John McLaren: Mixed signals leave us no clearer as to just what is happening with economy

Published on 25/08/2012 03:17

THE latest news on the UK economy may have been positive, but it was the least that was expected. The revision to construction, making it less of a fall than had previously been forecast but still a big fall, has been known about for a fortnight.

As well as poor construction figures, the position with regards to private sector services was confirmed as being dismal. This is an area where rising output had been driving the recovery up to the middle of last year but since then has been in decline.

Overall, we are still left with a conundrum over the what the output figures are telling us, stagnant gross domestic product (GDP), and what the labour market figures are telling us, rising employment.

The Office for National Statistics even went so far as to issue a 15-page article trying to explain this.

The picture was further muddied by this week’s latest UK borrowing data, showing revenues, particularly related to corporation tax receipts, under-performing, tending to support the low-to-no-growth scenario.

There are a whole host of potential, partial explanations for such apparent asymmetry in the paths of output and employment, including the rise in part-time and self employment; a degree of job hoarding; a decline in well-paid jobs in the financial services sector; an inevitable adjustment from the high pre-recession productivity growth rate; a steep decline in output in the jobs-sparse North Sea oil and gas industry, or simply a belief that the GDP figures are wrong.

Counter to these partial explanations, recent data also tells us that the total number of hours worked has also increased and that new jobs are in the private sector, which tends to have faster rising productivity than in the public sector, where jobs are being lost.

Unfortunately, it is very difficult to disentangle all of these influences and so to understand the true position.

Scotland offers a good example of a similar conundrum in the recent past, which has yet to be resolved.

Between 2000 and 2008, Scotland’s labour market performance went from significantly below the United Kingdom average to significantly above it.

However, this was at a time when the Scottish and UK economies were growing at very similar rates, suggesting a big drop in Scottish productivity, relative to the UK, over this period.

Understanding the true causes of the drop in productivity and the underlying health of the economy has important policy implications, as a weak GDP growth picture strengthens claims for a further fiscal stimulus, while a more positive labour market position suggests that a recovery may already be taking place.

• John McLaren is an economist with the Centre for Public Policy for Regions.