

Howard Archer, economist at IHS Global Insight, said the data was “truly dire”, undermining hopes that UK GDP for the fourth quarter of 2009 could be upgraded tomorrow. Archer warned there was even a danger that the first estimate of 0.1% growth could even be downgraded, which would mean that the UK was still officially in recession.

“Furthermore, the sharp overall and ongoing decline in business investment could threatens to have significant long-term damaging repercussions for the economy’s potential output,” he added.

Business investment makes up more than 10% of overall UK GDP.

David Kern, chief economist at the British Chambers of Commerce (BCC), agreed that the preliminary business investment figures showed “alarming declines”. He said companies had been forced to conserve cash and not spend on new equipment, a decision which would make it harder for British industry to grow in the future.

“In the face of weak demand and acute financial pressures, businesses have had little choice but to slash investment and stocks in order to survive. But, such a situation cannot persist over the long-term without damaging consequences,” Kern warned.

“In order to promote investment, companies need continued support now – and the confidence that a credible plan is in place to mend our public finances as the recovery takes hold,” he added.

… (26/02/2010) – Spectre Of Double-Dip Recession Looms

Britain Posts First January Deficit Since Records Began

(Telegraph) – BRITAIN REPORTED its first budget deficit for January since records began as government spending rose and tax receipts fell sharply.

The Office for National Statistics said today that spending by the Government had exceeded its income by £4.3bn.

It is first time the Government has had to borrow in a January since records began in 1993. Economists had expected a surplus of around £1bn.

The figures reflected the impact of the economic downturn on the UK’s finances as tax revenues slumped while spending grew because of measures such as the jobseeker’s allowance.

It will renew pressure on the Government to set out plans to ease the burden on public finances, with many predicting a future of tax rises and spending cuts.

Andrew Goodwin, senior economic advisor to Ernst & Young Item Club, said: “These are pretty ghastly figures and come as somewhat of a surprise given the smaller overshoots of the past couple of months.

“January usually yields a healthy surplus due to receipts from corporation tax and even in the current climate it is surprising to see the government rack up a deficit.”

The pound fell after the release.

The ONS said spending was £4.4bn higher than in January 2009, while receipts were down £4.2bn.

Government receipts stood at £50.5bn as income tax fell 19pc to £19.4bn compared with January last year.

VAT income grew 16pc year-on-year after the rate returned to 17.5pc at the end of the Government’s temporary move to help the economy.

Spending grew to £49.5bn in the month, with layout on social benefits up 3pc at £14bn in January.

The UK’s net debt hit £848.5bn, which is equivalent to 59.9pc of the country’s annual output – the highest proportion for a January since the 1974 financial year.

David Kern, chief economist at the British Chambers of Commerce, said the worse-than-expected January figures further emphasised the dangers facing Britain’s international credit rating.

“The deficit this year reinforces the need for credible and specific deficit-cutting measures in next month’s Budget,” he said.

“As well as explicitly spelling out its medium-term spending plans, it is now necessary for the Government to announce a freeze in the public sector wage bill, and an immediate review into the cost of public sector pensions. This would persuade the markets, and the rating agencies, that the Government is serious about cutting the unsustainable deficit, and enabling the private sector to drive Britain’s recovery.”

Unemployment Claimant Count Rises Again

(Guardian) – GORDON BROWN’S EFFORTS to win the next general election received a blow today after official figures showed that the number of Britons claiming unemployment benefit rose unexpectedly in January to the highest level since Labour came to power.

The Office for National Statistics (ONS) said that the number of people claiming jobseeker’s allowance (JSA) rose by 23,500 in January, compared with a fall of 9,600 in December. This is the largest monthly rise in the claimant count since last July, and takes the total number of people receiving unemployment benefit to 1.64 million, the highest figure since April 1997.

Economists had expected the claimant count to fall by 10,000 in January as the UK economy struggled out of recession, after falling in November and December.

The ILO – the wider measure of unemployment – fell by 3,000 in the three months to December to 2.457 million. The jobless rate now stands at 7.8%.

Howard Archer, economist at IHS Global Insight, said the rise in the claimant count was a “reality check” that dashed any hopes that unemployment had peaked.

“The economy is just not strong enough at this stage to prevent further job losses and the fall in unemployment late in 2009 had masked the fact that full-time employment was still falling appreciably,” said Archer.

Ross Walker, an economist at RBS Financial Markets, agreed.

“The fact that the claimant count was falling in recent months was the huge surprise. The fact that we have got a rise is not particularly surprising. It seems to fit more with the underlying reality,” Walker said.

Yvette Cooper, the work and pensions secretary, said that the government’s actions have helped to keep the unemployment total almost half a million lower than the National Audit Office predicted last year.

“We always knew it would be difficult in the new year, and said that we expected unemployment to keep rising,” Cooper told the BBC.

Separately, the ONS said yesterday that underemployment has risen sharply during the recession, according to separate ONS figures.

About 2.8 million people were officially underemployed – defined as working fewer hours than they want to – between July and September 2009, which equates to nearly 10% of those in employment. The number went up by 700,000 from a year earlier. This is in addition to the 2.6 million out of a job.

Even Retailers Spin The News

(Guardian) – BRITAIN’S RETAILERS saw the weakest Christmas for more than two years, according to official figures, with shoppers staying away amid concern about their jobs and financial security.

Retailers also hiked their prices in December at the fastest rate since the early spring. Increased prices came after six months of declines in which retailers tried desperately to get consumers spending again in the depths of the recession.

Sales growth of just 0.3% in December, according to the Office for National Statistics, was far less than the 1.1% rise which analysts had been expecting and the weakest for the month of December since 2007.

Year on year, it was the weakest December for more than a decade, with sales volumes up just 2.1%. That is the lowest annual growth for a December since 1998.

But the rise in prices forced through by retailers meant that in terms of value, retail sales rose 3.6% in December year-on-year – the second highest for the month since 2001.

The figures come as a shock as most of the recent clutch of trading updates from retailers have been good. Instead they have been warning that trading will be tough in 2010 as consumers suffer frozen pay and increased taxes – including the ending of the VAT reduction.

Just yesterday, supermarket chain Morrisons announced it trumped its bigger rivals over Christmas, recording better sales growth than Tesco, Sainsbury’s and Asda.

The ONS said sales volumes at department stores fell 1% on the month, but non-store sales, which include mail order, rose by 2.8%. The department stores figure is a surprise as earlier this month House of Fraser revealed record seasonal trading while John Lewis had a record Christmas.

Debenhams, however, reported flat like-for-like sales for the 18 weeks to 2 January.

Youth Unemployment Hits Record High

(Independent) – YOUTH UNEMPLOYMENT reached a record high today as the jobless total nudged 2.5 million, the worst total since the mid-1990s.

The number of 16 to 24-year-olds out of work was 952,000 in the three months to October, a quarterly rise of 6,000 and the highest figure since records began in 1992.

Total unemployment increased by 21,000 to 2.49 million, the highest level since early 1995, although the quarterly rise was the smallest for 18 months.

There was some good pre-Christmas news for the Government in today’s figures, which showed the first fall in the number of people claiming jobseeker’s allowance since February last year.

The total fell by 6,300 to 1.6 million, more than half a million higher than a year ago.

Other data from the Office for National Statistics showed that the number of people out of work for more than a year increased by 49,000 in the latest quarter to 620,000, the worst total since 1997.

Unemployment among 18 to 24-year-olds was 757,000, up by 26,000 from the three months to July, the highest since 1993.

The UK’s unemployment rate has now reached a 13-year high of 7.9 per cent.

The number of people in work increased by 53,000 to almost 29 million, although the figure is 432,000 lower than a year ago.

There were 30 million jobs in the economy in September, down by 127,000 over the quarter and 649,000 fewer than a year ago.

The number of people classed as economically inactive, including those on long-term sickness or who have given up looking for a job, was 7.9 million, down by 1,000 over the three months but up by 96,000 compared to last year.

More than one in five working-age people are now economically inactive.

Average earnings increased by 1.5 per cent in the year to October, up by 0.1 per cent on the previous month.

The ONS also revealed today that public sector employment increased by 23,000 in the third quarter of the year to just over six million.

Employment in central government rose by 31,000, mainly because of growth in the NHS.

There were 432,000 job vacancies in the economy in the three months to November, up by 1,000 from the quarter to August but down by 124,000 from a year earlier.

[In Castle Point the claimant count was up 63.1 per cent in October on the same time last year, by 669 to 1,814. This figure was down 4.6 per cent over the previous month.]