macro economics feb

8/12/2019 Macro Economics FEB

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FEBRUARY

2014

ECONOMICOUTLOOK:THE FREELANCERS PERSPECTIVE


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INTRODUCTION

The UKs economic recovery remains

on track but some disappointing data in

February should serve as a reminder against

complacency. Forecasters have once more

rushed to upgrade growth projections,

however signs that the economic recovery

is slowing down should keep policy-makers

on their feet. Unemployment has increased

since January, while data on manufacturing

and public nances were below expectations.

Nevertheless, with ination down, credit

conditions easing further and business

investment picking up to support growth, these

issues should be seen as temporary bumps

rather than major causes for concern. The UKs

freelance workforce should remain optimisticas stable and more balanced growth will allow

them to reap the benets of an expanding

economy.

The chief obstacles for the UKs economic

recovery continue to be slow productivity

growth and a sluggish increase in wages.

Improving productivity is vital for allowing

wages to increase without generating

overwhelming inationary pressures. Thisis an issue that will remain crucial in future

debates as analysts argue over the size of the

output gap and whether the nancial crisis

has permanently damaged UK productivity.

Freelancers, who are lauded for their high

expertise and productivity levels, have an

important role to play in bridging this gap.

GROWTH

GDP growth forecasts have yet again been

revised upwards with estimates ranging from

2.4% by the Oce for Budget Responsibility

(OBR) to the most optimistic prediction of 3.4%

by the Bank of England (BoE). Growth has

been chiey supported by consumer spending

induced by low interest rates discouragingsavings. Consumer spending has now relaxed

and capital expenditure is picking up to provide

for a more balanced growth. Ination has

fallen to 1.9%, below the BoEs target of 2%

reecting a fall in world commodity prices,

lower year on year rises in utility prices and a

strong pound making imports cheaper. Ination

is projected to be kept at bay over the next few

months but should rise towards the end of the

year after further improvements in the labour

market have taken place.

UK GDP % growth forecasts for 2014

Key to low ination forecasts is the large outputgap which means there is still enough spare

capacity in the economy to contain inationary

pressures and suppress wage increases. The

large population of people in part-time work

who want to work full-time also provides room

for businesses to hold o on wage rises. This

underlies the BoEs rationale of maintaining

low interest rates until economic slack in

the economy is absorbed. Much debate has

surrounded the magnitude of the output gap

and the extent to which the nancial crisis has

caused permanent damage to UK productivity.

The Institute for Fiscal Studies (IFS) speculates

that the severity of the crisis means that the

GDP

%

Growth

Oxford

Economics

BoE

OBR

BCC

IMF

EuropeanCommission

3

2

1

0 2.6

%

3.4

%

2.4

%

2.7

%

2.4

%

2.5

%


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of prudent public nances for the overall health

of the economy, freelancers should monitor

developments in government scal policy with

interest.

Public sector net borrowing, 1996-97 to 2012-13

(Source: ONS)

INVESTMENT AND

TRADEThe nal quarter of 2013 nally saw business

investment picking up after a long slump,

responding to receding uncertainty, higher

domestic demand and mounting condence

over the prospects of the economy. Business

investment rose by 2.4% more than the

previous quarter and 8.5% more than a year

ago. This is an encouraging sign for a more

balanced and sustainable growth as Q4 2013

also saw consumer spending slowing down

to a 0.4% increase. Nevertheless, business

investment has remained almost 20% below

its pre-crisis peak despite relatively healthy

corporate nances. Diminishing uncertainty

should mean business investment will continue

to increase, forecasted by the IFS to rise by

at least 5.4% in 2014. Rebounding business

investment should translate to more projects

for contractors as companies call in freelancers

to provide their high expertise and manageproject risk.

Most encouragingly, trade data for December

damage to potential output is possibly towards

the higher scale. However, the output gap is

still likely to be very large, at 5% of potential

GDP in 2013. This contrasts OBR forecasts

of 2.3% and the consensus of independent

forecasters of 2.9%.

A large output gap means more room for theeconomy to grow and implies less permanent

damage to UK total factor productivity. The

IFS expects potential output to grow by 2.1%

a year up to 2018. Although measuring the

precise output gap is notoriously dicult

and estimates dier widely, there appears to

be agreement that there is sucient spare

capacity in the economy to sustain output

growth in the coming years. Freelancers who

are often recruited by businesses to improve

operational eciency and facilitate innovation,

will play an important part in boosting

productivity growth.

PUBLIC FINANCES

Public nances worsened in January despitecontinuing eorts by the Government to min-

imise scal liabilities. Initial government esti-

mates showed a surplus of 4.7bn, down from

6bn a year ago, reecting an increase in gov-

ernment spending of 0.7bn. This was partially

oset by a drop in government borrowing of

4bn compared to last year. It should be noted

though that January is usually an outlier due to

higher tax receipts, with the Government bor-

rowing more money than it receives for most

other months. Public Sector Net Borrowing,

1996-97 to 2012-13

The OBR predicts that borrowing this year will

be 111bn, which is still 51bn higher than

forecasted in 2010. This does not necessarily

mean that targets for a budget surplus by

2018-19 are unachievable, provided that the

Government continues its scal consolidation

program as planned. The IFS contends that the

level of public debt will remain substantial at1.6 trillion or 76% of national income in 2018-

19 and will constrain policy for at least the

following decade. Considering the importance


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LABOUR MARKET

The labour market continues to improve

although the pace of the recovery is gradually

slowing down compared to previous months.

Unemployment gures are up 0.1% from last

month, illustrating an anticipated cooling o in

the labour market. Unemployment now stands

at 7.2%, down 0.4% from the last quarter and

down 0.6% from a year earlier. The number of

Job Seekers Allowance (JSA) claimants fell by

327,600 between January 2013 and January

2014, representing the largest annual fall since

March 1998.

Youth unemployment continues to fall, now at

19.9% and down 1% from the previous quarter.

For October to December 2013 there were49,000 more 16 to 24 year olds in employment

and 9,000 less economically inactive youths.

Involuntary part-time work remains 3.3%

higher than last year but saw a big quarterly

drop of 2% after consecutive spikes. We

should continue to see a contraction in youth

unemployment and involuntary part-time work

as the labour market continues to grow in the

following months.

Output per worker, 2012-2013

(Source: ONS)

2013 showed that net trade contributed 0.4%

to quarterly GDP growth against expectations.

The UKs trade decit shrank to its lowest since

July 2012, compounded by a combination of

rising exports and falling imports. December

saw a fall of just over 2.5bn in the overall

trade decit to 1.03bn, which represents the

largest monthly decline since records began in1998.

Value of UK trade in goods and services, 2012-13

(Source: ONS)

Worryingly this fall is almost exclusively down

to a decline in imports by 4.7% compared

to an increase in exports of 1.9%. This is

partly due to the poor performance of the

manufacturing sector, which is yet to recover

from the nancial crisis, with the Oce ofNational Statistics (ONS) revising its growth

estimates down to 0.7% from 0.9%. Although

the OBR has predicted that the UK will run

a trade decit up until 2019, growing output

levels, easing consumer spending and the

slow revival of most Eurozone countries should

help to further shrink the decit. With services

remaining the main driver of UK exports and

evidence showing increasing demand for

contractors abroad, freelancers can play their

part in tackling Britains trade decit.

2012Q

Q2

Q3

Q4

2013Q

Q2

Q3

Q4

2013J

u

Aug

Sep

Oct

Nov

Dec

0

-1000

-2000

-3000

-4000

-5000

-6000

-7000

-8000

-9000

-10000

-8728

-9925

-6474

-8513

-6515

-5111

-10201

-8026

-3197

-3269

-3735

-3418

-3582

-1026

OutputperHour

2010Q

1

Q2

Q3

Q4

2

011Q

1

Q2

Q3

Q4

2

012Q

1

Q2

Q3

Q4

2

013Q

1

Q2

Q3

101

100

99

98 100.5

99.8

100.2

99.5

99.9

101.3

101.1

100.8

100

99.1

98.8

98.4

98.7

99.2

98.9

UKTotalTradeBalance(

Million)


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4.1% on the last quarter and 3.6% on last year,

outstripping the growth in employees by almost

3 to 1. While employees increased by 63,000

from July to September 2013, the number of

self-employed rose by 172,000 to reach 4.37

million, now representing 14.5% of the total UK

workforce. Crucially, this growth is driven by

the self-employed working full-time rather thanpart-time, rising by 4.3% compared to 1.7% for

the latter. In fact, the BoE ination report shows

an almost uninterrupted increase in the share

of self-employment to total employment since

2000.

Self-employment share as % of total employment

(Source: Bank of England)

This spectacular rise has nally garnered

the attention of the press and placed self-

employment at the centre of economic

debates. Some argue that the rise in self-

employment is tied to the increase in

involuntary part-time work and is thus partof the problematic nexus of low productivity

and low wages. In our view, the persistence

of self-employment in the recovery points

to a structural change in the UK labour

market rather than a cyclical reaction to the

nancial meltdown. In the past, increases in

self-employment were linked to depressed

employment opportunities during economic

downturns which then reversed in times of

recovery. Now however, self-employment has

played a key role in augmenting unemployment

during the recovery as much as during the

crisis.

On the other hand, sluggish earnings and

productivity growth continue to pose the most

imminent threat. While ination is steadily

declining, total earnings continue to lag behind

the ination rate for the 5th year running. Total

pay rose by 1.1% for September to December

2013 but with ination at 2%, workers still

experience a signicant squeeze on theirincomes. According to the IFS, the average

British household is 6% poorer than before the

nancial crisis and is highly unlikely to recover

that lost ground before the 2015 general

election.

Key to slow wage growth is the below par

performance of labour productivity where

output per worker shrunk another 0.3%

between Q2 and Q3 2013. This is disappointing

considering that Q1 and Q2 2013 saw an

increase after falls in every single quarter in

2012. Unless labour productivity picks up,

declining unemployment will not necessarily

translate to better wages as people work

for less hours than they would like and

consequently more workers are required to

produce the same level of output. With the

size of the output gap at the core of economic

debates in the UK, improving productivity is

crucial for reducing the amount of slack in theeconomy and allowing wages to rise.

Vacancies continue to increase with the ONS

reporting 580,000 job vacancies for November

to January 2014, up 28,000 from previous

quarter and 89,000 from a year earlier. A

report by the Recruitment and Employment

Confederation (REC) and KPMG shows that

the growth in permanent appointments has

eased but remains marked. Vacancies havebeen rising at the fastest pace since May 1998

as demand rises sharply and the availability of

sta declines.

FREELANCING AND THE

LABOUR MARKETThe biggest news from the ONS February

report is the unabated rise in self-employment.

The number of self-employed has increased by


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the economy grows, people will work more

hours and move away from lower to higher

productivity jobs. This should occur over the

relatively short-term considering the pace of

economic growth and allow wages to increase

in tandem.

The slowdown in the labour market is to beexpected and despite January being a poor

month for public nances, the economy

seems to remain on the right track towards full

recovery. Policies announced in the Budget on

March 19th should solidify condence in the

economy and provide the necessary signals

for businesses to continue to invest. Dangers

are still lurking however, especially with regards

to the Scottish referendum set to take place in

September, with Chancellor George Osborne

and BoE Governor Mark Carney both clarifying

in February that a currency union between the

UK and an independent Scotland is o the

table.

The BoE will also need to monitor the

economic situation carefully in order to pick the

right moment to hike interest rates, although

it would be surprising if this occured before

the spring of 2015. Tensions in emerging

economies and the requirement for furtheradjustment in the Eurozone could pose

additional risks for UK growth. Nevertheless,

freelancers should eye the economy with

condence and expect that steady growth,

albeit at a slower pace, will continue to support

demand for their services.

Written by Georgios Nikolaidis

Economic Policy Adviser, PCG

This shows that self-employment is persistent

and possibly a manifestation of changing

working patterns and growing exibility in the

UK labour market. With low productivity for the

self-employed measured in terms of working

less than 30 hours per week, increasing

demand and easing credit conditions should

mean that the self-employed will soon bebetter situated to up their game. Freelancers,

a sub-set of the self-employed, stand at the

higher-end of the self-employment scale in

terms of skills and productivity and have

already seen their demand and rates increase

substantially.

Indeed, the REC/KPMG report shows that

temporary billings rose in January at a rate

only marginally slower that Decembers 15-

year high, reecting increased activity levels

at clients. Demand rose for all nine types of

contract sta on record, with engineering, an

industry abundant with freelancers, topping

the table. Finally, with rising demand for and

declining availability of contract workers, hourly

rates of pay for contractors continued to rise in

January.

VERDICT

The UKs macroeconomic outlook continues

to appear encouraging with most politicians,

analysts and businesses articulating their

optimism over the future direction of the British

economy. This overarching positive sentiment

is rubbing o on businesses who have started

to invest, contributing to a more balanced and

sustainable growth than the consumer-led

recovery observed in previous months. Falling

ination, a shrinking trade decit and mounting

business investment should be welcome news

for freelancers in the months to come.

Persisting problems in the face of low

productivity and stagnating wages are

particularly worrying but their resurgence is

bound to materialise; the question is howfast? While the drop in labour productivity

has been puzzling commentators given strong

employment growth, indications are that as


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Professional Contractors Group Ltd. Feb 2014

Registered in England and Wales, number 03770926, registered at 35 Ballards Lane, London N3

1XW. This guide is not intended to constitute legal or professional advice, and neither PCG nor

the documents authors accept any liability for any action or inaction taken on the basis of this

document. This document is intended for general guidance and information purposes only. It

has been prepared in good faith and represents PCGs own interpretation of the law; reasonable

eorts have been made to ensure accuracy. Whilst this document has been prepared with the

help of legal advice and research, its content is of its nature generalised and it is no substitute

for specic legal advice. Individual circumstances will always vary, and specialist professional or

legal advice should be sought where required.

ABOUT PCG

PCG, the voice of freelancing, is the cross

sector association for freelancers, contractors

and consultants in the UK, providing its

members with knowledge, representation,

community and insurance. With around 21,000

members, PCG is the largest association of

independent professionals in the EU. It is PCGs

fundamental belief that exibility in the labour

market is the key to ensuring Britains future

economic success.

CONTACT PCG

Heron House

10 Dean Farrar Street

London

SW1H 0DX

T: +44 (0)208 897 9970

W: www.pcg.org.uk

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