Special Report: The facts and figures behind the UK’s economic recovery

MoneyAt the end of April 2014, the Chancellor George Osborne, confirmed that the UK economy had grown by 0.8% in the first three months of 2014, marking a fifth consecutive period of gross domestic product (GDP) growth (the longest since the 2008 financial crisis). Meanwhile, unemployment has dropped to 6.8% (the lowest figure in 5 years) as wage growth slowly begins to catch up with inflation and new jobs are created. The International Monetary Fund (IMF) has added to the renewed optimism by forecasting that the UK economy will grow by up to 2.9% in 2014, making it the fastest growing of all G7 nations (a figure eclipsed by the greater than 7% growth predicted for China).

‘Serious problems’

Nevertheless, there are many who believe that the recovery is being undermined by inherent problems in the UK economy. Stewart Wood, in a recent article for the New Statesman, identified the following three weaknesses which he believes present serious problems to the economic recovery:

1) “It is a recovery predominantly fuelled by consumption, more than any other major economy. The consumption is coming from the expansion of household debt and people running down their savings to spend more. Between January 2012 and December 2013, the UK savings ratio dropped from 8% to 5.4%.”

2) “It is a recovery of an economy that is relatively inefficient. Our productivity has gone from bad to worse since the crash, and is now about 20 per cent below the average of our G7 competitors. This year, Britain’s trade deficit is predicted to rise to the highest level of any industrial country in 2014, its highest level in 25 years…As a share of GDP, investment in the UK economy dropped by a quarter in the five years after 2008. We now rank 159th in the world, just behind Paraguay and Mali.”

3) “It is a recovery whose benefits are being felt by very few, not by the broad majority. And not any old “very few” either. City bonuses are predicted to be 15 per cent up on last year. Meanwhile, average earnings are £1,600 a year lower than at the last election, and earnings will only have grown by half the level of the overall economy by the next election. The median household has seen their income drop by nearly 4 per cent since the recession. In our country, the poorest 40 per cent have the lowest share of national wealth of any western country.”

Wood (a Labour shadow cabinet peer) added: “[we are] too dependent on housing and debt for family incomes, too dependent on consumption rather than saving and investment, too dependent on an under-skilled workforce, and too dependent on low-wage and insecure jobs.” The Henry Mayhew Foundation decided to look at the merits of each argument  to reveal the truth behind these facts and figures.

‘Neither balanced nor sustainable’

There is no doubt that the economic recovery in the UK has gained momentum. The Governor of the Bank of England, Mark Carney, recently stated: “[Worker] output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began and after four years above target the inflation rate is back at 4%”. He noted that the Monetary Policy Committee’s (MPC) forecasts envisaged the prospect of “a recovery sustained by household spending [shifting] to an expansion sustained by business investment“. However, he also warned that “the recovery is neither balanced nor sustainable…Activity is still below its pre-crisis level…The pick-up in business investment is still in its earliest stages [and] the global outlook, though improved in the advanced world, entails growing downside risks in emerging markets.”

Stewart Wood’s first assertion appears to be supported by the figures available on the UK household savings rate. Around 12 months ago, households were saving less of their income than at any point since the beginning of 2009 when the financial crisis was at its height, a sign that fast rises in the cost of living and falls in disposable income have greatly impacted on the savings rate in the UK. The 5.4% figure Wood provided for the year leading to December 2013 (which appears to be from the Office for National Statistics [ONS]) is lower than the 6.1%* savings ratio the OECD for 2013. The household savings ratio has in fact nearly halved in just four years since 2009. The Governor of the Bank of England conceded this when he recently stated: “a few quarters of above trend growth driven by household spending…aren’t sufficient for sustained momentum…Wage growth remains weak, and the household savings rate is likely to fall further.”

ToUChstone - ONS

ToUChstone – Based on ONS figures

Wood’s second claim that “our productivity [output per hour] is now about 20 per cent below the average of our G7 competitors” is corroborated by the most recent ONS statistics. When output per worker is taken as the indicator, the 20% figure drops further to 25% below the rest of the G7. By contrast, output per hour was unchanged in 2012 on average across the rest of the G7, and output per worker increased slightly across the group of developed nations. There is also strong evidence that the productivity gap is widening between the UK and the other developed nations which form the G7.

However, there have been tentative signs that UK productivity may be improving at long last. In their Inflation Report of 2014, the Monetary Policy Committee (MPC) of the Bank of England stated that “…stronger demand, easier credit conditions and reduced uncertainty should facilitate movements of capital and labour to more productive uses, both within and across companies…The precise timing and extent of the recovery in productivity is highly uncertain, and this uncertainty inevitably carries over into the outlook for policy. If the recovery in productivity is [less] rapid than expected, Bank [Interest] Rate could rise [less] slowly.”

UK investment

The figures for investment in the UK economy as a share of GDP appear to reflect Wood’s remarks. For example, the share of the UK’s national profits from buildings and infrastructure was valued at £412bn in 2013. This figure was equivalent to 29% of GDP, significantly below the 35% average of advanced economies.

In contrast to Wood’s pessimistic assessment, Olivier Blanchard of the IMF, recently told the BBC that residential investment in the UK was seeing a positive increase. There is further cause for optimism, as a recent analysis by Citigroup revealed that growth in the business investment sector has overtaken the increase in consumer spending for the past year, averaging a figure of 2.1%. These figures imply that conditions in the economy are becoming more favourable for business investment and that technological advances (e.g. cloud computing) and flexible renting schemes have driven down investment costs for firms, particularly in the services sector. Furthermore, The Centre for Economics and Business Research (CEBr) predicted that “growth should become more evenly spread as business investment grows strongly (by 10.1% in real terms this year) and the construction sector is supported by a robust pick-up in housebuilding, especially in London.

Thirdly, Wood’s observations on inequality, are according to Tony Yates of Bristol University: “possibly the most contentious.” He told The Henry Mayhew Foundation: “the recovery has involved an unusually large fall in unemployment (which principally affects the poorer sections of society) and very low real interest rates have hurt those living off asset incomes [the rich].” Evidence of the breadth of the recovery can be found in the unemployment figures in the UK, which in April 2014 fell below 7% for the first time since the recession. This is despite the fact that the recovery has led to a sizeable increase in asset prices. Certainly, more could be done to redress inequality in the UK, with the five richest families in the UK having greater wealth (property, savings and assets) than the poorest 20% of UK citizens (around 12.6 million Britons).

‘Deeply divided’

Wood correctly determines that, compared to other developed countries, the UK has a relatively large number of people working in low-wage and low skilled jobs. Commentators have estimated that wealth inequality costs the “deeply divided” UK around £39 billion a year, associated with managing the consequences of social and health problems.

There is obvious reason for a Labour peer such as Stewart Wood to be overly critical of the current policies underpinning the economic recovery. Nevertheless, there is cause for “cautious optimism” in the words of the Chancellor George Osborne. The latest IMF forecasts have predicted the UK economy to be the fastest growing major economy this year, apparently justifying his major moves to cut deficits and control government spending as part of wide ranging austerity policies introduced during the recession. Interestingly, this estimated growth comes in spite of disappointing figures for UK exports and business investment (although even these are slowly improving).

‘Solid, not spectacular’ progress

Jonathan Portes, director of the National Institute of Economic and Social Research, told the Times that the economy had reached an important moment, observing that “the British economy is very close to being bigger than it has ever been…[and] it comes at a time when growth is entrenched”. Jeremy Cook, chief economist at currency brokers World First, told the BBC that “solid, not spectacular” progress was what the UK needed, and this appears to be taking place. Many of Stewart Wood’s points are valid, but it is important to keep them in context and ensure that reforms to the economy (which all political parties concede are essential to build a prosperous UK) are made rigorously and diligently.

*This article was corrected on 22/05/2014. The OECD household savings ratio estimate for 2013 was 6.1%.

 

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