United Kingdom - Developments in Individual OECD Countries

OECD Economic Outlook, June, 1993

Since mid-1992, the U.K. economy has been slowly emerging from its longest post-war recession. With a large improvement in cost competitiveness and a substantial easing in monetary conditions, the recovery is expected to gather pace gradually. Unemployment fell modestly in the three months to April, but is expected to remain stubbornly high in the coming year and a half. Given the large degree of slack in the economy, the disinflation process is projected to resume, following a temporary break in the second half of 1993 due to higher import prices. But the actual outcome may be significantly influenced by the impact of the Budget measures next year, as well as future developments in the exchange rate. On present policies, the general government deficit is likely to reverse its upward trend in 1994, but the net debt-to-GDP ratio is nevertheless projected to reach 52 per cent in FY 1997/98, the level of the early 1980s. The projected widening in the current external deficit, in a weak conjunctural situation, is a another matter of concern, as it could constrain the scope for higher non-inflationary economic growth at some time in the future.

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Recent developments

While output began to rise around mid-1992, reflecting higher oil production, clear signs of a recovery in non-oil GDP began to emerge only in early 1993. Non-oil output rose at an annual rate of 2.5 per cent in the first quarter of 1993, bringing an end to the U.K.'s longest post-war recession. The latest CBI and Purchasing Managers' surveys, leading indicators, as well as a marked improvement in business confidence all point to a slowly rising trend in output in the months ahead.

Consumer spending has risen modestly since mid-1992. Retail sales volumes in January-March were 1.6 per cent above their fourth-quarter level of 1992, albeit falling slightly in April. New car sales and registrations have recovered sharply since the turn of the year, reflecting a recovery of consumer confidence and perhaps an ending to the long period of household balance-sheet adjustment. A key to the strength of the current recovery may be the end of falling house prices and the consequent easing of fears concerning debt deflation and negative equity. House prices rose 3 per cent between February TABULAR DATA OMITTED and April, and house sales, new mortgage commitments and housing starts have recovered significantly in response to the marked drop in mortgage rates and improved affordability of housing.(1)

Non-residential investment has proved resilient. Fixed investment reached a trough in mid-1991 and a slow recovery is now under way, sustained by buoyancy in the newly-privatised utilities and in oil production. Public-sector investment has also played a supportive role. However, stock-to-output ratios fell to record lows in 1992.

Unemployment fell unexpectedly by more than 50 000 persons in the three months to April 1993 and vacancies rose slightly. This quicker-than-anticipated drop in unemployment may have reflected a correction for excessive downward adjustments to employment levels in late-1992, in reaction to an exaggerated drop in business confidence. A shortening in adjustment lags between expected output and desired employment levels -- in response to labour market deregulation in the 1980s -- may also have been a factor in the fall in unemployment; employment in manufacturing has recovered since the turn of the year. Notwithstanding modest recent improvements, labour-market conditions remain depressed. Unemployment in April was still some 10 1/2 per cent of the labour force. Overtime worked has recovered slightly from a low base and long-term unemployment has increased by 50 per cent compared with its level in 1990.

Unlike previous episodes, the recent recession impacted on labour markets across all regions, sectors of the economy and income classes, which may explain the rapid moderation in wage settlements (see below). Full-time male employment was particularly hard hit. Job losses also affected the service sector, with restructuring in financial services, transport, communications and the distributive trades. The government sector has not increased hiring, in marked contrast to previous recessions. Self-employment has also declined after a decade of strong growth.

The year-on-year rise in the "headline" RPI and underlying inflation (on the official definition, excluding mortgage interest payments) fell to 1.3 and 2.9 per cent respectively in April, partly reflecting changes in local taxation.(2) Wide margins of excess capacity and subdued costs will continue to exert disinflationary pressures for a time. Service price increases, the major source of inflation inertia during 1992, are now on a downward path. The sharp depreciation-related rise in import prices has had little effect to date on retail prices because of stable unit labour costs for the whole economy and absolute declines in the manufacturing sector since the second half of 1992. In addition to moderating wage growth, these trends also reflect strong productivity growth related to labour shake-out.