What’s going on in the economy? Five key charts for September
It’s been a challenging summer for the UK economy with growth slowing, demand declining, business investment stalling and the UK’s balance of trade deteriorating. In happier news employment levels are at a record high, although real wages have continued to decline.
So what’s going on in the economy?
The chart below represents the quarterly (blue bars) and four-quarterly (orange line) growth rate for the UK economy. It shows growth slowing significantly over the first half of 2017. The economy grew by 0.2 and 0.3 per cent in the first and second quarters of the year, compared with 0.5 and 0.7 per cent over the second half of 2016. Four-quarter growth came in at 1.7 per cent, down on the previous quarter’s 2%, and far below the pre-2008 long-term average of 2.8%.
GDP growth, per cent
This reduction in GDP growth is being driven by declining demand across the board, with the notable – and perhaps surprising – exception of government spending. The chart below shows the contribution to the quarterly change in expenditure from different sectors. The key drivers of this year’s slowdown have been a reduction in household spending and a deterioration in the UK’s balance of trade (of which more below). This is particularly alarming given our recent over-reliance on consumer spending, and the high hopes for exports in a post-Brexit world.
GDP (expenditure), percentage point contributions to quarterly growth 2016-17 Source: ONS
Government investment (the pink bar on the chart above) has been stronger, growing by 10.4 per cent on the year – the highest rate of growth since the spike in 2014. This is striking, though should be approached with caution – the figures are very provisional. Even at face value this is still very small-scale stimulus, set against the harm done by austerity policies since 2010, and the scale of uncertainties since the referendum. But it might be step in the right direction.
Over the year since the referendum, the trade story is complex to unravel. But the overall narrative is not a happy one. The chart below shows the annual percentage change in trade flows. For goods, exports (‘X’ on the chart) have seen a moderate strengthening (up 5.0 per cent in the year to Q2 2017), that has been matched by a corresponding increase in imports (‘M’ on the chart, up 4.7 per cent). With imports larger in cash terms, this means a deterioration in the balance of trade on goods.
Trade flows, % four-quarter growth 2014-17
The picture for services is more categorically negative, with exports declining by 1.3 per cent on the year to Q2 2017 and imports up by 0.5 per cent. As a result, over the year, the overall trade deficit has deteriorated in cash terms from £7.8bn in Q2 2016 to £8.9bn in Q2 2017.
There is a brighter picture in the labour market data with the employment rate reaching 75.1%. This is the highest level the figure has hit since comparable records began in 1971.
Quarterly change in composition of jobs 2008-17
Encouragingly, the majority of jobs created this year have been full time positions, shown by the size of the blue bars in the chart above. The majority of employment growth in previous quarters has come from an expansion in the number of part-time or self employed positions. There has even been a (very slight) drop in the number of workers on zero hour contracts this quarter, although 900,000 people remain reliant on these controversial arrangements.
Unfortunately this has not had the effect you might expect on pay packets. The chart below shows the increase in real wages we saw in 2015 and 2016, which was largely due to low inflation rather than strong nominal pay growth, was short-lived. Nominal wage growth is still around half the average before the 2008 financial crisis and the return of inflation this year has resulted in falling real incomes yet again.
Real earnings (percentage year on year) 3-month average 2008-17
And the squeeze is not expected to ease. The Bank of England expects inflation to increase to around 3 per cent in the autumn, and for wage growth to average 2 per cent in 2017.
Which means the pressure on household incomes shows no sign of abating. And for those working in the public sector, the continuation of a 1 per cent cap on pay increases has made life even more difficult.
So there’s no shortage of challenges for the Chancellor to think about as he turns his mind to his first autumn Budget.