Zombie Lending

If the UK’s economy is so lousy, how come its job market is doing so well?

Which is more trustworthy: the UK’s GDP data … or its employment numbers? On the one hand we have GDP, which fell 0.3% in the fourth quarter of 2012, leading to fears of a triple-dip recession. But the UK also added an impressive 513,000 jobs in 2012, and unemployment has been falling steadily for over a year. So either the economy is atrophying and jobs growth is merely an outlier—or people are getting jobs, collecting wages and then doing something with their money that the macro data aren’t capturing.

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Fraser Nelson of the Spectator takes a crack at reconciling the data:

One answer is immigration: foreign-born workers account for 60 per cent of the rise in working-age employment under Osborne. Data earlier this week suggested that people are also having to accept lower salaries, and more part-time or temporary work. So the quality of jobs is going down, but the number is going up.

That sounds compelling. Just this week, Bloomberg reported on the influxes of young Spanish economic refugees, who are flooding low-paying service-sector jobs. The worrying implication is that, in the converse of America’s “growth without jobs” quandary, the UK has a problem of jobs without growth.

Another possibility, however, is that the GDP data are simply wrong. They could be the result of a flawed methodology that over-adjusts GDP growth for inflation, because it fails to take account of various hard-to-quantify economic inputs such as free entertainment online, charity work, or the increased productivity of people using their phones as mobile offices. FT Alphaville explains:

[T]here is wealth and growth being added, it’s just that it’s not the sort of wealth and growth that you can express in monetary terms. Which leads to one overriding conclusion: that inflation is potentially being overadjusted because the basket of goods the measure is based on is failing to account for an ever larger component of “free” stuff.

But The Economist, citing the research (pdf) done by Bank of England economist Ben Broadbent, highlights another theory, which is that the UK’s productivity is falling. Following a shock, an economy enters a period of transition in which declining sectors react conservatively, retaining workers and capital—so-called “labor hoarding.” They eventually begin to shed workers and claim less capital, but higher-growth sectors tend to be slow to absorb that excess. Productivity will recover once the labor and credit markets rebalance, but in the meantime GDP and jobs data will disagree.

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A key reason why this rebalancing is slow to happen is a lack of credit for businesses. Banks with limited resources, argues The Economist, are too ready to keep lending to established customers and too reluctant to lend to new startups. The result, it warns, is that “whereas workers are fairly mobile, capital is getting bunged up in inefficient firms while new businesses remain starved of credit. In short, people are working for firms that should not exist.”

How to solve this? The Bank of England last August launched a credit easing program, which gives banks access to cheap funds so they can lend more. But while this has boosted mortgage lending, it hasn’t done so much for business loans. “There is clearly low demand for credit, with many companies wary about borrowing and investing in the current difficult economic environment,” Howard Archer, the chief UK economist for IHS Global Insight, told the Wall Street Journal (paywall). And the latest GDP data will offer little in the way of encouragement to take on more.

If credit demand continues to tank, it will mean even the old-guard companies are tightening—suggesting less money for salaries. The UK government will then need to get creative about channelling funding to high-growth companies. Otherwise, Britain’s problem won’t be jobs without growth, but neither jobs nor growth.

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