UK: Deloitte Monday Briefing: What Sort Of Recovery Will It Be?

Last Updated: 7 October 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* In economics most silver linings come enveloped in clouds. A case in point is the resilience of the UK jobs market.

* On the face of it this is unadulterated good news. Despite a deep recession more people are in work today than ever. Mass unemployment did not materialise and this has softened the human impact of the UK's deepest recession since the 1930s.

* The "cloud" is that with more people producing less output per person – or productivity - has fallen sharply.

* In the last five years the total output of the UK economy has fallen by 2.9% and employment has risen by 0.7%. Productivity, the volume of goods and services produced by each working person, has dropped by 3.6%.

* Productivity is the key to competitiveness and to strong growth. In the long run high productivity countries are wealthy countries.

* In the circumstances of a deep recession the strong labour market/poor productivity mix looked better than the alternative – soaring unemployment and strong productivity.

* Here are two contrasting views on what might happen next.

* Optimists think the UK's poor productivity performance has been recession-induced. They believe that companies hung on to workers to give them capacity to cope with a recovery in demand. If this is the case, there is plenty of slack within companies and the existing workforce can drive growth.

* Improved productivity and competitiveness will create a virtuous cycle of rising profits, investment and wages. This is the balanced, sustainable recovery of which policymakers dream. 

* By contrast pessimists believe that the recession has dented the UK's productive potential. Companies will be unable to produce more with their existing employees. Additional growth can only come from an expanded workforce.

* As a result, productivity will continue to languish and so, too, will exports and incomes. Low productivity will act as lasting drag on growth and incomes.

* On this issue we are more aligned with the optimists and take some comfort from recent official data. It shows that in the second quarter productivity rose for the first time in two years. Business surveys point to an acceleration in growth and suggest the recovery in productivity continued into the third quarter.

* Stronger capital spending should also boost productivity. So, too, will a rebound in high-productivity sectors which bore the brunt of the recession, including finance, construction and manufacturing.

* Only time will tell if the optimists are right. But what is clear that the UK has a long way to go to catch up with the rates of productivity in its major competitors.

* Official data show that output per hour in the UK is 16 percentage points below the average for G7 economies in 2012, the widest productivity gap in 20 years.

* Productivity holds the key to the shape of Britain's recovery. Our hunch is that the UK is heading for a productivity revival. Without one, growth will remain unbalanced and fragile.


UK's FTSE 100 rose 0.1% last week, having regained losses made in the middle of the week on the back of fears about the US debt crisis.

Here are some recent news stories that caught our eye as reflecting key economic themes:


* Around 800,000 US federal government employees were told to stay at home or work without pay as a stand-off between Republicans and the White House over public spending resulted in the first government shutdown in 17 years
* The Financial Times reports that US banks are delivering up to 30% more cash to ATMs in case panicked customers attempt to withdraw cash en-masse in response to a possible government default
* China's largest bank, the state-owned Industrial and Commercial Bank of China is to invest £650m in a new business district at Manchester airport
* UK construction activity grew at its fastest pace in almost a decade in September, suggesting housing supply is being boosted following recent incentives to house buyers
* The UK service sector, which accounts for more than three-quarters of the economy, activity recorded its best quarterly performance in more than 15 years in Q3 2013 according to purchasing managers data
* Chancellor George Osborne announced a new fiscal objective – that the UK should run a budget surplus by 2020 – potentially paving the way for another 6 years of austerity
* Discount retailer Poundland announced a potential flotation of the company early next year following further strong sales figures, with an initial public offering that could value the company at more than £600m
* Japanese Prime Minister Shinzo Abe announced plans to proceed with a rise in the Japanese consumption tax from 5% to 8% in April 2014 in a bid to reduce the country's debt burden, despite critics suggesting it may derail growth
* The Financial Conduct Authority said that it wants to introduce tougher new regulations for payday lenders, including mandatory affordability checks, to increase protection for vulnerable borrowers
* The price of online 'Bitcoin' currency fell markedly following a Federal Bureau of Investigation raid on an online marketplace called Silk Road, which has allegedly facilitated illicit trade in online goods and services
* Analysis by the Wall Street Journal suggests the US is set to overtake Russia as the world's largest producer of oil and natural gas by the end of this year, if it hasn't already done so
* German paper Bild reported that luxury German carmaker Mercedes-Benz sold 142,000 cars in September, the most in one month in its history, driven by demand from China and the US
* Social network Facebook announced that it is to build a $120m, 394-unit housing community near its California headquarters, in order to house employees nearby
* The Irish central bank cut its forecast for growth in the Irish economy in 2013 to 0.5%, citing weaker-than-expected export demand, marking the fifth cut to 2013 forecasts since August 2012
* Ratings agency Moody's lowered its outlook for Brazilian debt from 'positive' to 'stable', stating that the economy is "going through an extended low-growth period"
* Apple was named the world's most valuable brand in the Best Global Brands annual survey, demoting Coca-Cola from the top spot for the first time in 13 years
* Korean carmaker Hyundai has replaced cigarette lighters with USB ports in all new cars built in South Korea
* Jens Weidman, president of the German Bundesbank, warned of the risks of excessive levels of sovereign debt on bank balance sheets
* The vice-president of the European Central Bank (ECB) claimed that European banks are just as strong as their American counterparts and are currently undervalued by markets
* The ratio of profits to dividends for members of the FTSE 350 index has fallen by 40% since the end of 2011 according to research by The Share Centre stockbroker, reflecting shareholder pressure to return income to investors
* Billionaire investor Carl Icahn made another bid to convince Apple to engage in a $150bn share buy-back in order to boost its share price, telling Apple chief executive Tim Cook that "I'm not going away"
* Shares in consumer goods companies fell following a sales warning by Unilver, who claimed that "significant currency weakening" in emerging markets would damage quarterly sales growth
* Plumbing and heating distributor Wolseley returned £300m to shareholders through a special dividend payment, announcing that it had been unable to find attractive bolt-on acquisitions to invest in
* Sales of collateralised loan obligations – instruments that bundle-up corporate loans – reached their highest levels since 2007 according to data from S&P Capital IQ LCD
* The value of hedge funds' bets on falling share prices – known as 'short positions' – has fallen to the lowest level since before the financial crisis according to data from Markit, with investors confident of equity gains continuing
* France's parliament passed a law preventing internet booksellers from offering free delivery to customers, in an effort to protect the country's independent bookshops from US online retailer Amazon
* The Spanish government admitted that a typographical error had increased Spain's public debt forecast by €10bn, with Spain's 2014 debt expected to be 98.9% of GDP rather than the 99.8% previously forecast
* California's Yosemite National Park was forced to celebrate its 123rd birthday alone and closed because of the partial government shutdown – wild life

* The Chinese National Tourism Administration has released an illustrated guide for citizens on how to be better tourists abroad, with visitors encouraged to wait patiently in line at museums and avoid snapping their fingers at German tourists - P's and Queues

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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