From the TUC

Where will growth come from?

09 Nov 2009, by in Economics

Ian Brinkley will be speaking at Beyond Crisis, a TUC / Guardian one-day conference on progressive responses to the financial crisis on 16 Nov in Central London. Register for free tickets at www.tuc.org.uk/beyondcrisis

The most recent growth figures (GDP) are a reminder that economic forecasting is a mug’s game. They show the UK economy was still contracting in the third quarter of 2009. Taking other indicators into account, we are still likely to be at a turning point and the numbers may well be revised upwards later this year.

But it is a salutary reminder of how easily hopes of an early recovery can be dashed. We have even less idea of the shape of the recovery – whether it will be a V, W or some other letter. The longer-term impact of the credit crunch on investment and consumer spending and the effectiveness of measures to free up the supply of credit – including “quantitative easing” – are still unknown. The only thing we can be fairly sure of is that the recovery in output to pre-recession levels will take no more than 4 years (a similar period to the Great Depression in the 1930s).

At the start of the recession much of the media was obsessed with the idea that this was going to be a middle class recession, centred on the finance sector in London. People leaving Canary Wharf with cardboard boxes made for dramatic pictures and TV crews prowled the streets of Surbiton, looking for evidence of recession. This was nonsense then and now. The recession is following a familiar path – it is the young, manual workers, administrative and sales persons, and the less skilled who are worst hit. And it is the cities and towns outside London in North Britain and the Midlands and Wales with low skilled populations, which have seen the biggest rises in unemployment.

The labour market has also performed better. Employers have been “labour hoarding”  – so that even though the fall in GDP looks similar to the recession of the 1980s and much deeper than the recession of the 1990s, far fewer people have been laid off. Equally encouraging, the surge in long-term worklessness that we saw in the last recession has not so far come through. Both suggest we could see a faster labour recovery than in previous downturns.

This is still a big “if” – in labour market terms we are still in the early stages of the recession and long-term problems emerge towards the end, not the start of recessions. Historical experience tells us that labour markets take between 8 and 10 years to recover to their pre-recession levels of employment. Even an optimistic view tells us it will be many years before employment fully recovers.

If forecasting is a mug’s game, how much can we say about where the new jobs will come from? As part of The Work Foundation’s Knowledge Economy Programme we have looked at what happened to employment in the decade after the start of the 1980s and 1990s recession to help us frame what a sustainable knowledge based economy might look like in 2020.

So where will growth come from in this recovery?

One source is overseas. The exchange rate fall is even greater than in the early 1990s and in the 1990s recovery UK manufacturing experienced a revival. Traded goods and services – including most of the manufacturing sector – will be more competitive. But much depends where the demand overseas recoveries fastest. The UK is less well positioned to benefit from faster growth in India and China than in the US and the EU.

Some manufacturing jobs may come back, but not on the production side. Manufacturing is transforming itself to a sector which combines high value services with some UK based production. It is in services associated with the manufacturing process that we will see growth. The net contribution of manufacturing to jobs growth is likely to be very small, but the sector’s contribution to the growth of value added, exports (including services) and innovation could be substantial.

The second is in the growth of high value service industries in the private sector such as high tech, business and communications services. These industries have provided much of the growth in jobs and value added over the past 30 years and helped lead the economic recoveries of the 80s and the 90s. These industries do not just provide jobs for graduates – the majority of jobs are held by non-graduates across a range of skill levels. But these jobs require different skill-sets to those being lost – these industries typically employ few manual and unskilled workers and routine admin jobs are being phased out by new technologies.

The third area is the most problematic. In both the 80s and 90s recoveries there was significant growth in both healthcare and education services, even those these periods were also years of public sector austerity. Over the next decade demand for these services is likely to grow while the ability of the public sector to supply them is going to be highly constrained. How much of the growth in education and health was in the private sector and/or funded by non-taxpayer sources in previous recoveries is surprisingly hard to quantify, but knowing the answer may give us some clue on the potential for growth in these areas in this recovery.

The fourth area is also difficult to predict. Traditional services such as hospitality and retailing can contribute large numbers of jobs. But retailing may no longer be the big job generator as new technologies and shifts in shopping towards on-line markets will reduce the labour intensity of the sector.

And what is completely unknown is how strongly consumer demand will return. Households always save more in downturns, so the current increase in the “savings ratio” (the share of household income saved) tells us nothing about the longer term. But if there is a structural shift towards permanently higher levels of saving above that in previous recoveries, then the longer run prospects for growth in traditional service sectors is correspondingly reduced.

Finally, the financial services sector can’t be written off entirely. In the UK at least, it has not been a big net generator of new jobs over the decade before the recession and is clearly contracting at present. But just suppose the big banks were broken up, new players outside the banking sector enter, and we give full encouragement to the rise of new financial institutions at the local and regional level. Perhaps, just perhaps, the sector could become a source of sustainable growth and jobs in the future.

GUEST POST: Ian is Director of the Work Foundation‘s Knowledge Economy programme. He previously worked at the Trades Union Congress, as Head of the Economic and Social Affairs Department, and before that as TUC Chief Economist, where he was a member of the Low Pay Commission. Ian has worked in a wide range of economic and industrial policy and research areas, including economic policy, public spending and public service reform, labour markets, energy and the environment and manufacturing policy, and produced numerous submissions to government and analytical papers. Ian writes periodically for the Work Foundation’s blog.

One Response to Where will growth come from?

  1. Nigel Stanley

    Nigel Stanley
    Nov 9th 2009, 6:15 pm

    It is clearly good news that employers are labour-hoarding. Employers and unions in important parts of the economy have preferred short-time working and other ‘work-sharing’ initiatives to redundancies.

    This means unemployment is lower than it might have been. But I’m not sure it follows that unemployment will fall faster as recovery begins. Labour hoarding employers will simply restore full-time working rather than take on new staff.

    A disprorportionate number of those on the dole will be those with fewer skills, young people with no work experience or older workers with skills and experience gained in declining industries that won’t see much recovery. It may be quite hard for them to find new jobs.

    I worry that this may add up to something of a jobless recovery.