The British economy [September 1989]

View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by University of Strathclyde Institutional Repository Strathprints Institutional Repository Ashcroft, Brian and Dourmashkin, Neil and Draper, Paul and Dunlop, Stewart and Lockyer, Cliff and Magee, Lesley and Malloy, Eleanor and McRory, Eric and Monaghan, Claire and McGregor, Peter and Perman, Roger (1989) The British economy [September 1989]. Quarterly Economic Commentary, 15 (1). pp. 5-11. ISSN 0306-7866 , This version is available at http://strathprints.strath.ac.uk/53168/ Strathprints is designed to allow users to access the research output of the University of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may not engage in further distribution of the material for any profitmaking activities or any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any correspondence concerning this service should be sent to Strathprints administrator: [email protected] The British Economy the average measure are affected by the quarterly paths measures of half-year expenditure GDP." The CSO suggest informative fourth of the - ie. for the income that comparison is to compare figures "erratic and a the more latest period of the quarter 1988 and the first quarter 1989 with those for the same period a year this period 2.5%. the average measure of GDP The output-based conventionally short-term quarter ago: the change, measure most reliable rose of by GDP, indicator did not change in - over the of first of 1989. Latest estimates of the average GDP indicator for the second quarter 1989 suggest that the output was largely unchanged compared with first three months of the year and 2% higher than a year earlier. Index oF UK 6DP at constant Factor cost Output M a s u r * - seasonally adjusted <1383-188) OVERVIEW After 120 - another slowdown rate quarter it seems clear that is continuing but probably at than many commentators a first the slower However, the form of the slowdown does give cause for 'soft concern landing' both for the prospects and for the balance 100 - expected. of of a payments. Inflation pressures appear, for the moment, to 1982 1984 1986 1988 1990 data provide strong be contained. MACROECONOMIC TRENDS The In the first quarter of 1989, the average of GDP at current market prices - measure nominal or most down more quarters of negative growth before returning to positive 1988 and nearly 10% higher than the same period coincident the earlier. After allowing for average prices first 1.7% - quarter at of the year to a level measure at cost, in the year to the market in which was therefore 1988. first cyclical growth rate. indicator for a The CSO's July, which long-term trend, continued the decline which began the the quarterly attempts to show current turning points around the during of GDP rose by 0.5% in the first 1.5% However, constant factor a changes, constant 0.2% above the first three months of measured and measure of GDP 'real' GDP - rose by price GDP but that the economy could experience one or 'money' GDP - was 2.2% up on the fourth quarter of year recent confirmation that not only is growth slowing When mid-1988. The current path of this consistent with a slowing index is down of economic growth which remains below trend. average quarter quarter. the CSO point out that the estimates Real of consumers' expenditure is estimated to increased 5 by 0.5% in the first quarter of have this year to a level 4.5% higher than a year earlier. This represents a marked slowdown on the 2% rate for the fourth quarter of 1988 reported in the Oune Commentary. However, spending on durable goods rose again in the first quarter, by 1.5%, thus returning to the increases which appeared to have ceased when no change was reported during the final three months of last year. Nevertheless, the growth of real spending on durables is considerably down if annual change figures are considered: in the year to the first quarter 1989 spending on durables rose by 5.5%, compared with 10% over the year to the fourth quarter 1988 and 14% to the third quarter of last year. Preliminary estimates of real consumers' expenditure for the second quarter of this year suggest that there was an increase of 0.7% in that quarter bringing the level of spending to 5% above that attained in the second quarter of 1988. Consumers' expenditure is now clearly growing at a much slower rate than two years ago; but in some ways it can be seen as holding up quite stubbornly, and more so than domestic output, in view of the significant base rate rises over the past year. factors such as the hot weather this summer and transport strikes may have resulted in a reduction in sales demand below what otherwise might have been expected. Nevertheless, there appears now to be very clear evidence that the government's high interest rate policy is taking the steam out of high street sales. The underlying determinants of the growth of consumer spending continue to point in different directions. The growth in average earnings was provisionally estimated to be 9.25% in the twelve months to July. Although this constituted a rise from the 9% recorded in the twelve months to June, the annual rate of change of earnings has averaged around 9.25% for most of this year. Real personal disposable income (RPDI) rose by 0.5% between the fourth quarter of 1988 and the first quarter of 1989 to a level 4.5% higher than the first quarter of 1988. The first quarter increase is significantly lower than the 4% growth recorded during the final quarter of last year. Both RPDI and real consumers' expenditure rose at the same rate between the fourth quarter of last and first quarter of this year. The saving ratio therefore remained unchanged at 5.1%, which is nevertheless higher than the 4.5% rate achieved for 1988 as a whole. There is therefore some suggestion here that the saving ratio is responding to the higher interest rate regime and we should expect some further rises during the year. Monthly consumer credit data - excluding bank credit other than bank credit cards ie. around 60% of credit agreements - rose by a record 505m in May, but the increase may have been due to unusual seasonal influences and households raising their borrowing levels in the face of higher mortgage rates. In any event, in June, outstanding consumer credit rose by only 182m, yet that still meant that the May/June monthly average was above the average for the first six months of the year. However, the rate of increase of consumer credit still appears to be declining if the quarterly changes - which include bank credit - over the past twelve months are compared. According to the TSB Scotland Treasury review, net advances of consumer credit in the first six months of the year were 8.6% down on the same period of 1988 and 6.8% down on the previous six months. Consuaars* expenditure a t 1985 prices <»iUions> 70000 -i 60000 - 50000 1982 1 1984 1 1986 I 1988 I 1990 The provisional, official (ex DTI now CS0) retail sales figures for July indicated a fall of 0.6% over June and an increase of only 0.25% in the three months to July. Over the year to May-July sales rose by only 2.25%, which is the lowest annual growth rate since October 1982. The CBI/FT distributive trades survey for July indicated a marked slowdown in retail spending. Sales were +2% of well below expectations with only respondents reporting sales higher than a year ago, the lowest on record; this should be compared with a balance of +27% in June. Unusual seasonal General government final expenditure rose by 0.5% during the first three months of the year taking it to a level 1.5% above that of a year 6 previously. This compares with a 0.6% increase in the final quarter of last year. Latest information suggests that government consumption remained at much the same level Starling •PFective •xchonga rata <1985-196) expenditures in the second quarter and unchanged on a year earlier. 110 -i Real gross first fixed investment rose by 1% in the final quarter of last year. Investment demand By 9.5% the end of the first quarter higher information some than year earlier. the 80 - Latest recently, perhaps due of higher interest rates. In 90 - stood suggests however that there has retrenchment effects a it the 1982 been to 1* V v \/^ in has therefore continued to grow strongly over year. \h 100 - the quarter compared with the 1.2% increase | | | 1984 1986 1988 ' 1 1990 the second quarter investment demand fell by 0.5% to a level which is 2% above a year previously. In The deficit on the current account of the balance the second quarter of 1989, the output of production industries is provisionally the estimated of payments continues at a high level. During 1988 to the of quarter to a level 1% below the same period a year second earlier. This compares with a 1.4% fall during the deficit reached 14.6bn after a deficit 3.7bn, on revised figures, in 1987. In the quarter the 4.9bn of 1989, the deficit rose to 4.8bn of the first quarter. The from have fallen by 1% compared with the previous quarter. Latest information shows that in latest the three months to Ouly production had fallen 5.4bn 0.5% over deficit recorded in the final quarter of last year 1.5% lower than the same period a year but at the current quarterly rate we must expect a downturn current account deficit this year of some the quarterly The figure visible is still lower than trade balance which the 19.4bn. deteriorated the previous three months to general also state of demand in the has been persistently throughout 1988 has continued at high circumstances interruptions during 1989. The second quarter deficit of 5.8bn represented a slight reduction on the 6bn turn outturn in the first quarter, represented which some improvement on Piper in influenced of the to Alpha reduced 6.5bn the a oil energy disaster and output other The reflects economy by extraction by level ago. in production activity clearly deficit levels previous the but special sector where following the accidents considerably. During the have second quarter of this year, energy sector output fell by deficit incurred between September and December of 3.5% last year. Some improvements in the terms of trade period of 1988. Manufacturing output, on the other during hand, 1989 improvement for compared with 1988 and in export volumes appear the slight turnaround. a relative was little changed from the quarter 1989. The growth of manufacturing can also be seen imports rose by rose 3.6%. stood unchanged. outgrow Export volumes will of course have import volumes for some time deficit on reduced. Finally, current account the oil is account before food, the of demand in manufacturing, the the economy as moderates. principal increases between the latest two quarters were drink, and manufacturing, substantially recorded quarter and the 6.6% annual rate - recorded to of the Within largely quarter the growth remained second first by imports at 5.5% above the to be slowing down - compare the 0.7% rise in However, in the second quarter export volumes rose but quarter In the first the year export volumes of non-oil goods 1% first same and more under the account by 7% while a level 16% below that during to of than to tobacco, 2%, and in 1%. Output in the metals in other industry fell by 4%, in other minerals it fell by 2% and in an increase of 0.1bn in the second quarter, the first chemicals, textiles and clothing a drop of 1% recorded increase since the second quarter of last recorded. was year. The average quarterly surplus of 285 million so far this year is significantly down on the 1988 quarterly average of 697m and the Ibn By market sector, the output of the consumer goods attained industries during 1987. compared 7 rose with by 0.5% in the a 0.9% increase second in quarter, first three months of the year. The output of the investment goods sector remained unchanged after decreasing in the preceding two quarters. Production in the intermediate goods sector fell by 2% after falling by 2.8% between January and March. Compared with the same period a year ago output of consumer goods has risen by 3%, down on the 5.1% recorded in the year to the previous quarter; investment goods output is up 8.8% over the same period, down on 9.4%; and intermediate goods output has fallen by 5.9% compared with a 3.3% fall in the twelve months to the first quarter. 43,300 and 23,000 respectively. Moreover the provisional estimate of the unemployment rate for July fails to show any reduction over the June figure. Although there was a relatively large increase in the seasonally adjusted number of unfilled vacancies at jobcentres in June, this was more than offset by reductions in May and July so that overall in the quarter to July there was a This maintains a trend reduction of 2,200 (1%). of reductions in vacancies which has been apparent since mid 1988. LABOUR MARKET 68 mployad labour Pore* It workforce in M p l o y m n t Thousands - seasonally adjusted EMPLOYMENT AND UNEMPLOYMENT Employees in employment in the UK is estimated to have risen by 0.7%, that is 181,000, in the first quarter of 1989. The increase in the year up to March 1989 is 598,000 (2.3%) and this keeps the number of employees in employment on the increasing trend which has been evident for the When the total figure is broken last six years. down, the following results emerge. First, there is a continuation in the long-term secular increase in female, relative to male, employment. Over the past year to March, female employment has risen by 2.8%, as against 0.7% for male employment. Within broad industrial sectors of the economy, employment in services continues to expand, with an increase of just over 400,000 (2.6%) for the year up to March. However, the recent increase in manufacturing employment has halted. In the year to March 1988 there were four consecutive quarterly increases in manufacturing employment. However, in the four quarters to March 1989 manufacturing employment change has been small and in the last quarter was negative. The overall figure for manufacturing employment in March 1989 is, as a result, very slightly down on the corresponding figure for 1988. 27500-1 25000 - 1978 1980 1982 1984 1986 1988 1990 The increase in average earnings of employees in Great Britain is estimated at 9.3% to the year to June. However, the underlying increase was lower at 9% as arrears in 1988 were lower than in May 1989 and some groups of workers have had more than one pay increase in the past 12 months. This represents a slight reduction in the rate of wage increases from the figure of 9.25% which held between February and May. There is some difference between the underlying increase in average earnings in different sectors of the economy, with the rate in energy and water supply and manufacturing being slightly above that for service industries in the last quarter, but the differences are small, of the order of 0.25% to 0.5. UK Seasonally Adjusted Unemployment fell by 69,000 in the three months up to July 1989 to a total of 1,789,000 (though the unadjusted total actually rose). The July unemployment rate stands at 6.3%, which is down from 6.5% in April and 7.9% in July 1988. Although unemployment continues to fall, this has been at a diminishing rate since late 1988: the average monthly reductions in total seasonally adjusted unemployment for the four quarters to July 1989 are 36,500, 56,700, Productivity in manufacturing fluctuates from month to month. However, taking averages over three month periods and comparing with the corresponding period in the previous year shows that the growth rate of productivity has been falling continuously from the beginning of the year. For the 3 months ending in February, output per employee was 6.5% higher than in the 8 corresponding period in the previous year and this falls to 5.5% for the 3 months ending in June. Whilst productivity in manufacturing is still rising at a historically high rate, the position for the whole economy is much less sanguine. The increase in output per head for the whole economy was 0.3% lower in the first quarter of 1989 than it had been in the last quarter of 1988, and only 0.4% higher than the same quarter a year earlier. It is estimated that the Piper Alpha disaster and other oil industry interruptions reduced the increase in output per employee in the economy as a whole by 0.5% in each of the last 2 quarters of 1988 and by 1% in the first quarter of 1989. Thirdly, the British Rail dispute illustrated the ability of unions to take effective industrial action within the new legal framework. Fourthly, the Government's threefold response, a threat to investment, privatisation or the exploration of the possibility of banning industrial action in essential services, did not demonstrate an understanding of the underlying issues and causes of the dispute. It is highly doubtful whether privatisation will solve issues of low morale, staff turnover and low pay. Fifthly, the dispute exposed fundamental weaknesses in the corporate industrial relations strategy. The public associated stock and service issues with management weaknesses and sympathised with the employees. There was some hope amongst passengers that the NUR would follow the example of the French transport unions whose industrial action took the form of refusing to collect fares on certain days, but maintained an otherwise perfect service. A reliance on the law was shown to be inadequate and unjustified. The percentage change in unit wage and salary cost is calculated as the difference between the rates of change of average earnings and labour productivity. From the data above it can be seen that in the first quarter of 1989, unit wage and salary costs were 3.2% higher in manufacturing and 8.3% higher in the economy as a whole than the figure for the corresponding quarter in 1988. The difference reflects the much higher increase in labour productivity in manufacturing as compared to the economy as a whole. As the Financial Times noted - 'The brutal truth is that a key part of the corporations' strategy has been forced off the rails'. Sixthly, the settlement of 8.8% inevitably became a target for other groups. INDUSTRIAL RELATIONS The annual Trades Union Congress heralds retrospective and forward view of industrial relations. both a British However, indications that the public believe that managers are more to blame for Britain's economic ills and other public opinion surveys which indicate a growing popularity for trade unions, nor the 'success' of the NUR cannot hide a series of weaknesses facing the trade union movement as it gathers at Blackpool. The announcement, in June, of the ending of industrial action by ex P and 0 seamen and the dispute by dock workers over the ending of the National Dock Labour Scheme illustrates a different facet of British industrial relations. The different labour market condition, inland container ports, changing patterns of freight movement, non registered ports all combined with the provisions of the legislation to ensure the defeat of any industrial action. The spring and summer of 'aspiration', the series of short lived strikes indicated clearly the changed nature of British industrial relations. Firstly, the pattern of selective industrial action in British Rail, the BBC and British Airways indicates a greater strategic awareness amongst trade unions. Secondly, the NUR's success highlights the weaknesses of 'hardline' management approaches of threatening mass dismissals at a time of shortage of skills, declining unemployment and more attractive employment elsewhere. Problems of recruitment were already apparent to British Rail. Travellers Fare, for example, had found it necessary to increase pay rates by between 5 and 25% in April and by August was offering a 'bounty' of £60 to attract recruits. In terms of legislation British workers have fewer rights than almost all their counterparts in the EEC. Moreover, the 20% decline in the numbers of safety inspectors and the increasing number of accidents at work indicates an increasing vulnerability in other aspects of employment. The Government focus is primarily upon the No industrial relations legislation can prevent employees voting with their feet by leaving for higher paid employment, a problem increasingly acute in several areas of the public sector. 9 collective rather than individual labour law. has announced its intention to legislation, including explore bans on It further strikes in essential public services. 1980s. A now has in example, and whether the employees in industry, sections of the as It would be necessary to consider what coupled protections would be necessary for the loss Traditionally, this has been automatic indexing of of taken earnings to been well actually printing hotel the beginning of derecognition. such rights. mean all should be covered have a union classic along with P & 0, Sky Television, and such services' action. of BT these employment, it is seen as by 'essential to actions of of Whilst News International considerable numbers of members It would be difficult to define essential services number publicised. and a trend Such policy changes by with the rise of part-time parts catering towards employers employment, rise of small firms, changes to the public through CCT could herald a long-term sector decline in union membership. inflation and/or to matched groups of employees in the private sector. However, it is unlikely that the Government would welcome such an intrusion the free market economy. services In Europe in essential have been defined as those necessary health, safety, law and order, and defence. For the union the agenda is clear. have included to working All greater unions entering flexibility, to services protection for the individual worker, some minimum time, self-employed and union groups. or provision limited areas - of some minimum especially service police and services. Few, if any, have found an democratic and services practical approach other Current than police and industrial Australia, impotence essential armed services. action by airline is a further example in effective, to a country with a strong arbitration, the face of scarce in armed to training offer into training relevant the increasing proportion of traditionally For the need government the part- non-trade and the elimination of areas skills. accept more For employers the will Suggestions hours compacts with employers, to the European examples allow either some additional notice Unions have to develop survival strategies. is of for scarce issue is contend with the reality that the settlement has been set by both the NUR to rate settlement, and pilots in higher rises in the private sector. Aspirations tradition of are settlements of government skills and an harder to control when high pay appear to be awarded to other groups and to senior staffs for no apparent or consistent reason. absence of alternative forms of transport. PROGNOSIS Trade unions still face a membership 145,000 membership, TUC affiliated unions dropped members to 8,652,318 at the end of excludes 330,000 EETPU members). (this has of declining pledged to fight against non The TUC unionism strengthening recruiting initiatives, force, and endeavouring to ensure collaborative approach recognition issues. between by recognising the differing needs of particular sections of labour by 1988 the a unions We argued in the June Commentary that the of the evidence suggested that the balance economy that the slowdown is continuing but probably at However, the form of the slowdown does give cause more for 'soft over landing' and for the balance of payments. The rate The latter seems problematic concern both for the prospects of a of inflation appears to be moderating and the be around EETPU on the membership of several unions and the continue above 5% for the foreseeable future. pressure deals for major unions to concede single union with foreign-owned firms especially. problems were forcibly brought home to The delegates as they had to forego the traditional stay at Imperial Forte, Hotel. refused Since the owners, recognition rights Trust to the inflation 7% to by the end of the remain at these year levels, should but pressures in the economy must be contained, GMB, The form of the economic slowdown gives some cause it appears that production in the tradeable sector that derecognition have some of the Journal, it been is 60 cases have occurred since noted in estimated the no House the for of world significant depreciation of sterling should occur. available issues For commodity price changes must be reasonable and Blackpool. Instances will cost-push delegates had to find alternative accommodation at earlier a slower rate than many commentators first expected. the intermittent raiding activities by given was slowing down. After another quarter it seems clear mid concern holding up Commentary because of from the the scant economy is better than tradeables. In evidence non- currently the June we noted that for a 'soft landing' be secured there would at some point have to be 10 to a relative contraction of demand and output in the non-traded sector - principally, construction and a large proportion of services - and a relative expansion of the traded sector largely manufacturing and the traded services such as insurance, other financial services and tourism. In the most recent quarter for which data are available - April to June - manufacturing output remained unchanged, and energy sector output fell considerably, so with an unchanged GDP at constant prices and output of the production industries falling, it appears likely that service sector output rose. Worrying secondary indicators are that during this period consumers' expenditure continued to rise, although at a slower rate than previously, while investment expenditure fell. This is perhaps another indication that the effect of higher interest rates has been different from what the government expected, in that investment demand has not escaped being hit by the higher cost of capital. The more investment in the British economy falters the less likely the economy can build up the capacity to ensure an effective switch in demand in favour of the domestic, and away from the foreign, production of tradeables. Without that, the balance of payments will only improve through a significant deflation of domestic demand. In the meantime Britain can only continue to run its extremely large deficit on current account if foreign holders and purchasers of sterling retain confidence in the economy. A collapse of confidence would see a run on sterling, a significant depreciation, higher interest rates and the inevitable emergence of higher price rises and much reduced output and employment: stagflation. 11