From the TUC

NIESR tells Osborne to think again

01 Feb 2011, by in Economics

The Chancellor likes quoting authority figures in support of his policies – Mervyn King, the OECD, the IMF. From today, he’s going to find it more difficult to quote one of them: the highly respected National Institute for Economic and Social Research. Their monthly Prospects for the UK Economy is a bit of a stunner, with downgraded growth forecasts for this year and next, very depressing expectations on real disposable income and “a case for delaying at least some of the austerity programme.”

NIESR is highly regarded because their forecasts are usually pretty accurate. And what is striking about today’s forecasts is the contrast with the Office for Budget Responsibility’s Economic and Fiscal Outlook, published in November:

NIESR and OBR forecasts

OBR NIESR

GDP growth 2011

2.1% 1.5%
GDP growth 2012

2.6%

1.8%

Consumer Price Inflation 2011

2.8%

3.8%

Consumer Price Inflation 2012

1.9%

1.8%

Real disposable income growth 2011

+ 0.8%

– 0.8%

Increase in unemployment 2011

20,000

260,000

Apparently, David Cameron was embarrassed last week when Jacob Rees-Mogg MP said that Mrs Thatcher was right, and There Is No Alternative to the government’s economic policy. But this was only because he thinks it is bad politics to remind voters of Mrs Thatcher; there is no sign the government thinks there is any need for a Plan B.

That has been one reason for quoting all those authorities – if they don’t have an alternative, why should we work on one? (Icebergs at this latitude? Impossible!) And NIESR has, on the whole, been quite supportive. They haven’t been as optimistic as the Office for Budget Responsibility, but they have repeatedly said that they do not expect a return to recession. It still isn’t possible for the Opposition to claim NIESR as full converts – Prospects for the UK Economy also calls for “accelerated” increases in the retirement age to meet the costs of an ageing population – but the downwards revision of NIESR’s own forecasts are severe. They now expect “lacklustre” growth this year and the economy won’t reach the size it was at immediately before the recession till 2013.

NIESR forecast that unemployment will grow by 260,000, reaching a peak rate of 8.8 per cent in the third quarter of this year. Last year, when John Philpott of CIPD made a similar forecast (if anything, his was slightly lower) he was monstered by Conservative MPs and media.

To cap it all, the National Institute calculates that real disposable incomes fell by 1 per cent last year and they expect a further 0.8 per cent fall this year, taking us 4 per cent below the last peak (in the final quarter of 2008). Unsurprisingly, consumer spending, which fell at the end of last year, is expected to fall 0.1 per cent this year.

NIESR says that “what growth there is will come from net trade” – they expect it to contribute 1.4 of the 1.8 per cent growth and they note that manufacturing “accounts for more than half of all exports” and “has been performing strongly.” There is good news today on this front from the latest Purchasing Managers’ Index figures for manufacturing, which are at a “record high.” The latest manufacturing PMI is 62 – any figure over 50 indicates growth and the index has been above this for a year and a half. Manufacturing production rose again in January (for the 20th month running) and output was also at a record high. Markit, which produces the PMI, noted that demand for manufactures came from domestic as well as export markets – very good news now, but this may be a bit of a problem if domestic demand falls.

The government will no doubt rely on the good news on manufacturing to argue that There Is No Need for an Alternative. But to what extent can manufacturing support the rest of the economy? The chart below shows the proportion of job vacancies that have come from manufacturing over the past ten years.

Manufacturing vacancies as a share of all vacancies

Ten years ago manufacturing only accounted for one vacancy in nine and the  proportion has been falling steadily since then. There was a little bit of a recovery last year, but the industry simply isn’t big enough to provide all the jobs we need. The manufacturing recovery is great – long overdue – but we need a much broader base for a healthy future.