Happy New Year?

Being one of those people who really enjoy the festive season, I find the start of January hard going. My day therefore began with a look at the pristine 2013 diary to check when Easter will fall (good news, it’s at the end of March, about the earliest date possible, though I guess it might still be cold then). However, having cheered myself with that prospect, it was back to the grim reality of economic statistics, with the third quarter 2012 labour productivity statistics dampening the mood.

The UK economy may have emerged from recession in the third quarter of last year but what might be called the ‘productivity recession’ deepened, with the amount produced per hour worked falling by 0.2%. For the economy as a whole output per hour worked fell by 2.4% between Q3 2011 and Q3 2012, while for the market sector the fall was 3.9%.

The continuing and deepening productivity recession highlights the degree to which rising employment levels mask a severe underlying shortage of demand in the UK economy. This situation continues to be sustained by an ongoing pay squeeze which is helping to keep wage costs in check. Despite this, however, the annual rate of growth of unit labour costs remains well above 3% at a time when, after several years of real pay cuts, the exercise of pay restraint has probably reached workplace tolerance levels. With the economy likely to have flirted with a further contraction in the final quarter of 2012 and a slow start to 2013 on the cards, businesses will therefore be under increased financial pressure to boost productivity in the coming months. Whether this means more redundancies, less hiring or an increase in staff workloads remains to be seen. But either way it suggests the UK workforce faces an imminent reality check.

Consequently, I expect total employment to increase by only around 80,000 in 2013, less than a fifth of the increase seen in 2012. When I released this forecast last week on December 28^th a Conservative MP (Ms Harriet Baldwin, Parliamentary Private Secretary to Employment Minister Mark Hoban MP, no less) tweeted that not only I was being wildly pessimistic but also that the media should ignore my comments because I had been wrong in my prediction for employment in 2012. Hands up to the latter change – I have openly admitted I got 2012 wrong, though since my forecast for last year was in line with the consensus view of economists I am far from alone, and still no one quite understands why a contracting economy managed to create loads of jobs. However, I fervently dispute the assertion that I am relatively pessimistic about 2013 (anyone who thinks this either hasn’t read the detail of my forecast or doesn’t know what other economists are saying).

In fact my 2013 forecast is both more optimistic than the consensus view and that of the independent Office for Budget Responsibility (OBR). The OBR, for example, forecasts no net employment growth in 2013 and a rise in the unemployment rate to 8.3%, up from 7.8% at the end of 2012. By contrast, I expect unemployment to peak at 8.1% (with youth unemployment actually falling a little). Critics who consider this forecast itself too pessimistic are fully entitled to their view and I genuinely hope to be as wrong about 2013 as I was about 2012. But I’m no more of a doomster than most other practitioners of the ‘dismal science’, all of whom, like me, are eager to see the UK economy return to solid growth as quickly as possible, with rising employment and pay. Happy New Year!