The UK Conundrum: Contracting GDP, Positive Jobs Numbers
Last week I wrote about the proposed European Union's Banking Union, with the sub-title "What's the point?". So I was pretty chuffed when I saw just a few days later a full page in this week's Economist on exactly the same thing (he didn't put it quite the same, naturally) from Avinash Persaud, a respected academic and now Emeritus Professor at Gresham College in London.
His analysis was much the same: the union wouldn't have prevented the crash and actually risks perpetuating boom-and-bust cycles. A bit like "macroprudential regulation", this idea is beginning to look more and more half-baked and one that will have some serious negative unintended consequences.
This week we look at something simpler. We've all noticed how U.K. employment creation has had a " " sign in front of it for the last two years at the same time as the economic output statistics as measured by growth in GDP (gross domestic product) show the U.K. not fully emerged from recession, with a 0.0 percent rate in 2012 and facing a "triple dip" if this quarter's GDP is also negative. How is this possible? Can one have a contracting economy at the same time as companies are taking on more staff?
(Read More: UK GDP Drop Raises Risk of Triple-Dip Recession)
As I have put the question, no. Not on a sustained basis certainly and not unless there is something a bit odd happening.
The GDP stats could be inaccurate, for starters. The first estimate is based on just 40 percent of firm data, with the balance made up of assumptions and model extrapolation. This is why it is always revised, initially twice more as data comes in and then again much later. But there is no doubt that the U.K. economy remains smaller in size than what it was in 2008 – it has definitely contracted, and quite severely. And yet unemployment has reduced the last 12 months.
(Read More: Why the UK Jobs Number May Be Misleading)
Some suggest that companies are hoarding staff, not letting people go because of the cost and bureaucracy associated with redundancy. I don't buy this. If orders are contracting as the economy contracts, it is pretty difficult to retain staff. A more plausible explanation is that productivity has reduced to the extent that the same, or more , staff are needed to produce the same output. Also, the level of company bankruptcies has been much lower in this recession than in the past. This is explained by banks not calling in debts as they also seek to repair balance sheets and minimize write-downs. As a result there is a growing number of "zombie companies" that continue to maintain employee levels and are being kept alive on credit.
Both developments should be extremely worrying for policymakers, particularly the former. Competitiveness is key if the economy is to pull away from its current stagnant state. Lower productivity could keep the U.K. in a near-permanent state of stagnation, turning the last five years of virtually continuous recession into a lost decade, and longer. This issue is worthy of serious investigation and policy action.
Unemployment, particularly youth unemployment, remains a problem in the U.K. as indeed it is for the entire EU. Just because it is lower than it might otherwise be is no cause for celebration. But decreasing productivity is a bigger bogey, and risks creating a vicious downward spiral that could make things much, much worse. I hope HM Treasury is looking closely at this…
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012).