Hopes of economic recovery limited

As we pass the half-way point in the year, how has our economy performed in the first six months of 2013 and what are its prospects for the remainder of the year?

Last week’s final data release for the first quarter of 2013 came with the publication of the national accounts figures, which provide the widest ranging measures of economic activity, including gross domestic product, domestic demand and aggregate exports of goods and services.

The figures were awful, both domestically and on the export side. GDP, the revised 2012 data showed, contracted for three quarters on the trot from the middle of last year.

The grim news contained in these figures was mitigated partly by the quarterly jobs data, which are as important, if not more so, in gauging the overall state of the economy. In the first quarter of the year, the numbers at work in the economy grew, on a seasonally adjusted basis, for the third consecutive quarter.

With GDP contracting at the same time as employment is growing, what is going on?

The national accounts and jobs data have been moving in different directions for some time in the UK, raising issues about whether the GDP figures are really capturing what is going on in the economy.

Here, where other indicators in the first quarter, including retails sales and (separate) goods exports figures, were also weak, the divergence is likely to be explained by the jobs data lagging economic activity figures. Thus, the likelihood is that a renewed downturn in the labour market can be expected in the second half of 2013 if activity does not bounce back soon.

A more stable second quarter
The second quarter of the year looks to have been better than the first, from what can be gleaned from the more limited, but more up-to-date numbers available.

The most encouraging of the more timely information is – again – employment-related. On Wednesday, the live register, which counts the numbers in receipt of unemployment benefit, was published. In June the numbers on welfare fell yet again.

Although these figures don’t measure employment, the statisticians include an estimate of the unemployment rate derived from the length of dole queues. Having remained stable at 13.7 per cent from February to May, the jobless rate inched down to 13.6 per cent last month, its lowest in three years. If nothing else, it shows that the labour market to mid-year has not yet been affected by wider weakness in the real economy.

Tuesday’s tax returns are also bang up to date, with a full set of figures for the second quarter. Although they are volatile, they show year on year growth rates accelerating in each month of the second quarter.

Less timely data, up to May, include retail sales figures and property prices. The former showed the first uptick in months, while the latter registered its second consecutive monthly increase, providing yet more evidence that the year-long period of broad stability in residential property prices is a market floor.

Even less timely goods export data – for April – are the final piece in the jigsaw. From a three year monthly low in December, the value of goods exports picked up gradually to a 2013 high point by April, even if that high point was still below the monthly average for 2012, reflecting the general weakness in the export sector this year.

Putting all the pieces together, there is no real reason to believe that a solid recovery is underway at this point. But nor are there signs that the economy is on the slide again.

It may by now have become a cliché, but “bumping along the bottom” still accurately describes the current state of play.

Will the second half of the year be better than the first? As there is no reason to believe that the debt-laden domestic economy will take off of its own accord, prospects for the rest of the year depend to a great extent on the international picture.

With the US economy looking as though it is finally getting into its stride, an uptick on this side of the Atlantic would allow exports to return to growth. And on the that front, the real economy data flow from Europe has finally begun to offer some signs that the long downturn may be coming to an end.

Euro zone retail sales volumes jumped in May, ending a protracted period of decline/stagnation, while hard data and surveys point to the bloc’s manufacturing sector pulling out of a nose dive in the second quarter. The British market, though almost as weak as the euro zone, is also showing some signs of life, having avoided a triple-dip recession that many had predicted earlier in the year.

But even if a recovery of sorts in underway across much of the continent, it is unlikely to gather much momentum quickly. The European economy has suffered a shock unlike any other in living memory. Almost every country’s domestic economy is still smaller than a half decade ago.

Some of the peripherals have experienced bigger contractions in the current downturn than during the great recession in 2008-09, with Cyprus in full scale meltdown (that island's collapse is shaping up to be even worse than Ireland's and Iceland's).

Jittery markets
And then there are the risks. It seems almost a cruel irony that just as tentative signs of a turnaround emerge in the real economy, financial markets look increasingly nervous. Their jitters could derail recovery.

Signals from the the Federal Reserve, the US central bank, in May that it would begin to unwind its massive bond-buying programme caused turmoil among financial market participants who have grown used to Fed intervention to support their trades. Wall Street, a bastion of free marketeers, is fearful of a world in which it has to fend for itself.

That fear has flowed out of the US and across the Atlantic. Since May, the contagion effect has caused yields on most securities to rise, including sovereign bond yields. As ever, the weakest securities have suffered the biggest sell-offs. And that brings the prospect of a reigniting of the euro crisis.

The resignation of the Portuguese finance minister on Tuesday has caused Lisbon's previously cohesive coalition to fray. The last thing Portugal needs is political instability on top of chronic economic weakness.

Despite not having had a boom in decades, the Portuguese are suffering a severe bust – their domestic economy’s contraction is fast catching up with Ireland’s.

Yields on Portuguese government debt shot up this week into territory that makes its prospects of an on-schedule exit from bailout in less than a year look even less likely than just one month ago. It could be much more serious. The Iberian state’s debt sustainability is borderline, if not past that point. Another sovereign debt restructuring would be a hammer blow to Europe’s already very fragile banking system

It was almost exactly a year ago that Mario Draghi made his famous "whatever it takes to save the euro" speech. He may soon have to put Frankfurt's money where its mouth is.