In the UK, data on ten indicators (referred to as ‘domains’) on the wellbeing of the nation are collected to form the ‘Measure of National Wellbeing’ framework. These factors are those that the public report as mattering most, namely: personal wellbeing, relationships, health, what we do, where we live, personal finance, economy, education and skills, governance and environment.

New data released by the Office for National Statistics (ONS) provide an update on personal and collective wellbeing in the UK. This is the first data release since 2010 and therefore the first to include the effects of the Covid-19 pandemic. Some of the data cover more recent months than others.

What has happened to people’s personal finances and how has this affected their wellbeing?

How well individuals and households are managing financially is important for their wellbeing, as this influences life satisfaction, happiness and anxiety levels. Looking at average income is therefore a useful measure of personal and national wellbeing.

Inflation-adjusted median household disposable income in the UK was £31,385 in the financial year from April 2020 to March 2021. This is both a short- and long-term increase from previous years (see Figure 1).

Figure 1: Median equivalised UK household disposable income (in 2020 to 2021 prices)

Source: ONS

Looking at subjective measures of financial wellbeing also suggests an improvement in personal finances. In 2019/20, 44.5% of adults reported that they were satisfied with their household income, up from 42.8% in 2014/15. But at the same time, 7% of adults reported that they found it quite or very difficult to manage financially in 2019/20.  

Crucially, these figures cover a period prior to rising inflation and the cost of living crisis. Indeed, they don’t fully include the pandemic either – a time when many individuals experienced drops in income due, for example, to being furloughed.

Current increases to households’ costs – particularly energy bills – are becoming a major source of concern and are expected to have a significant effect on people’s attitudes and financial wellbeing in the immediate future.

What has happened to wider economic indicators?  

The country’s economic position affects people’s income and wealth, the state’s ability to provide public services, job creation and living standards. It is therefore an important contextual factor for measuring national wellbeing.

The pandemic brought large parts of the economy to a halt, with the government responding by increasing social support spending (for example, through the furlough scheme).

This had a significant effect on the UK’s economic wellbeing, increasing public sector net debt to 97.3% of gross domestic product (GDP) by the end of 2021. It is estimated that once this ratio exceeds 77%, it starts to affect economic growth negatively (Caner et al, 2010).

Net national disposable income per capita was also hit by the pandemic, dropping to £24,625 in 2020 (see Figure 2). This recovered to £27,023 in 2021, but it remains below the pre-pandemic level of £28,125 in 2019.

Figure 2: Real net national disposable income per capita, seasonally adjusted, UK

Source: ONS

The economic slowdown caused by Covid-19 reduced inflation to below 1% at the end of 2020 (ONS, 2022). Since then, it has continued to grow past the initial economic recovery, with the consumer prices index including owner occupiers' housing costs (CPIH) reaching 8.8% in July 2022.

It is expected to increase further, causing concern about the rising cost of living. This is likely to have a substantial effect on national wellbeing over the coming months.

What about education and skills?

Gaining an education and/or new skills can improve people’s socio-economic outcomes, which in turn contribute to better personal and national wellbeing.

The estimated value of human capital – the total net present value of working age adults’ projected lifetime earnings – has been increasing in the short and long term in the UK, reaching £23.8 trillion in 2020. This can be explained by an increase in the number of people of working age with at least an undergraduate degree or equivalent in recent years.

The proportion of people of working age with no qualifications has also been falling, more than halving to 6.8% in the third quarter of 2021, compared with 15.6% in the third quarter of 2002 (see Figure 3).

Figure 3: Percentage of adults aged 16 to 64 years with no qualifications, UK

Source: ONS

What about other factors related to wellbeing?

Personal wellbeing is central to understanding national wellbeing. It is measured by asking people questions about how satisfied they are with their lives, whether they feel that the things that they do are worthwhile, and their happiness and anxiety levels from the previous day.

In the first quarter of 2022, these measures remained below their pre-pandemic levels, representing a long-run deterioration in personal wellbeing. But there has been some short-term improvement compared with the first quarter of 2021 (during the UK’s third national lockdown).

People’s relationships also affect their happiness and quality of life. The latest data (from June to July 2022) show that people appear to feel well connected, with a high proportion of adults feeling that they can trust most people and can rely on people in their life if they have a serious problem (both of which are measures of social capital). These high levels of social capital support a well-functioning society, which can enhance national wellbeing.

Participation in both work and leisure activities also influences people’s wellbeing, lifestyles and relationships. Following the pandemic, unemployment in the UK rose to above 5%, but it has since fallen. It stood at 3.8% in March to May 2022 – a 48-year low.

People’s ability to enjoy leisure activities was also disrupted by the pandemic, but the proportion of people who accessed the natural environment rose during the first months of lockdown and it has stayed at this new higher level.

The pandemic halted the world economy and led to months of lockdown and social distancing rules in the UK.  This negatively affected numerous measures of personal and collective wellbeing, which have since started to recover following the lifting of the final Covid-19 restrictions in July 2021. But, the current cost of living crisis, uncertainty about the coming winter months and the possibility of an impending recession are expected to have a sizeable negative effect on wellbeing in the immediate future.

Where can I find out more?

• The full data release for the quality of life in the UK from August 2022 is available here.
• Previous data for 2019 with international comparisons are available here.
• Wellbeing Research Centre – University of Oxford.
• World Wellbeing Movement.

Who are experts on this question?

• Richard Layard
• Jan-Emmanuel De Neve
• Maria Cotofan

Author: Marco Vaitilingam

The post What do new wellbeing data reveal about the quality of life in the UK? appeared first on Economics Observatory.

Some claim that inflation is unavoidable and that it is inherently unequal since poorer households often have fewer options in terms of shopping and essential items take up a bigger share of their incomes. Others suggest that by looking around for bargains, even the cash-strapped should be able to avoid the worst price rises.

This article uses the latest data to test these two points of view: is inflation avoidable?

Figure 1: The UK's consumer price index, 1988-2022

Source: Office for National Statistics (ONS)

The UK’s three measures of inflation – the consumer price index (CPI), the consumer price index including housing (CPIH) and the retail price index (RPI) – are closely related. They are all currently over 10% in the UK.

These measures are the country’s most essential economic yardstick – since they are hard-wired into policy decisions. Inflation is used to uprate pensions, public sector pay and to set the pay-out on inflation-protected debt.

Inflation also influences the Bank of England’s decisions in interest rates, and the payments made and received by savers and borrowers across the economy. The official figures are based on records for over 100,000 prices, which are collected each month by the ONS. Knitting together these underlying historical files (known as ‘price quotes’) results in a database of over 40 million prices going back to 1988. (More detail on the data is available in this paper and the files can be found on my site, here.)

The argument that high prices can be avoided by judicious shopping rests on the common-sense observation that for any given item there will be many options – and many prices – on offer.

To take a late summer example, consider a trusted gardener’s tool: the garden spade. So far this year, the ONS has already collected almost 1,000 prices for garden spades across the country. These range from £5.99 to £44.99:  £14.99 is the most common (modal) price; £19.99 is the middle of the distribution (the median); and the average (mean) price is £21.73 (see Figure 2).

Of course, there is likely to be a difference in quality between a humble spade bought for less than £10 and a fancy one for over £40. But the basic economic function of the product is the same.

If all we cared about in the economy was spades, then the ‘thrift’ argument would be right. Massive savings are possible if you go for bargain basement goods.

Figure 2: Price of different garden spades

Source: ONS

But we care about more than garden tools, and so to measure the cost of living in a meaningful way, we need to track a bundle of items. To simplify comparisons over time, I focus here on the prices of goods that were included back in the 1988 CPI and are still used today. There are 106 of these perennial items and a table summarising them is available here.

This bundle includes a range of products – food and drink, tobacco, homewares, clothing, healthcare products and services – that people across the UK have been buying for the past 34 years.

To follow how shoppers of various types – from those that opt for the cheapest options, to those that pay for luxury – we can track the distribution of prices over time. Figure 3 identify nine spending levels, corresponding to evenly spaced points on the price distribution.

In 2022, the group opting for the lowest priced bargains (buying at the 10^th percentile) could get the entire bundle for £1,650. Those buying the highest-priced options (the 90^th percentile) would need to spend over £7,000. Those in the middle group (the 50^th percentile) would spend £3,500.

The fact that the bundles include one-off purchases – pushchairs, for example – that have a wide range of prices magnifies the spread. There is a wide range of prices for many goods, and so there are savings from ‘trading down’ to comparable, but lower priced, items.

Over the long run, the lower end of prices has risen less quickly, as might be expected, with the long-run inflation rate for our best bargain bundle close to 2%. Again, this seems to support the intuitive thrift argument: over the long run, the price of the cheapest goods tends to rise slowly. (This price distributions for all of the goods can be seen in this visualisation).

Figure 3: Consumer bundles by price decile, 1988-2022

Source: ONS

High costs for low prices

So, should the spread of prices in the economy make us less worried about inflation? There are three reasons why not.

The first is that for many goods, inflation is impossible to avoid. We can see this by comparing the plots below for garden spades and driving lessons (Figures 4A/4B).

Over the past 30 years, the spread of spade prices has changed very little: you could buy one for £15 in 1990 and you can today. But for driving lessons, the pattern is different. As time passes, prices rise at the top and disappear at the bottom. So, while driving lessons priced at £11 per hour were common in 1990, the cheapest today is closer to £20.

Learning to drive can be an economic and social necessity – if you live rurally, for example – and the only option is to pay higher prices. Energy markets, covered extensively on the Economics Observatory site, are another example of this.

Figure 4: Price evolution, 1990-2022

Panel A: Garden spades

Panel B: Driving lessons (one hour)

Source: ONS and author's calculations

The second problem is that you can’t keep switching to ever cheaper options. At some point those driven to find bargains will end up with much of their shopping the bargain bucket. And while historically, prices here have risen more slowly, that pattern has evaporated with the UK’s latest bout of inflation.

In fact, those that buy goods in the cheapest three buckets of goods (the 10^th, 20^th and 30^th percentiles) are seeing higher rates of inflation than those at the top (the 70^th, 80^th and 90^th percentiles). Families that shop at the bottom now face higher inflation than those that shop at the top.

Figure 5:  Average inflation rates, consumer price baskets

Source: ONS and author's calculations

Note: Buckets defined as average across inflation rates for decile groups (Bottom = 10^th, 20^th, 30^th; Middle = 40^th, 50^th, 60^th, Top = 70^th, 80^th, 90^th).

The third problem is volatility. To see why this matters, step back and consider why inflation matters. In part, it is due to the costs that workers and shops face – often referred to as ‘shoe-leather’ and ‘menu’ costs – when trying to keep up with rising prices.

But it is unexpected shifts in inflation that are especially damaging, since these undermine plans in the economy – from wages rates to investment decisions. This is why John Maynard Keynes saw unanticipated inflation as the most malign type, writing about the ‘precarious life of the worker’ and ‘excessive windfalls’ to profiteers (Keynes, 1956).

As the UK’s inflation targeting regime was set up, volatility and the violation of expectations were seen as a vital target. Useful, and very readable, articles from this period include Leigh-Pemberton (1992) and Briault (1995). Price rises are supposed to be low, and predictable.

Assessed over short windows of time, prices are highly volatile, as a series of seminal studies focused on US data by, Emi Nakamura and Jón Steinsson (2008), Pete Klenow (2010), and Virgiliu Midrigan (2011) have shown. Some of the reasons why are intuitive – firms offer temporary sales and when multiproduct companies decide to change prices, they often change them all.

The important point here is that prices, as well as trending up with inflation, are in constant flux. And the problem is that the price bundles for the perennial goods shown here seem to have a lot of volatility at the bottom. The long-run standard deviation (the distance from the average) of the cheapest food prices is around 11% higher than for the most expensive, for example.

Other categories, including services, show volatility at the top and bottom, but less in the middle. The concern is that those shopping at the low end are likely to pay a high price in terms of inflation uncertainty.

In summary, there are elements of truth in both perspectives on prices. A capitalist economy provides choice, and we have seen a huge ‘fanning out’ of prices in the UK over the past 30 years. So, many families will be able to make savings by trading down – opting for bargain basement options and forgoing luxury. Indeed, this intuitive response to higher prices seems to be playing out across the economy, as evidence from supermarkets and consultancies shows.

But this does not reduce the problem, nor ease the headache for the Bank of England and HM Treasury. You can’t scrimp forever, and the analysis here shows that, once you reach the bargain basement, prices are rising fast and are volatile. The latest inflation in the UK, the worst since the 1970s, is one in which those at the bottom are paying some of this highest costs.

Technical notes/data access

The data used in this essay were first published as Davies, 2021. I update the databases each month and make them openly available via my website here. Please get in touch if you have questions related to a research or policy project.

The specific numbers used in these figures, together with the JSON spec that draws the charts (using Vega), are all available on my GitHub page, here.

Where can I find out more?

• Inflation and price indices: Latest data and updates from the ONS.
• How is inflation affecting your household costs? ONS inflation calculator.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Michael McMahon
• Xavier Jaravel

Author: Richard Davies

The post Is inflation avoidable? appeared first on Economics Observatory.

Unemployment rates

The headline UK data indicate a tight labour market with low numbers of people unemployed and high numbers of vacancies. The unemployment rate sits at 3.8% for the period between March and May 2022, down 1.1 percentage points from the previous year. Similarly, there is around one unemployed person for every vacancy that exists at the moment, compared with 1.9 this time last year.

While we do not have a regional breakdown of data on vacancies, we can see what is happening to unemployment across regions of the UK.

Most regions now have lower unemployment rates than they did in the immediate pre-pandemic period (see Figure 1). Unemployment rates were generally around historic lows at that time (see Figure 2).

Figure 1: Change in the regional unemployment rate (16+) between January-March 2020 and April-June 2022 (latest data)

Source: Office for National Statistics (ONS)

Figure 2: Regional unemployment rates (16+), post 1992 high/low, January-March 2020 and April-June 2022 (latest data)

Source: ONS

Economic inactivity

The headline measure of economic inactivity covers a broad range of situations in which people of working age (16-64) are unable to be economically active. These include some we might think of as ‘good’ reasons for economic inactivity, including being a student, as well as more worrying reasons, such as long-term ill health.

Given the impact of the pandemic on the health of the UK population, there has been a significant amount of attention paid to economic inactivity over the past year, as public health restrictions have all but ended. An additional trend that seemed to emerge during the pandemic has been a rise in retirement, which is another reason why people of working age might be economically inactive.

Figure 3: Change in economic inactivity among people aged 16 to 64 by reason, April 2021 to March 2022 compared to April 2019 to March 2020

Source: ONS

Most regions have more people who are economically inactive now than in the year prior to the pandemic (the white squares in Figure 3 indicate the overall change by region in Figure 3).

In most regions, the key drivers of more people being economically inactive are ill health, retirement and because they are students. At the same time, the number of individuals who are economically inactive because they are looking after family or the home is generally declining.

Earnings

Undoubtedly, the big story in the labour market remains wage growth lagging well behind inflation, which means that many households face a cost of living crisis.

New data also show that inflation has hit 10.1%, while this week’s labour market data highlight that over the past year, average total pay growth was 5.1%. Pay growth was higher for those working in the private sector – at 5.9% – while public sector pay grew by only 1.8%.

The headline monthly measure of earnings does not come with a regional breakdown, but there is a relatively new data source – known as the ‘pay as you earn real time information’ dataset – that does provide this.

The measure is designated as an ‘experimental statistic’, as it is still in the development phase, and so should be used with more caution than ‘national statistics’ publications.

What do these data show?

While median pay growth for the UK as a whole in these data is slightly higher (at 6.6%) than the headline measure (which is only 5.1%), there is variation across regions (see Figure 4). The biggest increase in median pay over the past year has been in the South West and the lowest in Northern Ireland, at 7.6% and 4.7% respectively.

Just as there is variation across regions, there are also differences within regions. Both the East Midlands and Yorkshire and the Humber have a difference of 1.7 percentage points between the areas with the fastest and slowest pay growth.

Median pay in North Yorkshire grew by 8.2% over the past year, but only by 6.6% in West Yorkshire. Meanwhile, in the East Midlands, median pay in Derbyshire and Nottinghamshire grew by 7% over the past year compared with only 5.4% in Lincolnshire.

A number of factors are driving these differences, including the types of businesses and the nature of work in these areas.

Figure 4: Annual growth in median pay of payroll employees by region ITL1 and ITL2

Source: ONS

The coming months will be very difficult for households across the UK, with inflation forecast by the Bank of England to rise above 13%, and wage growth struggling to keep pace.

Figure 5: Consumer price index (CPI), percentage change

Source: ONS

What these new data highlight is the diversity of economic experience across different parts of the UK over the past couple of years. It is this that should provide the starting point for analysis as we head into exceptionally challenging economic times.

Where can I find out more?

• Labour market in the regions of the UK: This publication from the Office for National Statistics provides a comprehensive overview of all the available data.
• The labour market is making history for the wrong reasons: Resolution Foundation article by Nye Cominetti and Hannah Slaughter.
• Long Covid and the labour market: Report by the Institute for Fiscal Studies.

Who are experts on this question?

• Stuart McIntyre
• Jonathan Wadsworth
• Stephen Machin

Author: Stuart McIntyre

The post The UK’s regional labour markets: what do the latest data reveal? appeared first on Economics Observatory.

But what is driving inflation? This update delves into the data underlying our measures of inflation to find out.

Figure 1: Line chart of CPI, 1988-2022

Source: ONS

The recent inflation is striking in just how broad based it is. The ONS breaks down the contributions to inflation by allocating goods and services into high level categories known as ‘divisions’. Across these divisions—food, housing, transport, clothing, furniture—we are seeing price pressure. This is rare. In less inflationary times the typical pattern is for some divisions to be rising, while others are flat or falling. 

The data underlying these findings—so called ‘micro data’—are individual prices collected by the ONS in shops across the country. The dataset is huge (well over 40 million prices have been collected since 1988) and allows us to take a finer look at how and why inflation is surging. For more on the data, see this page.

Delving into the micro data in normal times, we find a lot of price flux. That is, even when inflation is rising, there tend to be some shops that are cutting their prices. In other words, prices tend to ebb and flow, as the pattern of the past ten years (see Figure 2). Recently, though, a striking (and historically unique) anomaly has emerged. The lines tracking the share of prices rising and falling have diverged. There are far fewer price cuts out there. This is another measure of just how widespread the inflation is that we are facing.

Figure 2: Month-on-month price changes

Source: ONS; Davies (2022)

Inflation is an annual concept—the price today compared to 12 months ago. So, the next chart asks the same question over a yearly window. The longer window smooths out some of the monthly flux, and clearly shows periods in which price rises become more common, and inflation rises.

Figure 3: Annual price changes

Source: ONS; Davies (2022)

Another interesting angle is to look at the prices of individual goods and services. Figure 4 does this, focusing on a selection of items which price rises, across the country, were most common. The left-hand panel shows the proportion of prices that rose compared to last year. For some items, all the prices the ONS collected rose—meaning inflation would be completely unavoidable. Annual prices are up for fuels (kerosene); smokers face higher costs with rolling tobacco, cigarettes and cigars all up; ready meals and take away food (fish and chips strongly up) have risen; as have staples like milk, cheese and butter. Those seeking home improvements will be stung by high prices of MDF, kitchen units and paint.

Figure 4: Micro data – main risers

Source: ONS; Davies (2022)

The higher frequency data shows a different story, and one that is increasingly causing concern. Food dominates the list of price risers, with milk, spaghetti, baked beans, salmon fillets, bacon, lettuce, cucumber and eggs all seeing high numbers of price rises. Normally these are exactly the type of items that see a great deal of flux. This means prices being up one month doesn’t necessarily lead to annual inflation, since they could soon drop down again. But as Figure 2 above shows, with price cuts a rarity, the short-term price jumps seen in the micro data may well become locked in.

Where can I find out more?

• The latest ONS data for inflation is available here.
• The latest wages data can be found here.
• More information on the prices micro data is available here.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Michael McMahon

Author: Richard Davies

The post Inflation update: what’s driving the cost of living crisis? appeared first on Economics Observatory.

For months, many people did their jobs without travelling into work, often in makeshift offices and workspaces, which led to a substantial reduction in commuting. This caused a surge in demand for larger, rural and/or suburban houses with extra rooms, and was at one stage hailed as the start of a big city exodus.

But now that the worst of the pandemic has eased, effective vaccines have been rolled out and many people are returning to their places of work, how have remote working patterns developed?

Between the end of 2019 (Q4) and the start of this year (2022 Q1), the number of people in the UK working from home more than doubled, climbing from 4.7 million to 9.9 million. That’s according to new data from the Office for National Statistics (ONS) – see Figure 1.

Compared with before the pandemic, there are now over five million more people working remotely in the UK. This is roughly the equivalent of the entire working population of Austria.

The increase has varied by nation, with the largest growth in home-working seen in Scotland (up by 203.5%, or 544,000 people). The smallest change has been in Northern Ireland (increasing by 56.4%, or 49,000 people).

Figure 1: Changes in home-working by UK nation/region (2019 Q4 to 2022 Q1)

Source: ONS

Looking at the regions of England, it is the richer places where the share of home-working grew the most. The places with the highest percentage of people working from home in 2022 Q4 were London (increasing by 37%, up by 1.9 million), the South East (36.9% or 1.6 million) and the East of England (31.1% or 903,000). In contrast, the regions with the lowest share were the North East (22.4% or 262,000) and Yorkshire and the Humber (26.2% or 668,000).

People with traditionally higher-paid jobs – such as those working in finance or professional services – can do their jobs at home more readily. In most cases, all that is required is a stable internet connection and perhaps a private room.

In contrast, jobs that are typically lower paid – such as retail, hospitality, manufacturing or social care – require personal interaction, physical labour and/or tools and machines located in the workplace.

It is therefore unsurprising that richer parts of the country, with a higher concentration of people working in higher-paid desk-based roles, saw a greater shift to home-working over the course of the pandemic.

How did this affect commuting between regions?

Unsurprisingly, commuting patterns also changed drastically – see Figure 2. Between late 2019 and early 2022, the number of regional commuters – defined as those working in one region but living in another – fell across the UK by 26.1% (down by a total of 629,000 individuals).

This decline was seen in all UK regions, but was largest in London (decreasing by -36.8%, down by 367,000 people), followed by the South East (-19.1%, down by 117,000) and the East Midlands (-21.2% or 32,000 fewer commuters).

Figure 2: Commuting patterns by UK nation/region (2019 Q4 to 2022 Q1)

Source: ONS
Note: There were no commuters in or out of Northern Ireland from other UK regions in either the October to December 2019 sample or the January to March 2022 sample. Northern Ireland is therefore absent from the figure.

What about hybrid working?

As restrictions eased, some workers adopted a hybrid working pattern, choosing to work remotely on some days and travelling into the office on others. Many enjoyed some benefits from home-working during lockdown, such as reduced commuting times and costs.

The latest ONS data capture the change in hybrid working from 2019 Q4 to 2022 Q1 – see Figure 3. By the spring of 2022, 14.3% of people (2.8 million workers) who do not mainly work from home said they did so at least once per week. This share was highest in London, with 24.3% of people working flexibly (627,000 workers), and lowest in the East Midlands, at 9.1% (126,000 workers).

Figure 3: Share of hybrid workers by UK nation/region (2022 Q1)

Source: ONS

Does home-working benefit men and women equally?

The data also highlight differences in home-working patterns between men and women. In the UK, 16.5% of men reported that they worked from home in 2019 Q4, compared with 12.3% of women. Although a greater proportion of men still worked from home in early 2022, the gap had narrowed, with 31.2% of men home-working compared with 29.9% of women.

Both men and women saw an increase in home-working across all UK regions between 2019 Q4 and 2022 Q1 (see Figure 4). Women in London represented the largest overall rise (at 24.9 percentage points). The smallest increase was for men in Northern Ireland (at only 4.2 percentage points).

Figure 4: Change in home-working percentage, by sex (2019 Q4 to 2022 Q1)

Panel A – women

Panel B – men

Source: ONS

Conclusion

The data suggest that working from home is here to stay, at least in some form. For many workers, the benefits of working remotely are clear, with less time spent commuting seen as particularly positive.

But working from home is not possible for everyone, and its popularity varies according to location, occupation and even gender. It is also unclear exactly how the rise of remote working will affect the wider economy.

Should current trends continue, it seems unlikely that we will ever return fully to pre-pandemic work patterns. How this will affect productivity, growth, working conditions and wages remains to be seen.

Where can I find out more?

• The ONS data release covering home-working are available here.
• More data on employment and employee types can be found here.

Who are experts on this question?

• Jonathan Haskel
• Paul Mizen
• Nick Bloom
• Jonathan Dingel
• Jesse Matheson
• Henry Overman

Author: Charlie Meyrick

The post Working from home: what can we learn from the latest UK data? appeared first on Economics Observatory.

The data, covering the calendar year 2020, include figures for Northern Ireland, Scotland and Wales, and the nine regions of England. Across the UK as a whole, there was a substantial year-on-year fall in total imports and exports from 2019. But there was considerable variation in the size of the decrease among different regions – see Figure 1.

Figure 1: Year-on-year percentage change in value of total trade imports and exports by ITL1 region, 2019 to 2020

Source: ONS
Note: The ‘Unknown’ category includes companies unmatched to specific regions, some offshore oil activity, non-monetary gold, government spending in trade in goods, and national imports of gambling in trade in services. The other 12 are what are known as the International Territorial Level (ITL) 1 statistical regions of the UK.

The West Midlands saw the largest year-on-year fall in total exports, at -25.3%. This decrease, seen in exports of both goods and services, may have been due to the prevalence of car (and car part) manufacturing in the region. The sector struggled significantly in 2020, in part because of a global shortage of semiconductors.

Beyond cars, both the wider manufacturing and accommodation and food service industries saw large decreases in trade during the pandemic. This is likely to have contributed to the shrink in exports seen in the West Midlands.

The East of England experienced the second smallest fall in total exports, at -4.3%. This is likely to be a result of the numerous research institutions related to medicine, pharmaceuticals and biosciences located in the region. Many of these research areas experienced a surge in demand in response to the pandemic. Overall, the professional, scientific and technical activities industry experienced a 22.5% increase in trade compared with 2019.

What happened to the UK’s trade balance?

The UK had a total trade surplus of £6.3 billion in 2020, as all four nations exported more than they imported. This contrasts with the deficit of £27.6 billion the previous year.

London was the main contributor to this, with a balance of £54.2 billion (driven by service exports). A significant proportion of these exports is likely to have come from the financial and insurance services industry. Recent analysis shows that, overall, this sector accounts for around a third of UK service exports, with half of the sector’s output generated in London.

The South East had the highest trade deficit of the regions of England, with £108.6 billion in imports. This is due in part to the presence of the Folkestone and Dover ports, as well as nearby warehousing in the region.

What happened to trade in goods?

All UK nations bar England had surpluses in goods trade in 2020, with the North East being the only region in England that was a net exporter. The South East was the largest importer of goods, accounting for 19.9% of UK goods imports.

Figure 2 shows that the value of goods imported and exported fell in all nations and regions from 2019 to 2020. London experienced the largest percentage decrease in goods imports, primarily due to buying in fewer products from countries outside the European Union (EU).

Figure 2: Year-on-year percentage change in value of trade in goods imports and exports by ITL1 region, 2019 to 2020

Source: ONS

What about trade in services?

The UK had a surplus in services trade of £135.7 billion, up from £103.3 billion in 2019. All nations and regions were net exporters of services. London accounted for 41.1% of imports and 48.5% of exports, trading in services more than any other region.

But imports in services fell in all regions from 2019 to 2020, and exports fell in ten of the 12 regions – see Figure 3. Northern Ireland was one of the two regions that saw an increase in exports, largely due to trade in financial and insurance services.

Figure 3: Year-on-year percentage change in value of trade in services imports and exports by ITL1 region, 2019 to 2020

Source: ONS

In terms of different areas of the economy, the travel industry dropped from being the largest contributor to services imports in 2019 to the fourth largest in 2020. Lockdowns and international travel restrictions caused travel imports to decrease by -71.1% on average across the UK.

Covid-19 restrictions also hurt exports of services in the accommodation and food service sector. Large decreases were seen in London, the West Midlands and the South East, in particular. This was due in part to drops in demand for retail, tourism and entertainment, as well as nationwide controls imposed on social interactions.

The new ONS data show that the pandemic had a significant impact on UK trade. It is difficult to assess the extent to which these patterns reflect short-term trade disruptions or longer-term supply chain adjustments.

The Trade and Cooperation Agreement between the UK and the EU came into effect in January 2021, as the Brexit transition period ended. It is likely that this will lead to further longer-term supply chain adjustments, and changes to UK trade patterns across the nations and regions.

Where can I find out more?

• The full data release for international trade in UK nations, regions and cities in 2020 is available here.
• Previous data for 2019 are available here.

Who are experts on this question?

• Thomas Sampson
• Meredith Crowley
• Swati Dhingra

Author: Marco Vaitilingam

The post How has the pandemic affected international trade across the UK? appeared first on Economics Observatory.

The strictness of lockdown measures varied by country and over time. For example, the UK is currently the country with the least stringent restrictions in the G7 (as measured by the University of Oxford stringency index), but it had the tightest reported restrictions at the start of 2021.

New data from the Office for National Statistics (ONS) outline the level of spending and provide comparisons between the G7 countries’ labour markets. Figure 1 outlines the level of spending by each country on fiscal measures to offset the negative impact of lockdown on household incomes. The chart plots the level of spending on non-health measures and forgone revenues in response to the pandemic as a share of 2020 GDP.

Figure 1: Spending on non-health measures as a percentage of 2020 GDP – by G7 country

Source: ONS, IMF

The United States spent the most (at around 22% of 2020 GDP), with the rest of the G7 spending between 7% and 15% of 2020 GDP. These ratios are huge relative to the response to previous economic shocks. For example, the European Commission recommended a stimulus plan of 1.2% of GDP for member countries during the global financial crisis of 2007-09.

But these numbers do not include the impact of automatic stabilisers – the (non-discretionary) increases in transfers and falls in tax revenues caused by a negative economic shock. This means that the percentages shown in Figure 1 may underestimate the extent of government spending across the G7.

What did governments spend money on during the pandemic?

Beyond healthcare, fiscal spending during Covid-19 was targeted primarily at two areas: job retention schemes and wage support; and direct support to households through extended benefit payments and tax deferrals. European countries seemed to have favoured spending more on the former area compared with Northern American countries, which made greater use of the latter.

Job retention schemes, such as furlough in the UK, were part of the response of all G7 countries. The Organisation for Economic Co-operation and Development (OECD) estimates that job retention schemes were supporting 50 million jobs across its member countries by May 2020. These schemes not only aimed to help households maintain their stream of income but were also used ease the bumps as economies were re-opened as the pandemic started to subside and vaccines were rolled out.

What was the impact on G7 labour markets?

During the period from the last quarter of 2019 to the last quarter of 2021, employment levels across all G7 countries apart from France and Canada remained below pre-pandemic levels – with UK employment 1.4% below its 2019 Q4 level.

Within employment statistics, people of working age (15 to 64 years) can be labelled in three different ways: employed, unemployed or economically inactive (not working but not seeking to start or cannot start work). This means that flows out of employment do not necessarily mean flows into unemployment. They can also be made up of flows into inactivity. Flows into inactivity have been particularly large in Italy, the United States and Canada. This is perhaps a result of lockdown measures discouraging people from searching for jobs.

Another possible explanation for the increase in the number of inactive workers may be that the closure of schools has led to childcare pressures on women in the working age population. The extra burden of home schooling, which fell disproportionately on women in the UK, may also have caused more women of working age to withdraw from the workforce, and become inactive.

But increases in inactivity levels have now been reversed across the G7, with the exception of the UK. Analysis from the Office for National Statistics (ONS) finds that this is partly a reflection of older workers leaving the labour market since the start of the pandemic – now that so many near-retirement people have left the workforce, a smaller proportion of those left over fall into this category.

Figure 2: Changes in real household disposable income, annual hours worked per worker, and the employed population

Source: ONS, OECD

Figure 2 reflects different fiscal policies adopted by each country. According to the data, across the G7, employment levels fell most compared with 2019 levels in the United States (-6.2%), followed by Canada (-5.2%) and then Spain (-2.9%).

Turning to the change in hours worked, this fell most in the UK (-11.1%), followed by Italy (-9%) and then France (-7.2%).

Finally, in terms of the change in real disposable income, this actually increased in the Unites States (+6.2%), Canada (+6.8%), Germany (+0.3%) and Japan (+3.8%), but fell in the UK (-0.7%), Spain (-5.4%) and Italy (-2%). Real disposable incomes remain unchanged from 2019 levels in France.

Changes in disposable income are large in countries that focused their fiscal strategy on direct support. For example, the United States and Canada used cash handouts to help households during the pandemic. European countries, which focused on wage support, do not see this strength in disposable income, because wage support schemes will not fully replace workers’ income (the UK’s furlough scheme only paid up to 80% of a worker’s wage).

Notably, the largest falls in employment and in the hours worked per worker come from the United States and Canada, again highlighting the differing outcomes from fiscal strategy.

Conclusion

Protecting both lives and livelihoods was at the heart of public policy across the G7 during Covid-19. Different countries adopted different strategies to protect their labour markets, which placed greater emphasis on either direct transfers or income support. As a result, the impact of the pandemic on various labour market outcomes varied across countries.

In North America, employment fell further but real household incomes were protected. In Europe, the opposite was true, with jobs being protected at the expense of real income levels. Across the board, the share of fiscal spending as a share of GDP was high, with the United States spending the most proportionally.

Where can I find out more?

• The ONS data are available here.
• Previous releases can be found here.
• The Covid-19 Government Response Tracker – or University of Oxford stringency index – is available here.

Who are experts on this question?

• Jonathan Cribb
• Mike Brewer
• Abi Admas-Prassl
• Richard Disney
• Jonathan Wadsworth
• Andrew Aitken
• Stephen Machin

Author: Elias Wilson, Charlie Meyrick

The post How has the UK’s pandemic labour market compared with other G7 countries? appeared first on Economics Observatory.

The consumer price index including owner occupiers’ housing costs (CPIH) – the most comprehensive measure of inflation – rose by 7.9% in the 12 months to May 2022. This is up from 7.8% in the 12 months to April (see Figure 1).

Figure 1: CPIH, CPI and OOH inflation rates (May 2012 to May 2022)

Source: ONS
Note: CPIH – consumer price index including owner occupiers’ housing costs; CPI – consumer price index; OOH – owner occupiers’ housing costs

There are several underlying factors driving up the indices (see Figures 2a, 2b). Soaring utility bills mean that the largest contributor to the CPIH rate was household services (at 2.79 percentage points).

Transport costs are also a key driver (at 1.5 percentage points), with the price of petrol continuing to rise. The average price recently hit £1.89 per litre in the UK. Similarly, diesel costs climbed to a new high of £1.96 per litre and may soon reach an average of £2 at pumps across the country.

Figure 2: Contributions to the 12-month CPIH rate (May 2020 to May 2022)

Panel A: CPIH rate, percentage point change

Panel B: Contributors, percentage point contribution

Source: ONS

According to the ONS, the contributions from housing/household services and transport account for 4.29 percentage points of the latest CPIH figure. This is more than half of the CPIH 12-month inflation rate for May 2022, with their combined weight comprising 42.5% of the basket.

This is partly due to the increase in the cap on energy prices on 1 April 2022. According to the Office of Gas and Electricity Markets (Ofgem), which determines the cap, people on standard energy tariffs, paying by direct debit, will see their utility bills rise by £693 (from £1,277 up to £1,971 per year). For those on prepayment plans, bills will go up by £708 (from £1,309 up to £2,017). The increase is driven by a record four-fold rise in global gas prices over the last six months, driven largely by the Russian invasion of Ukraine.

The war has also led to a substantial rise in the prices of wheat, sunflower oil and fertiliser, pushing up the cost of food products for consumers all over the world. In the UK, food and non-alcoholic drinks contributed 0.78 percentage points to the May CPIH figure, up from 0.61 in April and 0.39 in January (before the invasion).

What does this mean for the cost of living crisis?

The growing costs of utility bills, petrol and food are a major concern for low-income households in the UK. It is estimated that the average annual grocery bill could rise by as much as £380 this year. For people counting every penny to make ends meet, this will be a substantial challenge to their financial security.

Lower-income households typically spend a greater share of their income on energy and food. This means that when these products go up in price, this group is hit particularly hard. People on lower pay are also less likely to have savings to fall back on and may resort to eating less or not heating their homes. This poses a serious health risk, particularly for children and older people.

There is already clear evidence that many people in the UK cannot afford to feed themselves adequately. Food bank use in the UK is surging, with the Trussell Trust reporting that it delivered 2.1 million food parcels in the year to April 2022, with 830,000 of those going to children.

How might the situation develop over the coming months? With the Bank of England forecasting that inflation could reach an annual rate of more than 11% later this year, and with energy prices set to spike again in October ahead of colder winter weather, the cost of living crisis represents a major challenge for UK policy-makers.

The Bank has already increased interest rates (from 1% to 1.25%) in an effort to curb price increases by ‘cooling down’ the economy. But this risks dragging the UK into a recession, piling further misery on those struggling most.

Policy-makers are also facing pressure from workers and trade unions, which argue that without wage increases, people will continue to see their living standards decline. The current industrial action by the National Union of Rail, Maritime and Transport Workers (RMT) has been met with fierce criticism from the UK government, which has warned of a wage-price spiral (where an increase in wages causes further increases in prices and vice versa) if union demands are met. But RMT members are adamant that now is the time to support the workforce by increasing pay, easing the squeeze on living standards caused by rising prices.

Whatever the outcome of the strikes, it is unlikely that this debate will subside any time soon. As wage growth fails to keep up with price increases, and people feel the full force of higher energy bills in the autumn and winter, the cost of living crisis is set to dominate headlines for months to come.

Where can I find out more?

• The latest ONS inflation data are available here.
• Previous data can be found here.
• The latest report from Bank of England’s Monetary Policy Committee can be found here.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Jack Leslie
• Michael McMahon

Author: Charlie Meyrick

The post Cost of living crisis: what do the latest UK inflation data reveal? appeared first on Economics Observatory.

According to the latest data, UK earnings including bonuses (known as total pay) grew by 6.8% during February to April 2022, compared with the same period last year. Pay excluding bonuses (known as regular pay) grew by 4.2%. High bonus payments, especially in March 2022, combined with increasing regular pay, mean that total pay growth was strong in this period.

But price rises are negating this strong growth. Consumer price inflation including owner occupiers’ housing costs (CPIH) stood at 7.8% in April 2022. As a result, when adjusted for inflation, growth in total pay was 0.4% in February to April 2022, while regular pay fell by -2.2% compared with the same period last year.

In terms of single-month annual growth rates (comparing each month’s pay levels with the same month one year ago), total real wages fell by -2.4% and regular real wages by -3.4% (see Figure 1). The latter is the biggest drop in over two decades.

Figure 1: Total pay, regular pay and CPIH growth (January 2001 to April 2022)

Source: ONS

This means that including bonuses, earnings are now worth 2.4% less than they were in April 2021. Earnings excluding bonuses are now worth 3.4% less. With inflation predicted to rise to around 10% later this year and if wage growth fails to keep up, then these pay contractions are only set to get worse.

How have different sectors of the economy been affected?

Wage growth has not been uniform across sectors and industries. According to the latest data, average total pay growth for the private sector was 8% in February to April 2022. In the public sector, it was 1.5% (see Figure 2). This was driven by stronger regular pay growth as well as higher bonus payments in the private sector.

Figure 2: Average weekly earnings annual growth rates for total and regular pay – by sector (January-March 2001 to February-April 2022)

Source: ONS

These figures are not adjusted for inflation, so they do not reveal the extent to which workers in the private and public sectors are feeling the burden of price increases. Instead, this chart shows the disparity between the two parts of the economy.

This 3.8 percentage point difference in total private and public sector pay growth is among the largest ever recorded. The last time the gap was this wide was mid-2021. But this was at a time when the data were being strongly affected by base effects, as the UK came out of lockdown.

Wages were very low in 2020, due to Covid-19 measures such as the furlough scheme, which cut earnings by 20% on average. This meant that when pay slowly returned to normal levels after lockdown restrictions were lifted and more and more people could return to work, earnings sprung back.

In terms of different industries, the finance and business services sector have had the largest three-month average year-on-year growth rate (at 10.6%), partly because of strong bonus payments (see Figure 3).

Wholesale, retail, hotels and restaurants saw a growth rate of 8.4%. This industry group includes cafes, restaurants and pubs, which had the highest proportion of workers on furlough during February to April 2021. This means that the 15.9% wage growth rate within this sector is affected substantially by the base effect.

Figure 3: Average weekly earnings annual growth rates for total pay – by industry (January-March 2018 to February-April 2022)

Source: ONS

Conclusions

The latest data show that wages are failing to keep pace with rising prices. The extent of the lag depends partly on the sector in which an individual works, and whether they usually receive a bonus or not.

Areas of the economy with traditionally high bonuses, such as finance, have been able to cushion their workers against surging inflation to some degree. In contrast, people working in the public sector, such as civil servants and NHS workers, continue to see the value of their take-home pay shrink. This is due to lower growth in regular pay and the fact that bonuses are rare, or smaller if they are paid.

With energy prices set to rise further this autumn, and food and other commodity prices under continuing pressure due to the Russian invasion of Ukraine, many will be worried about making ends meet. The cost of living crisis risks plunging thousands of people into poverty, and policy-makers must act now to support those whose wages are most under pressure from soaring prices.

Where can I find out more?

• The latest ONS weekly earnings data are available here.
• Previous data can be found here.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Michael McMahon
• Jonathan Wadsworth

Author: Charlie Meyrick

The post What do the latest UK labour market data mean for real wages? appeared first on Economics Observatory.

Overall, UK GDP grew by 1.1% in these three months. But the data reveal that output did not rise evenly across the four nations. GDP grew in Northern Ireland, Scotland and England during this period (at 1.5%, 1% and 0.6%, respectively) but shrunk by -0.3% in Wales (see Figure 1).

Figure 1: Quarterly GDP growth (2020 Q1 to 2021 Q3) by UK nation

Source: ONS, Northern Ireland Statistics and Research Agency (NISRA), Scottish Government

Note: Quarterly GDP based on GVA (gross value added); percentage changes are based on chained volume indices of gross value added at basic prices

The dip in Welsh GDP was exceeded by five English regions. Among them, the North East experienced the largest quarterly drop (-1.2%). In contrast, London’s GDP grew by 2.3% in the same period (see Figure 2).

The sectoral breakdown provides a clue as to why this might be the case: accommodation and food services – including hotels and restaurants – were the fastest growing sector in the quarter, with London the best performing region in this sector.

Manufacturing, energy and scientific activity also experienced significant relative declines in the North East. The Midlands and East of England, which also slowed but only by half as much, did not see the same declines in manufacturing.

Figure 2: Quarterly GDP growth (2020 Q1 to 2021 Q3) in England by region

Source: ONS, NISRA, Scottish Government

Note: Quarterly GDP based on GVA (gross value added); percentage changes are based on chained volume indices of gross value added at basic prices

The path of the economy during this period was heavily dictated by the spread of Covid-19 – recall that the Delta variant was the predominant threat at the time. England had the broadest relaxation of rules on 19 July 2021. Scotland also eased restrictions on the same day, but to a lesser extent. Northern Ireland and Wales followed suit on 26 July and 7 August, respectively, but with different controls remaining in place.

In this context, it is not surprising that GDP growth in this quarter was lower compared with the previous one (5.4% overall). The figures for April-June 2021 started from a lower base, and captured the re-opening of pubs, restaurants and non-essential shops after the third national lockdown.

Yet the removal of all social distancing restrictions, face mask obligations and gathering limits (as well as work from home guidance) in England does not appear to show up as exceptional English GDP growth.

Inequalities in the recovery between English regions can also be explained to some extent by the spread of the virus. The Delta variant was particularly prevalent in the North East during July 2021, leading to a five-week support package including greater testing and vaccines from the government. Tourism spending in the South may also have been buoyed by the presence of the delayed Euro 2020 football tournament (with the final held in London on 11 July).

In September 2021, the UK economy remained 1.5% smaller than it had been at the end of 2019 before the pandemic began. An unbalanced recovery across the regions widens pre-existing inequalities, with the North East and Wales the lowest income regions in 2018 and London and the South East the highest.

This supports earlier evidence from the pandemic recovery by John Gathergood and co-authors. They argue that the pandemic has been ‘levelling down’ economic activity due to a quicker recovery in consumer spending in richer regions.

The uneven recovery could be compounded by the cost of living crisis, as households in poorer and lower growth areas of the UK are forced to cut back on spending to be able to afford surging energy and food bills.

Where can I find out more?

• The quarterly country and regional GDP data from the ONS are available here.
• The latest annual GDP data for England, Wales and the English regions are available here.
• Data for Northern Ireland are available here.
• Data for Scotland are available here.

Who are experts on this question?

• John Gathergood
• Stuart McIntyre
• Michael McMahon
• Paul Mizen
• Graeme Roy

Author: Ben Pimley

The post What do the latest UK data reveal about regional GDP? appeared first on Economics Observatory.