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Paying the way. Is Britain on the road to economic recovery?

This week the business of governing Britain winds down for the August break. MPs have left Westminster and many ministers are taking leave of Whitehall. However for most people the bread and butter of life must be paid for. What matters are the economic prospects they and the country face. Should we be hopeful about the future? In Politeia’s summer debate, two economists consider the outlook from two different perspectives.

 

John Mills writes…
The support for Jeremy Corbyn in the current Labour leadership election is yet another manifestation among many others in Europe of the resentment generated by austerity economic policies which are widely perceived to be both damaging and ineffective. Who can deny that they impoverish the public sector; that they heap hardship on those least able to bear it; that they stunt growth in living standards while failing to produce a sound foundation for future economic growth; and that they tend to favour the rich – and especially lenders rather than borrowers – at the expense of everyone else?

It is easy to portray left wing remedies as likely to be ineffective and – as in Greece – liable to make the situation worse rather than better. But those who take this view – almost certainly a majority of the electorate, which is why Labour is very unlikely to get elected on a far left manifesto – might like to ponder why we have got into the position where so many people are prepared to throw over the traces and – as they see it – to take a stand against policies which they perceive as being so damaging. Surely the most important single reason is the fact that the policies pursued by the political centre in the UK – and indeed in nearly all of the West – have in recent decades actually been so ineffective, that our growth rate has been so low, and that we have allowed the economy to become so unbalanced.

The proportion of our GDP which we devote each year to investment rather than consumption is far below the world average. We have deindustrialised to a point where we cannot pay our way in the world. For this and other reasons we have a balance of payments deficit which means that we are living now at a level about 6 per cent higher than we are earning. Hardly surprisingly, in these circumstances, we are running up debts both as a nation and through our government at an unsustainable rate. And what growth we have achieved has been driven by consumption, based on ultra-low interest rates and asset inflation, both of which are unsustainable, rather than on net trade and investment, which is what we really need.

The result is that the UK economy has produced no increases in living standards for most people for almost ten years as productivity has stayed static. What growth there has been has been swamped by our rising population. No longer do people believe that their children are going to be better off than they are. Nor do they expect the resources to be available to pay everyone a reasonable pension or to provide the healthcare that an aging population needs. These are real problems to which the political middle ground has produced few adequate responses.

Those who criticise solutions offered far left adherents, therefore, need to do more than just decrying the policies they propound. They also need to think long and hard about where we are going if – as many people, including plenty who are not Jeremy Corbyn supporters justifiably fear – there is a major risk that the future is one of stagnant living standards and endless cuts. You may not believe in the remedial strategy which the far left puts forward, but it is hard to deny that its supporters have a very serious point which badly needs an answer when they say – especially thinking of those who are already disadvantaged – that there are far too few signs that austerity policies really provide any long term solutions to the problems they are supposed to solve.

 

Dr Ruth Lea writes…
UK GDP growth in 2015Q2 was a respectable 0.7 per cent, suggesting a return to more robust activity after some weakening at the start of the year. GDP was estimated to be 5.2 per cent higher than the pre-recession peak (2008Q1) and so, on this measure, it can fairly be said the economy is recovering well.

A brief inspection of the GDP per capita data presents, however, a less happy picture. The ONS estimated that this measure in 2015 Q2 was ‘broadly level with’ the pre-recession peak. And, even though this must be regarded as a milestone, it is a sobering thought that it has taken over seven years for GDP per capita, a rough measure of living standards, to achieve the level last recorded before the Great Recession.

Moreover, growth since 2008 has been almost entirely driven by the services sector, which accounts for nearly 80 per cent of output. Manufacturing, at just 10 per cent of output but disproportionately significant as an exporting sector, has languished and is still 5 per cent below the pre-recession peak. Arguably manufacturing has been disadvantaged by the strong £/€ exchange rate and generalised weakness in the Eurozone, which is still our largest single export market. And doubtless a weaker currency would help manufacturing exports and thus contribute to a reduction in our large visible trade deficit. But it is difficult to see how a major depreciation can be achieved in a floating exchange rates regime whilst the pound is supported by expectations of higher UK interest rates, timed to be well ahead of any tightening in the Eurozone.

Looking ahead, the Office for Budget Responsibility (OBR) forecast quite modest GDP growth rates at the time of the Summer (July) Budget. The OBR expected annual increases of around 2.3-2.4 per cent for the years 2015 to 2020 compared with 3 per cent in 2014. But the economy’s productivity performance will need to improve as the economy nears full employment for even these relatively modest growth rates to be achieved. Since the Great Recession growth has been enabled by the sharp fall in unemployment and a significant rise in employment and productivity growth has been disappointing. I am, however, relatively optimistic that productivity will respond. Indeed there are now signs that productivity growth is firming as the recovery matures. In 2015 Q1 output per hour was up 0.3 per cent in the quarter and I expect a significant pick-up in the second quarter. Productivity growth tends to be cyclical and we are now at the point of the cycle where labour inputs tend to be deployed more intensively. Productivity growth should, therefore, accelerate. The pick-up in business investment, a lagging indicator in any recovery, also augurs well and should support productivity improvements.

As already indicted the Bank of England seems to be gearing up for an interest rate increase ‘at the turn of the year’. Given the tightening in the labour market and the recent sharp increase in earnings, this is appropriate despite the seemingly weak inflationary pressures.

Finally and briefly, there are definitely signs of economic improvements in the Eurozone, putting on one side the debacle of Greece and albeit patchy. The first quarter GDP data were generally encouraging and Spain posted a healthy 1.0 per cent GDP increase in 2015 Q2. This is wholly to be welcomed but it is always worth noting that the Eurozone comprises mature economies with few prospects for buoyant growth. Growth markets for exporters are elsewhere.

 

John Mills

John Mills is an economist and chairman of JML, a UK household goods company which operates globally, as well as being Founder of Labour Leave. He recently found the Institute for Prosperity. He is the author of Exchange Rate Alignments (2012), Call to Action: Britain’s Economic Problems and How They Can Be Solved (with Bryan Gould, 2015) and The Real Sterling Crisis (with Roger Bootle, 2016).

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