Achieving growth

It seems everywhere you look, there are signs of economic ‘growth’  (I don’t like the word ‘growth’ as it is too broad brush; I much prefer the idea of ‘development’). GDP is forecast to be some 2.6% for 2013-14 and 2.7% for 2014-15.  Unemployment is coming down so we have more people in employment.  Inflation is coming down so we have ‘growth’ in the spending power of the pounds in our pockets and there may be an increase this year in tax revenue received by the Treasury.

 

 

So far so good –  although is that the complete picture? Scratch the surface of each of these indicators and uncomfortable questions emerge. Questions which resonate with what David Cameron said at the recent G20 summit when he referred to there still being dark clouds on the world economic horizon. So, what might these be?

 

 

GDP appears to have increased – I say, appears because, as you know, it pretends to a  degree of thermometer like mathematical accuracy, clothing itself in numbers with 1 decimal place.  It is nothing of the sort. If GDP is reported as being 2.6% then the only rational thing we can say about it, the only intellectual position which is backed up by the facts is that GDP probably lies somewhere between 1% and 3%.

 

 

But what of the distribution of  an increase in GDP? Well the latest research by the Social Market Foundation makes for sobering reading. Over the last 7 years the gap between rich and poor has widened ever more significantly. Your position on the ethical questions raised by such a development will depend in large part upon your politics. But what is beyond political point scoring is the fact that people who are at or towards the poorer end of the wealth spectrum will tend to be much more likely to spend whatever increases in wealth they enjoy –  they have what is called a greater marginal propensity to consume. You might criticise some of the things they choose to spend it on –  but you could also do the same for the spending habits of anyone.  But the fact is that that spending will increase GDP –  which, despite its legion faults, is currently the primary measure of the health and vigour of the UK’s political economy. The media narrative surrounding GDP influences people’s (ie consumers’) perceptions – their hopes and fears.  So in a very tangible way the GDP statistics and the commentary and analysis which hangs around them are important for the influence they have on our behaviours.

 
In a similar vein, the OECD recently released a report which concluded that the levels of inequality endured in the UK since the 1980s had held back GDP growth over the period to date.  If we had enjoyed levels of inequality similar to those in France over the period our GDP would have been higher.

 
Unemployment is coming down faster than many expected. That is a good thing.  But there are concerns that there may be a  problem of ‘under employment’ – people on short working hours.  This only exacerbates the problem of squeezed disposable income over the last 5 years. I know that a recent report suggested that at the end of this parliament the average UK household take home pay would equate to its 2007-08 level; but again, the devil is in the detail. Across the generations, the effects are very different.  Households in the 22-30 yrs age bracket are some 7.6% down on 2007 levels; 31-59yrs are 2.5% down; but 61+yrs are 1.8% up.
Inflation is down to 0.3% in January 2015. Indeed a short period of deflation is looking likely. Food prices are, apparently, down some 0.4% year on year and non-food some 2.5%.  Small movements, and arguably not noticeable for many. The recent fall in oil prices seems to have underpinned this fall in prices (showing the dependence upon hydrocarbons across the entire developed world economy). But no-one knows how long we will enjoy low oil prices. This rise in household spending power may prove to be shortlived.

 

And let’s not forget home ownership. For many, servicing a mortgage is their biggest expense.  Again, the OECD praised the Coalition for increasing the supply of new housing, but cautioned that house prices still were far too high. Average UK house prices were recently reported as being some 5x average earnings –  that is hugely out of line with historical trends in the UK and many (on all sides of the political spectrum) regard this as unsustainable and sensitive to a ‘correction’. By the way, the 5x ignores the London effect; factor that in and it looks even more worrying
Last month the OECD released its regular assessment on the state of the UK economy. One the one hand it congratulated the Coalition for its fiscal policies (ie reducing government spending).  But on many other criteria its note was more cautious. Yes, it looks like the tax receipts this year will be higher than last – but the OECD believes that this may be temporary effect as bonuses which would have been paid in 2013-14 were deferred into 2014-15.
It has a number of concerns from the poor quality of UK infrastructure, the continued economic overdependence of the UK upon the financial services sector, low levels of R&D spend, low levels of skills and training, weak exports, a funding landscape which is unable to provide the required investment to SMEs, levels of inequality, concerning levels of house prices and – a perennial favourite –  the UK’s continued low levels of employee productivity.
The Prime Minister was right; there are dark clouds swirling in our economic skies. We can all agree on that. Where opinions will differ is the question of whether those clouds have been made darker and more numerous as a result of the Coalition’s policies over the last 5 years.

 

For more information, please contact Stephen Gregson.