Silver linings in dark clouds James McCann RBS Group Economics May 2013

Depressing times! UK national income during and after recessions (Pre-recession peak level = 100) Source: National Statistics and Group Economics Calculations Average UK recession Great Depression 2008 onwards Years since pre-recession peak in national income

Traditional export markets struggling Export growth 2012 (%y/y) Source: National Statistics TotalEurozoneSpainGermanyNon-EUUSAChina

Money’s too tight to mention UK household debt-to-income ratio (%) Source: National Statistics and Group Economics Calculations

How much “austerity” to go in the UK? Tax increases Investment cuts Benefit cuts Day-to-day spending Total Start Finish How much of scheduled austerity completed at end of

Okun’s law broken? -6% -4% -2% 0% 2% 4% 6% 8% 10% Q1 1971Q1 1981Q1 1991Q1 2001Q % -2% -1% 0% 1% 2% 3% 4% %y/y GDP growth (4 quarter ma, LHS) 12m Change in unemployment rate (RHS) Relationship between unemployment and growth in the UK Unemployment risingGDP growth Source: National Statistics and Group Economics Calculations

What’s going on?? Source: National Statistics and Group Economics Calculations UK productivity (100 = Q1 2000)

What “should” have happened? 26,500,000 27,000,000 27,500,000 28,000,000 28,500,000 29,000,000 29,500,000 30,000,000 Q Q2Q3Q4Q Q2Q3Q4Q Q2Q3Q4Q Q2Q3Q4Q Q2Q3Q4 Employment Constant productivity employment Source: National Statistics and Group Economics Calculations Actual employment and employment under constant productivity assumptions

What has been driving the unemployment rate? Source: National Statistics and Group Economics Calculations The UK labour market story so far (changes in the number of people (thousands) between Q and Q4 2012

Where has job creation been strongest? Source: National Statistics and Group Economics Calculations Change in employment by sector ( )

1. Real wages are falling Real average employee compensation and the unemployment rate Source: National Statistics and Group Economics Calculations

2. Firms substituting labour for capital Net lending/GDP (inverted scale) and the unemployment rate Source: National Statistics and Group Economics Calculations

3. Firms hoarding workers Business confidence (inverted scale) and the unemployment rate Source: National Statistics and Group Economics Calculations

What does this mean for the future? Source: National Statistics and Group Economics Calculations Unemployment forecast

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