Look “beneath the bonnet” to understand why it is not surprising that growth is slowing
Official figures show that the rate of economic growth halved in the three months to the end of March. When you look ‘beneath the bonnet’ at the UK economic engine this is not surprising given our weak and unbalanced economy where labour productivity growth has stalled and momentum is overly reliant on household spending.
These are not the characteristics of an economy poised for sustained take-off. Growth is petering out – down to 0.3% in the last three months compared to 0.6% in the last quarter of 2014.
As a new paper I helped to write – ‘Beneath the bonnet: how sound is Britain’s economic recovery?’ – makes clear, the next Government will need to address the economic imbalances currently emerging if we are to deliver some sort of sustained recovery.
If you compare the UK economy to a four cylinder car, then not one of its four cylinders is firing as smoothly as it should:
- PRODUCTIVITY – Record employment has been accompanied by the virtual disappearance of growth in labour productivity. After each of the recessions in the 70s, 80s and 90s, labour productivity rebounded strongly. Its absence this time round spells danger: sustained real wage growth is impossible, the choices that governments have to make, far harder.
- EMPLOYMENT – Although the total number in work and the employment rate are at record levels, this is to a large degree due to the rise in self-employment, income from which has at the same time plunged. The scale of zero hours contracts also points to the weakness beneath the record. Secure, decently paid jobs are in less abundant supply than the headline figures might suggest.
- HOUSEHOLD INCOME – Real household disposable income has barely increased at all since 2009. This means that sustainable growth, let alone growth that feeds through to good living standards, is far from assured.
- TRADE AND OTHER SECTOR BALANCES – The public sector deficit at 4.5% is the same now as it was 19 years ago. But at that time, the other sector balances, trade with the rest of the world and corporate investment, were set fair for sustained economic growth. The current situation, with a record balance of payments deficit and too low levels of corporate investment as well as households already spending to the hilt, looks like the end of a period of growth not the early stages of a strong, sustained recovery.
Our paper makes it clear that the Coalition ended up following a path for deficit reduction which was actually the one advocated by Labour (i.e. to reduce the deficit by half during a five year term). The Coalition followed its own Plan A – A for austerity – for about two and half years but then switched tack after two and a half years of low or no growth.
The report – written before the latest GDP figures were released – comes to two main conclusions given that productivity is in the doldrums.
Firstly, this unbalanced economy is more likely to lead to growth petering out than a strong, sustained recovery. Secondly, unless these wider imbalances are addressed another recession is a matter of ‘when’ not ‘if’. Deficit reduction is desirable (although we can see from Osborne’s failed Plan A the dangers of cutting too far too fast) but on its own it is nowhere near enough to address the fundamental weaknesses in the UK economic engine and secure strong growth into the future.