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The Right Recovery?

After the wrong type of austerity do we now have the wrong type of recovery? That is the issue the morning after the 2013 Autumn Statement. The main message from the Autumn Statement was “growth matters”. An improvement in growth allowed the Chancellor to announce a better outlook to his fiscal numbers, with a budget surplus projected before the decade is out, and the debt to GDP numbers trending down.

The trouble in recent years has been that taxes went up too much, before spending was brought under control. That is why it was the wrong type of austerity. Now, there are tentative signs this is being addressed. And if growth improves further, more tax cuts will be possible. The worry about the recovery is that it is too dependent on housing at the moment.

Despite all this, it was a positive Autumn Statement. The economy is recovering, and I think it is likely to gather momentum over the next year. At the beginning of last year I was cautious about the economy in 2012, wondering where demand would come from, but at the start of this year I felt we could reach 1.5% to 2% growth in 2013, with the second half stronger than the first. In his Statement, the Chancellor announced an upward revision to growth for this year to 1.4% and to 2.4% next. It wouldn’t surprise me if next year is closer to 4%. There is so much catch up potential for an economy that is still smaller than it was five years ago, and which has suffered from a lack of demand. The high level of employment and the recent recovery in confidence are all positive. What we need is increased investment by small and big firms alike. The latter are cash rich, and have the ability to spend at any time. Small firms, meanwhile, have complained this year about the lack of demand, lack of lending and high business rates. These remain issues, but by now may be turning.

While recovery is good, the nature of the economy remains a worry. The world economy is changing. Europe is mired in weakness. The rest of the world is not, and could be on the verge of another strong growth phase, led by the emerging economies. The US has deleveraged, and is looking better, as its latest growth figures show.

The Chancellor announced many tweaks, some of which are hard to disagree with. There were measures to build houses (since the problem in the housing market is supply, not demand), investment in infrastructure, Help to Work aimed at the still huge numbers of young people not in employment, education or training. There was more for infrastructure, but even more could be done there. In one respect, the Autumn Statement could be viewed alongside the Pisa educational results that were released on the same day. Those highlighted the competitive nature of the global economy. And in the context of the Autumn Statement, and in economic terms, the UK needs to compete better and play to its strengths.

The UK has suffered from a lack of demand in recent years, but it is on the supply side where many of the challenges and opportunities exist. The problems are: low investment, low productivity, wasteful Govenment spending, the need for more infrastructure, and an obsession with the property market and a belief that you get rich not by innovating and trading but by waiting for your house to rise in value.

However, the projections accompanying the Statement point to rapid house price growth and rising personal debt, with the OBR projecting a rise in household debt to income from around 140% to around 160%. Before the crisis the UK suffered from the lethal combination of cheap money, leverage and one way expectations. Help to Buy feeds this again, now. There are few signs yet of the much needed rebalancing in growth, with higher investment and an improvement in net trade.

One clear underlying message from the Autumn Statement was the critical importance of the Bank of England. So far, the Bank has been the shock absorber, with its ultra loose monetary policy helping stabilise the economy. The Statement expects unemployment to hit 7% in 2015. In its forward guidance the Bank indicated that is the level unemployment needed to reach before it hiked. Despite the recovery in the housing market I don’t think the Bank should raise rates next year. The economy is too far below potential and we don’t know how resilient the recovery is yet to higher interest rates. Instead the Financial Policy Committee needs to kick into action. In his Statement, the Chancellor alluded to this, saying he has given new powers to the Bank to stop asset bubbles. The Bank’s Monetary Policy and Financial Policy Committees also need to show they are interacting closely together.

Overall, the biggest immediate worry is a further shock from Europe. But even allowing for that possibility, it seems more likely that the global recovery will be gathering momentum. This should be good news for the UK, and I think the economy here is going to grow strongly over the next year. That will allow the debt numbers to improve further and should allow the Chancellor to look forward to a positive March Budget. But at some stage the nature of the recovery and the structure of the economy needs to be addressed further.

*Dr Gerard Lyons is Chief Economic Adviser to the Mayor of London. Until November 2012, he was the Chief Economist and Group Head of Global Research at Standard Chartered.

Dr Gerard Lyons

Dr Gerard Lyons is an international economist and Chief Economic Strategist at Netwealth Investments, having previously served as Chief Economic Adviser to Boris Johnson while he was Mayor of London. He was Co-Founder of Economists for Brexit and is co-author with Liam Halligan of Clean Brexit (Biteback, 2017). For Politeia he was co-author of Banking on Recovery: Towards an accountable, stable financial sector (2016).

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