News that the UK economy grew 0.3 per cent in the first quarter was welcome. It fits with my view that the economy is turning for the better, albeit slowly. And, by avoiding a triple dip recession, it may help change some of the narrative about the economy, which would be important for overall confidence.
In spite of this growth, the economy is still weak and thus it remains vulnerable to shocks, particularly ones that could emanate from the euro zone.
The economy is suffering from a lack of demand, a lack of lending and a lack of confidence. Thus macro-economic policy needs to remain supportive of growth.
The lack of demand is best addressed by consumer spending and that can only be achieved by getting more money into people’s pockets and by giving them the confidence to spend. The recent increase in personal allowances to £9,440 will help, but with still sluggish wage growth it is vital that inflation is kept in check. Talking the pound up, not down, would be a start.
There is also a strong case still to boost construction spending, which was weak in the first quarter and in which one in four to five small firms is engaged. There is a need to build ample affordable housing, as well as a need for the government to take advantage of low cost borrowing rates to kick-start much needed infrastructure. In London, which accounts for just under 22 per cent of the UK’s gross value added, there are plenty of projects underway that will help give the recovery further momentum. I think London is already leading the recovery, as the rebound in the service sector in the first quarter data may reflect.
The opening of the London Gateway deep sea port, on the north side of the Thames Estuary, later this year will be a major plus for the UK. This £1.5 billion investment by Dubai’s DPWorld provides a port to rival Rotterdam. Now we need to back that up with a transformational new airport east of London, for which there is an overwhelming case, as well as ample private sector investment money globally.
There is a need to boost lending. Despite low rates, the transmission mechanism of monetary policy is not working. Expanding the Funding for Lending Scheme is a step in the right direction, but more is needed. Often the banks say it is a lack of demand. Really? Small firms cite three reasons why they are not borrowing: the weak economy, high business rates and the prohibitive lending terms of the banks. Interest rates have to remain low but I think there is a strong case for the Bank of England to follow the lesson of the US Fed and outline the pre-conditions that need to be in place before interest rates start to rise
The economy is 3.6 per cent off its low, but is still 2.6 per cent below its pre-crisis peak. The economy may yet prove to be stronger than the GDP figures suggest but it is clearly not as good as it should be. Having been on the pessimistic side of forecasts in recent years, I think UK growth this year will prove higher than expectations, perhaps nearer 1.5 per cent to 2 per cent. Some people ask how much spare capacity is there – based on the idea of an output gap. Trouble is these measures tend to be pretty useless. The economy is 14 per cent below where it would have been if its per-crisis trend had continued. Although that trend rate was probably not sustainable there is clearly ample spare capacity.
Although the numbers in work are good, the still obscenely high rate of youth unemployment, approaching one million people, is a testimony to the fact that there should be no complacency about the economy. It also begs the question why the cash rich big firms do not invest more, and do not take more of the country’s younger talent?
So, overall, good news that the economy grew in Q1. I think the economy will grow at a stronger pace than generally expected this year, but demand is still too weak.
*Dr Gerard Lyons is chief economic advisor to Boris Johnson, the Mayor of London. He can be followed on Twitter: @DrGerardLyons