Employment in most OECD countries is still below 2008 levels

There were 528 million persons employed in the OECD area in the fourth quarter of 2011, 2 million below the level observed at the onset of the crisis. Putting this into context, during the same period the working age population increased by 17 million persons, the unemployed increased by 13 million, and those not employed nor looking for employment (i.e. the inactive population) increased by 6 million.

Considering the entire period since the start of the crisis, there are large disparities in the way employment rates have changed across OECD countries. Since the second quarter of 2008, the employment rate has declined by around 2 percentage points in the European Union and Canada, by more than 4 percentage points in the United States, and by around 8 percentage points or more in Greece, Ireland and Spain. Only in Chile, Germany and Turkey is the employment rate significantly higher today than at the onset of the crisis.

In virtually all OECD countries, the job crisis is affecting men more severely than women, and young people (aged 15 to 24) more than prime age workers (those aged 25 to 54). Since the onset of the crisis, the employment rate for the OECD area as a whole has declined by 2.6 percentage points for men and by only 0.7 percentage points for women.

For youth, the employment rate has contracted by 3.3 percentage points compared to a 1.7 percentage points fall for prime age workers. Over the same period, employment rate for young people has declined by around 10 percentage points or more in Denmark, Greece, Iceland, and Portugal and by more than 15 percentage points in Ireland and Spain.

The prices of staple foods have been increasing

The World Bank’s Global Food Price Index was only 1% below what it was a year ago and 6% below its historic peak of February 2011. The Bank is warning that unless the current forecasts for increased food production actually materialise, global food prices will rise further.

Otaviano Canuto, World Bank Vice President, said that: “After four months of consecutive price declines, food prices are on the rise again threatening food security for millions of people.”

Prices of all key staples increased between last December and March, except for rice, which was in plentiful supply. Maize prices went up by 9%, soybean oil by 7%, wheat by 6%, sugar by 5% and crude oil prices also rose by 13%.

On top of this domestic food prices are remaining high, especially in Africa. This is due to a combination of large food imports, plus other factors such as trade restrictions between countries, hoarding, civil unrest, high fuel transportation costs and bad weather conditions.

The World Bank also noted some examples of exceptional domestic price increases. Between March 2011 and March 2012, wheat prices rose 92% in Belarus, and the price of maize went up by 82% in Malawi, 80% in Ethiopia and 71% in Mexico.

However, there is some good news. The outlook for food production for 2012/13 remains strong and there have been a number of factors which have brought downward pressure on prices. The previous record prices established at the end of 2010 and early 2011 have led to increased production of major crops throughout the world. Added to this the reduction in the use of maize for ethanol production in the US and the weakness of global demand resulting from the euro crisis have both helped to restrain price increases

The global jobs outlook is getting worse

The first reason for this was that many governments, especially in advanced economies, have shifted their priority to a combination of fiscal austerity and tough labour market reforms. The report says that this has had devastating consequences on labour markets in general and job creation in particular, whilst mostly having failed to reduce fiscal deficits as well.

“The narrow focus of many Eurozone countries on fiscal austerity is deepening the jobs crisis and could even lead to another recession in Europe”, said Raymond Torres, Director of the ILO and lead author of the report.

He went on to say: “Countries that have chosen job-centred macroeconomic policies have achieved much better economic and social outcomes. Many of them have also become more competitive and have weathered the crisis better than those that followed the austerity path.”

The second concern expressed was that in advanced economies, many jobseekers are demoralised and are losing skills. Added to this small companies are being starved of credit which in turn is keeping investment depressed and preventing job creation. Job recovery is not expected in these countries, especially in Europe, before the end of 2016, unless there are dramatic shifts in policy.

Thirdly, in most advanced countries, many of the new jobs are precarious, as they involve part-time and temporary employment which workers are being forced to accept, as full-time jobs are not available.

Finally, the report notes that the social climate has deteriorated in many parts of the world, particularly in Sub-Saharan Africa, the Middle East and North Africa.

The main conclusion is that fiscal austerity combined with labour market deregulation will not raise job prospects in the short term. It claims that there is no clear link between labour market reforms and higher employment levels. On top of this, the report notes that some recent reforms, especially in Europe, have reduced job stability and increased inequality without creating jobs.

But, the report argues that if a job-friendly policy-mix of taxation and increased expenditure in public investment and social benefits is put in place, approximately 2 million jobs could be created over the next year in advanced economies.

There is a huge difference in labour costs across the EU

In 2011, the highest hourly labour costs were estimated for Belgium (€39.3), Sweden (€39.1), Denmark (€38.6), France (€34.2), Luxembourg (€33.7), the Netherlands (€31.1) and Germany (€30.1). The lowest hourly labour costs were estimated for Bulgaria (€3.5), Romania (€4.2 in 20103), Lithuania (€5.5) and Latvia (€5.9).

Average hourly labour costs in the EU as a whole rose between 2008 and 2011 from 21.6 to 23.1 euros. But the rises have tended to be higher in the wealthier parts of Europe and lower in the relatively poorer areas.

Belgium tops the league table, and this has led Patrick De Maeseneire, CEO of the world’s largest staffing firm Adecco, to encourage employers to leave the country. He is reported to have said: “If you can leave Belgium, run!”

Obviously the higher the labour costs, and the faster that those labour costs increase, the less competitive a country will become, other things being equal.

By contrast, countries such as Lithuania, Hungary and Poland have reduced their average hourly labour costs between 2008 and 2011 and several other recent EU entrants have seen minimal rises.

Although the UK is outside the eurozone it has managed to cuts its labour costs in terms of the euro, from 21.1 to 20.1 over the same period. This has partly been aided by the fact that our currency has been able to depreciate against the euro, and this has made our exports more competitive.

According to the Office for National Statistics there was a strong contraction in construction of 3% which weighed heavily on the final figure. Overall output in the production industries fell by 0.4%, while service sector output rose by 0.1%.

One thing to bear in mind is that this is a preliminary estimate, which is based on 40% of the available information. It is possible the growth figure could be revised upward at a later date – or of course downward!

There were one or two positives. For example, the panic buying of petrol did help to maintain retail sales and we could, or course, hope for more panic in the future.  But, on the other hand, we will expect an additional loss of output from the extra bank holiday in the current quarter, as a result of the Queen’s Diamond Jubilee which will weigh down on the second quarter’s figures.

How important is this fall in GDP? Many were hoping to see a figure of plus 0.1% growth, and I suppose most of us would like our wages to go up by 0.1%, rather than down by 0.2%, but on the other hand this would not make much difference to our spending power. In the same way the fact that we are in a ‘technical recession’ does not mean that we are going the way of Greece.

The government is on target with its borrowing, but the argument continues to rage as to whether austerity is the right way forward. Should we be going for a fiscal stimulus to get the economy moving again?

All in all, today’s figure is more likely to have a psychological impact rather than an economic one. But – if such an impact causes consumers to hang on to their cash because they are fearful of the future, and causes companies to continue to hold back on investment, then the implications will be much greater.

Public sector net borrowing is right on target

The Office for Budget Responsibility had forecast a borrowing figure of £126bn, and the final result was £125.97bn. So the government hit their target. This result means that they reduced borrowing over the past 12 months by nearly £11bn, as total borrowing in 2010/11 had reached £136.8bn.

As recently as 2001/02 public sector net borrowing had stood at only 0.08% of GDP, but had risen to a massive 11.15% in 2009/10. However, over the last two years this has been brought down to 9.27% in 2010/11 and has now reached 8.3% in 2011/12.

Whilst this is good news, it is as well to remember that although this percentage figure is reducing, the total for our outstanding public sector net debt continues to rise. This climbed to £1.02 trillion in the year to March, which is equivalent to 66% of GDP. In 2001/02 this figure was as low as 29.7%.

The government was able to achieve its target this year through some tax increases, including VAT going up from 17.5% to 20%, coupled with some fairly savage spending cuts.

Will they be able to continue to reduce borrowings as planned? It will be interesting to see the last quarter growth figures when they are published tomorrow to see whether there has been any positive growth at all. Most economists think this figure will just be into positive territory and we will avoid the recession label, of two consecutive quarters of negative growth.

But with some estimates suggesting that unemployment may peak at 3 million, the subsequent loss of tax revenues and the increase in welfare payments, may well undermine government borrowing plans for the coming year. We desperately need a faster rate of growth, but with large firms holding on to their cash, and the banks reluctant to lend to smaller companies, coupled with the uncertainty within the eurozone, this is just not likely to happen in the short-term.

Will inflation increase as a result of rising oil and commodity prices?

Although inflation has been above its 2% target for over three years, they believe it could continue above that level for another three years. And, this stubbornly high inflation will make it difficult to achieve a rapid growth in GDP in the medium term. Although Cebr has revised its growth forecast up from minus 0.4% to plus 0.3% for 2012, they feel that growth will only average just over 1% per year up to 2016.

Unemployment is also forecast to rise to about 3 million and stay there for at least three years, in response to the low rates of economic growth.

Scott Corfe, Cebr Senior Economist said: “The Monetary Policy Committee has been dealt the worst possible hand of cards. High inflation and sluggish growth on a persistent basis mean that almost any decision the Committee makes will be wrong from at least one point of view. They will probably hold base rates until 2014 at least, and hold bank on further QE. But even that may not be enough to keep inflation near target or achieve economic growth at a reasonable rate.”

Douglas McWilliams, Chief Executive of Cebr, added: “Inflation used to be driven by labour costs. Now it is driven by high and rising demand for oil and other primary commodities from the emerging economies in the Far East. We could only opt out of this by pushing up the exchange rate to a level that made the UK even less competitive. So it looks as if inflation above target is a price we may have to pay for some time”

But this is not the only view out there at the moment. The Telegraph online has reported a story today that analysts at Standard Bank think that current economic conditions will keep commodity demand down, and therefore keep commodity prices low. They quote Mr de Wet, a leading analyst at the bank as saying: “We continue to see a physical market that reflects a consistent picture of lacklustre demand across many commodities.” He went on to say that for commodity prices to rally upwards it was necessary to see an increase in real consumption levels.

1.4 million UK workers are in part-time jobs because they cannot find a full-time one

But, there were still 1.61 million people claiming Jobseeker’s Allowance in March 2012, which was an increase of 3,600 on February.

What tends to go unnoticed in the figures is the level of underemployment in the UK.  Underemployment can include situations where people with high level training or skills, such as graduates, are working in a job which does not require those skills, such as behind a bar. However, these numbers are not easily quantified.

What is measured in the figures is the number of people who have to work part-time although they would prefer to work full-time if they could find a full-time job. This measurement in the UK has been increasing steadily and is now of major significance.

In the quarter from December 2011 to February 2012 there were 1,400,000 people working part-time because they could not get a full-time job. This was an increase of 89,000 compared to the previous quarter. The total amounts to 18% of all part-time workers and nearly 7% of all those in employment.

Also, a survey published yesterday by eurostat shows that there are 8.6 million workers in the EU27 who wish to work more hours and are therefore considered to be underemployed. These accounted for 20.5% of part-time workers and 4% of total employment. This was a slight increase on the previous year.

Not only does underemployment carry a social cost, in terms of the psychological and social impact on workers who cannot work as much as they would wish, but there is also an economic cost. Underemployment should be added to unemployment to see the true loss to the economy. Although the underemployed might not qualify for any welfare benefits their inclusion into the equation does mean that the economy is working further inside its Production Possibility Frontier and therefore below its potential capacity.

When will businesses start to turn on the taps and invest their cash reserves?

The report notes that UK businesses are stockpiling cash at an increasing rate. The cash balances of private non-financial companies are now worth over £754 billion, which is equivalent to a staggering 50% of GDP. However, last year, business investment only rose by 1.2%.

Peter Spencer, chief economic advisor to the ITEM club, said that the UK won’t begin to prosper until these funds are put back into the economy. He said: “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy. Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”

The ITEM forecast shows that even if businesses grow investment by 6% next year and 10% in 2014, that won’t go far enough, as the company sector financial surplus is still expected to increase from 5.2% of GDP in 2011 to 5.6% in 2014.

The report also points to the fact that households remain under intense pressure with unemployment expected to approach 9.3% by the middle of 2013 before falling back. Although falling inflation driven by lower commodity prices will lead to a gradual improvement in levels of disposable income Spencer comments: “…make no mistake; consumers can’t lead this recovery.”

ITEM forecasts that disposable income will fall by 0.2% in 2012, while consumer spending will increase by 0.8% before accelerating to 1.1% in 2013 as household incomes gradually strengthen.

One good piece of news is the strength of the export sector. Exports of goods increased by 5.1% in volume terms in 2011, while services were up by 3.9%. The report forecasts export growth of 4.5% this year with net exports adding 0.3% to GDP.

According to Spencer: “…exports are helping to keep the UK in positive territory. A 0.3% contribution to GDP might not sound a lot, but this will increase as international markets continue to improve.”

“However, this remains a major risk to our forecast. The Euro time bomb hasn’t been de-fused, while geopolitical tensions in the Middle East continue to be a cause for concern because of their potential to cause a spike in oil prices. If these crises escalate, UK exports and GDP would be a major casualty.”

The UK is becoming increasingly reliant on energy imports.

Oil production was 17.5% lower than in 2010 and continued a downward trend which has been going on for the last decade, and meant our oil production is now at its lowest level since the 1970s.

At the same time our natural gas production was 21% lower last year than it was in 2010, with gross imports of natural gas now greater than gross production for the first time since 1967. Liquefied Natural Gas (LNG) accounted for 47% of total gas imports.

The DECC did note that the share of renewable energy in electricity generation rose by 2.5 percentage points last year compared to the previous year, to a record total of 9.5%. Overall, hydro and wind generation was 55.5% higher than it was in 2010.

So, all in all, we are dependent on imports for over one-third of our total energy needs, and it is thought that this could rise to 75% by 2020. Energy security is obviously a major issue. The UK has been increasing its imports of LNG from sources in the Middle East, in order to reduce dependence on gas supplies from Russia.

However, the Middle East is not the most secure place in the world to import energy from, witness the recent surge in oil prices brought on by fears of Israeli intervention in Iran.

Renewables are not going to fill any gaps in the foreseeable future and only this week two energy companies have said that it is no longer viable for them to construct nuclear power stations in the UK.

Securing energy supplies cannot be done on a short-term basis and the government is going to have to come up with a more coherent policy.