Economy Flatlining ... I Am Not Happy With These Numbers Says Chancellor

The Chancellor and the Growth Stats ...
Three months into office and Rachel Reeves is dismayed by the performance of the economy. The Chancellor of the Exchequer is disappointed with figures showing the economy  is flatlining in the months since Labour came to power.

The chancellor promised "economic growth is at the heart of everything I am seeking to achieve". Official figures showed Britain's economy grew by just 0.1 per cent between July and September.

"I want growth to come stronger and sooner" she said. "I am not satisfied with these numbers. Not when we consider the ONS had suggested the economy was growing at a "Gangbuster Rate" under the Tories at the start of the year.

The Chancellor is missing the point, or rather the decimal point. The focus of the budget was clearly on bridging the fiscal deficit with a big surge on employment tax via the NI employers surcharge. The performance of the economy was always set to take second place. Not much in the budget to stimulate growth in the short term.

Look into the detail of the GDP monthly estimate for September, released on Friday and maybe things ain't that bad. Growth year on year (our favoured measure GVA3) was up by 1% in the third quarter. It was up by just 0.2% in the first quarter and O.7% in the second quarter. So much for the "Gangbuster Growth" at onset. The Government could claim things are getting better under Labour but not by much.

Assuming growth of 1.3% in the final quarter, that would generate an annual growth rate of less than 1% for the year as a whole. The economy will struggle to hit the OBR 1.1% forecast for growth this year. Heaven knows, or maybe the OBR model knows, how growth will hit the forecast growth of 2% growth next year.

It could get better. Manufacturing and construction output was down by 1% and 0.4% in the latest quarter. Service sector growth was up by 1.5% with a strong performance in transport, storage, accommodation and food. Professional, scientific and technical services were up by almost 2%.

Our scenario forecast is for growth of 1.0% this year and 1.5% next. Yes we all want growth to come stronger and sooner but want doesn't always get.

The Governor of the Bank of England was in feisty mood his week at the Mansion House. Brexit had a negative effect on the British economy he said. Britain must rebuild relations with Brussels and warned of the economic consequences of Brexit. He also had  a pop at the ONS and the job stats' "I am not happy with these numbers" he said.

The Governor and the Job Stats ...
The Governor took a pop at the Office For National Statistics. The Chancellor may be disappointed with the growth stats, the Governor is disappointed with the job stats.

"The UK's unreliable labour market statistics have become a "substantial problem" for the Bank of England. We are making interest rate decisions without accurate data on how many people are in the workforce", Andrew Bailey said.

In a speech to City financiers at Mansion House on Thursday night, the Governor made his most pointed comments yet about the failure of the Office for National Statistics to collect enough reliable data on the jobs market.

The UK's official statistics body is failing to get enough people to respond to its monthly Labour Force Survey, forcing the Bank to rely on alternative measures as it makes key decisions.

"The travails of the Labour Force Survey are quite well known," Bailey said. "It is a substantial problem and not just for monetary policy. We don't know how many people are participating in the economy. It would help if across the country we were better at answering the phone when the ONS calls up."

In response the ONS said "We advise caution, particularly when interpreting short-term change in the Labour Force survey, and encourage users to make use of a wide range of data sources where possible."

Worrying isn't it. The latest figures suggest the unemployment numbers (000) increased to 1,486 in September. In August they had fallen to 1,386 from 1,487 in July. The unemployment rate increased to 4.3% in September from 4.1% in August and 4.2% in July. 

The Governor has a point. So how to make the forecasts accurately?

The Bank forecasts the unemployment rate will hit 4.5 per cent in three years time. It does, however, acknowledge the danger of a bigger negative budget impact. "There is a risk that changes in the overall cost of employment for firms, including the increase in employer NICs and the national living wage, lead to greater cashflow constraints for some businesses, particularly SMEs" it said last week.

The OBR, in fact, sees unemployment falling, not rising, because of the increase in public spending announced by the chancellor. "Supported by the temporary boost to demand from this budget, the unemployment rate falls from 4.3 per cent this year to 4.0 per cent in 2026 before returning to its estimated structural rate of 4.1 per cent in 2028," according to the latest economic and fiscal outlook.

So why the big difference? The OBR forecasts growth of 1.8% in 2026. The Bank pencils in a more modest 1.25%. Confused? Don't be!

Stay tuned to the Saturday Economist updates. Next week, we look at the forecasts for inflation and interest rates. Worth  a closer look.