Economy, Employment, Global, Places, Policy, Public sector jobs, UK »

On Wednesday, the Office for National Statistics (ONS) announced that the UK economy grew by 0.2% in the second quarter of 2011, down from a 0.5% increase in the first quarter of 2011. ONS stated that growth was impeded by, amongst other things, the Royal Wedding, the impact of the extra bank holiday in April and the after-effects of the Japanese tsunami. Without these events, growth could have been as high as 0.7% according to ONS.

The news means that growth expectations for 2011 have fallen from the 1.7% projected by the Office for Budgetary Responsibility (OBR) in March to approximately 1.3% according to some private sector forecasters. There have been some suggestions that the UK could lose its AAA credit rating, which would make borrowing more costly, echoing warnings earlier in the year that the UK economy was growing too slowly.

Despite continued slow growth and calls for a ‘Plan B’ for the economy, there seems little likelihood of a change in policy by the government, with both the Prime Minster and the Chancellor indicating that current policies would continue. The announcement today of 7,000 further job cuts at the MoD underlines the government’s commitment to spending cuts.

Where does this leave the UK economy? A recent IMF working paper reviewing the impact of public sector austerity on economic growth has found that cutting a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point. We should therefore expect continued public sector austerity to be a drag on growth.

A major influence on UK growth will be the health of the global economy. Relatively good growth in developing countries is being undermined by the twin risks of the collapse of the Euro, only partly assuaged by the recent Greek debt deal, and the ongoing US debt crisis. A recent report by Oxford Economics suggested that fears of a Japan-style ‘lost decade’ for advanced economies were overstated but that recovery will be ‘relatively bumpy and muted compared to recent historical experience.’

The most recent OBR forecasts published in March 2011 suggested that the economy would grow by 1.7% in 2011 before increasing to 2.5% in 2012 and then 2.9% in 2013. It is likely that growth will remain subdued for the remainder of the year, and lower than expected. Assuming that neither of the two big global economic risks occur – and this is far from certain – then it is likely that growth going forward will be uneven but positive.

For local authorities this means that efforts to support local demand and employment will remain vital to the health of local economies. Unemployment, wage erosion due to inflation, and high levels of household debt are all factors weighing on local communities and individual households. LEPs and local authorities will therefore have a large role to play in supporting the emergence and growth of sectors which will drive employment growth over the next decade, and so underpin the economic sustainability of local communities.