What are we to make of this? Today, the Bank of England released its latest Quarterly Inflation Report, a document of Stygian gloom in which it admitted that inflation would stay above the 2% target for longer than previously expected (well, colour me surprised!), while GDP growth will reach only 0.8% for the year, down from a previous forecast of 1.2%. However, we also learned today of an unexpected 45,000 fall in unemployment during the first quarter -- a quarter during which, it should be remembered, the UK economy supposedly entered a double-dip recession.
Let's look first at the Inflation Report. The prospect of sticky inflation is, as usual, dismissed as something the Bank can't do anything about, even though it's the only part of the economic outlook that it has a specific target for. As for growth, the downward-revision of the forecast is partly a reflection of the problems in the Eurozone, but the Bank acknowledges other factors, including the "squeeze on household earnings", which is apparently in no way related to the fact that inflation has remained above target for so long!
The recent fall in global energy prices and the strength in Sterling, if sustained, hold out the prospect that inflation may fall somewhat faster than the Bank is now predicting, which would be good for domestic demand. However, it would be rash to suggest that the Bank is overstating the risks to UK growth posed by the crisis in the Eurozone, which Gov. King depicted as "tearing itself apart without any obvious solution".
Turning now to the unemployment data, a look beyond the headlines shows a mix of good and not-so-good news. The fall in the unemployment rate and the 105,000 rise in the number employed are of course welcome, as is the decline in the separate "claimant count" measure, which has been rising in recent times partly because of changes in the structure of welfare programmes. There was also a small decline in youth unemployment, though at 21.7%, this remains criminally high.
Less welcome is the fact that part-time jobs accounted for all of the improvement, rising 118,000 in the quarter. There are now signs that an increasing proportion of the part-time workforce is only working shorter hours because of a shortage of full-time jobs: the number of people saying they are in that situation rose by 73,000 in the quarter. (Even so, fully 82% of the people working part-time are quite happy about that fact). The number of long-term jobless (out of work for more than a year) continues to rise. Lastly, average earnings only rose 0.6% from a year earlier. The fact that this is so far below the rate of inflation indicates that even a turnaround in the jobs market may not be sufficient to give a lasting boost to domestic demand.
The fact that the jobs market improved at all during the first quarter suggests that the ONS GDP data, which have already come in for some strong criticism, must surely be flawed. (Compared to other national agencies, the ONS publishes its first GDP estimates much sooner, but spends much longer revising them, with the final story not told until years after the event. Time to rethink, perhaps?) At the same time, it would be wrong to see the numbers as a sign of a return to sustained growth. Even if falling inflation boosts consumers' real purchasing power, the increasingly doom-laden scenario for the Eurozone, and the prospect of renewed turmoil in financial markets, will weigh heavily on the UK for the rest of this year. The Bank's forecast that real GDP will not regain its 2008 peak until 2014 seems all too likely to be accurate.
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