GDP figures show both investment and profits in negative territory: the first time for six years
Behind today’s headline GDP figures are signs of corporate stress, with both investment and profits showing negative growth on the year – the last time this happened was in 2010Q1, at the end of the global recession.
Headline figures confirm the ongoing slowdown. GDP growth was unrevised at 0.4% in Q1, down on 0.6% in Q4. Annual growth was 2.0%, down from 2.1% in Q4 and continuing the steady weakening since the recent peak of 3% in 2014Q2.
Demand figures show the ongoing reliance on households, though there was also a modest rise in cash spending by government at the end of the financial year. Trade remains very weak, with exports declining by -0.3% on the quarter, though imports still expanding by 0.8% (and compounding the damage on net trade).
But the key feature on the demand side may be the ongoing decline in corporate investment: business investment has fallen for two consecutive quarters and is now showing a fall of -0.4 per cent on the year – back in territory last seen at the start of 2013 (chart).
Investment and profits: % growth, q on yr ago
On the income measure, corporate profits (also on chart) are also in a bad way – with a decline of -1.0 per cent on the year, and in the doldrums for over a year.
We have speculated before that this is not altogether surprising given the ongoing dis-inflationary environment (here). Unprecedented weakness in headline nominal GDP growth continues, with annual growth of 2.5% in the year to 2016Q1.
(While up slightly from 2.2% in Q4, this was driven almost entirely by a 6.4% surge in taxes on the year, seemingly following a sharp rise in stamp duty revenues – as buyers moved to beat the increase at the start of April.)
The ongoing weakness of consumer and producer prices suggests great pressure on firms. While compensation of employee figures have been slowing over the past year – from a recent peak of 4.3% in 2015Q2 to 3.3% in 2016Q1 – growth still remains fairly elevated relative to nominal GDP itself. (Likewise ‘other income’, which includes self-employment, is still rising at 3.5% a year.) As a matter of arithmetic, profits must be weaker to make things add up.
Without a revival in headline growth (coming from where?), firms are unlikely to tolerate this position indefinitely.
Slowing compensation of employees’ growth follows from slower employment growth and the pathetically brief revival in earnings going back into reverse. The risk is that there is further to go.
The figures are a reminder that weakness was entrenched long before the referendum took centre stage. They are a reminder of the underlying fragilities that are now backdrop to that referendum, and the risks with the economy that the government have taken in holding that referendum.
The TUC support a remain vote for many reasons (see Frances O’Grady’s blog here for a longer argument on this), but these include the very real threat of an exit vote tilting the economy back into recession.