UK economy: a turnaround at last?
Is that light at the end of the tunnel or an on-coming train?
The crowds gathered all day in Trafalgar Square, fuelled by alcohol and relief. People were crushed together and yet, for once, no one was complaining. Cheers spread through the throng as another piece of good news filtered through. Young lovers coupled up, swept away on a wave of giddy optimism. It was tell-your-grandchildren stuff, being there on VE (Victory in Economy) Day.
Of course, none of this happened. Trafalgar Square remained largely populated by pigeons and tourists. But the giddy talk of an economic turnaround over the past few weeks has certainly had a demob-happy ring to it. And with news earlier this month of growth in the Eurozone, too, the liberation of Europe is surely complete, it would seem.
It’s true that the second-quarter figures for UK GDP growth were better than expected, with initial estimates for growth for the months of April to June revised upwards to 0.7 per cent in figures released on Friday. Forecasts for the year as a whole have been tweaked upwards, too. The chancellor of the exchequer, George Osborne, declared that the patient was ‘out of intensive care’: ‘Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend, but there is still a long way to go and I know things are still tough for families.’
Other recent data suggests that UK exports are up and the trade deficit is down, while unemployment – stuck at around 2.5million – has not shot up to the high rates of the Eighties. Last Wednesday, news came of positive feedback from a survey by the Confederation of British Industry (CBI), showing manufacturers enjoying their best spell for two years. Nor is the good news confined to Britain: the Eurozone grew by 0.3 per cent in the second quarter.
The celebratory tone around this wave of news is more a measure of the depths to which the economy has plunged than of genuine vibrancy. UK GDP grew by a mere 0.2 per cent in 2012. Taking into account the growing population, GDP is still five to six per cent below its peak value in 2008. The relatively healthy headline unemployment figures hide a lot of people scratching around in part-time work, either as employees or self-employed, who would like to get more hours of work. So even if the economy grows, the rate of joblessness is likely to stay high for a while, as underemployed workers gain more hours rather than employees being taken on. When the new Bank of England governor, Mark Carney, announced ‘forward guidance’ on interest rates, saying they would not rise till the unemployment rate fell from the current 7.8 per cent to below seven per cent, analysts suggested that this might mean record-low rates continue to 2016.
Living standards have also declined. Wage rises for those in work have not kept pace with inflation. According to a recent report from the Institute for Fiscal Studies (IFS), by 2011-12 ‘real median income was 5.8 per cent below its 2009–10 level’. That blow has been softened a little by those low interest rates, particularly for those with mortgages; but most people, even if they have avoided unemployment, have faced at least some tightening of their belts, or have only maintained their expenditure by dipping into savings. At least Osborne had the sense to admit that there is a long way to go.
An old quote, attributed to Winston Churchill – ‘never let a good crisis go to waste’ – seems to have been ignored. While there has been a shift from public sector to private sector employment, which may indicate more profit-making activity as opposed to activity based on spending taxes, the economy seems largely to have been in the deep freeze rather than taking the opportunity to restructure. Investment, both public and private, has been low. There seems little to justify claims of a significant ‘rebalancing’ away from financial services to a dynamic manufacturing sector.
Instead, what we are experiencing is more muddling through. What the UK economy needs is new investment, yet this is the one area where there has been some serious austerity. In the financial year 2009-10, according to figures produced for the UK Parliament, the government spent £48.6 billion, or 3.4 per cent of GDP, on ‘public sector net investment’ in 2009-10. In 2012-13, that fell to £22 billion, or just 1.4 per cent of GDP and that figure is likely to stay flat for most of the rest of this decade. So one area where the government could usefully do something – spending money to improve the conditions for wealth creation through improving infrastructure – is the very area where some of the biggest spending cuts have been made.
Instead of investment, we are getting more of the same short-termist thinking about the economy. There is little in the way of long-term vision, but merely a desperation to get the show back on the road. The fact that the economy is showing some signs of life should really be no surprise. Normally, growth immediately after a recession is strong, as the economy catches up with previous output; but there has been little sign of that. Add in very low interest rates and the amount of money being pumped into the banks through ‘quantitative easing’ by the Bank of England, and it would be more correct – following Osborne’s analogy – that the patient is still very much in intensive care, but the priest administering the last rites has decided he’s no longer needed. But the treatment is more of the same – easy credit and government borrowing – that exacerbated the UK’s underlying economic problems in the first place.
The immediate reaction when the financial crisis and recession hit in 2008 was overdone. Unemployment didn’t hit the levels of the 1980s and real hardship, as experienced by most households, was nothing like as severe as in past recessions. The real gloom back then, and even more so today, should be about the long term. Until there is a concerted effort from the top of British society to pursue economic growth, and to make the necessary investment in infrastructure, innovation and education, the UK will remain in intensive care for many years to come.
Rob Lyons is commissioning editor at spiked.