Last week ended with some pretty bleak news for the UK economy. “Output shrinks yet again,” the broadcast news bulletins boomed. “Britain now faces the dreaded triple-dip recession”.
The latest UK GDP numbers are certainly disappointing. National output fell during the last three months of 2012, down 0.3pc on the quarter before. This economic contraction, the fine-print shows, was driven by a 1.8pc industrial production decline and, within that, a 1.5pc fall in manufacturing.
What really weighed on the numbers was a 10.2pc fourth-quarter plunge in mining and quarrying, the biggest drop in over 15 years and largely explained by lower North Sea oil and gas production. Britain’s massive services sector, meanwhile, now three-quarters of all output, was flat over the final three months of last year.
Back in the third quarter, the UK had just emerged from a nine-month recession. Between June and September, the economy expanded by 0.9pc – boosted, of course, by the London Olympics. But growth stalled, then apparently went backwards. Britain has now contracted in four of the last five quarters.
During 2012 as a whole, the UK failed to grow at all, even including the medal-laced third quarter. If GDP shrinks again over the first three months of this year, we’ll officially be back in recession – defined as two consecutive quarters of falling output – for the third time since the spring of 2008, when this ghastly credit crunch began. That’s what sent the headline-writers into overdrive.
These latest GDP numbers are clearly very bad. They may not be quite as terrible, though, as the news bulletins suggest. This poor fourth-quarter reading reflects above-trend activity between June and September, due not only to the Olympics but also an extra spring bank holiday and a volatile construction sector hindering growth during the quarter before that.
If oil and gas extraction are excluded, along with the post-Olympic unwind, the UK actually managed a 0.3pc expansion over the last three months of the year. Growth was anyway around 0.6pc during the second half of 2012 – suggesting an annual rate of 1pc, or slightly more.
This preliminary fourth-quarter GDP number will almost certainly be revised, most likely upward. One reason is that respected leading indicators – such as PMI surveys of business-owners’ opinions – have lately looked more positive. Another is that recent increases in private sector employment have easily out-weighed public sector job cuts.
While there was very little growth in 2012, if any, there was more private sector hiring than in any year since the late 1980s. Around 1.1m such jobs have been created since 2010, in fact, while 421,000 state posts have gone – a net employment gain that should eventually bolster consumption.
This brings us to the so-called “low-growth-high-employment conundrum” at the heart of the UK economy. While this outcome is good for those in work, providing some shelter from the economic storm, it is far from positive for our future prosperity. That’s because the combination of low growth and high employment points, of course, to plummeting productivity.
Far from becoming more efficient in response to the excesses of the 2000s, the UK has begun producing less with more – particularly in the manufacturing sector, but across services too. In an increasingly competitive world, that doesn’t bode well.
These latest “triple-dip” headlines have seen the usual suspects call for the government to “intervene”. Every time a weak growth number is published, the cry goes out that ministers should “do something” – not least more money-printing and fiscal “pump-priming”. The pressure for Britain to attempt to borrow and spend its way to recovery, while junking the lessons of history, gets ever more extreme.
Why is employment high, while growth is weak? Well, many workers, in difficult times, have been switched to part-time employment. Others are being sacked, then immediately re-hired, so various length-of-service workplace entitlements don’t kick-in. More fundamentally, though, firms’ creditors, fearing their own insolvency, are often petrified to foreclose.
The UK economy has contracted for 12 of the last 15 months. Yet, for now at least, our biggest banks – desperate not to crystalize losses on existing loans – have turned a blind eye, keeping thousands of “zombie” companies going. That’s seen as positive by some, given the “breathing space” it provides. Yet the reality is that, right across the economy, scarce resources are now tied-up in unproductive uses, stymieing Schumpeter’s “creative destruction” and condemning us to anaemic growth.
Many British firms are “hoarding labour”, often hiring more on less-binding contracts, as an alternative to substantial capital investment. A deeply uncertain outlook, and the lack of fresh credit availability, makes it extremely difficult for businesses to invest in the capital goods that they, and our broader economy, so desperately need.
UK manufacturing output is still 10pc below its 2008 peak. It’s no coincidence the latest figures show manufacturing investment almost 7pc lower during the third quarter of 2012 than the same period the year before. The recent expansion of our service sector has also been mostly about just “adding people”, rather than enhancing productivity – why is why real wages have barely grown.
Yes – UK employment remains high, but productivity has collapsed. In other words, we’re hindering our future expansion, locking ourselves into a low-growth trap, at the very time when global realities require us to compete. That will carry on as long as the UK’s banking sector continues to conceal vast losses, while rejecting genuine recognition of previous mistakes.
Weak British growth has nothing to do with the government’s reluctance to go explicitly “Keynesian”, or because we should be doing even more quantitative easing. If only life were so easy! The main reason our economy is so turgid is that our moribund banks, desperate to deny their insolvency, are keeping zombie firms alive, while failing to provide the fresh working capital needed for viable companies to expand and to finance new and productive projects.
There is a role for public sector capital spending, I agree, and the coalition has rightly recognized that, partly reversing Labour’s planned investment cuts. The UK economy will only really get moving, though, when our banks are restructured and the wheels of commercial finance start turning. For in the here and now, our bloated banks are dragging us down, stifling the natural energy and ingenuity of the British people.
In recent months, the global outlook has begun to brighten, with China and Germany picking up in the fourth quarter and America avoiding the “fiscal cliff”. That’s one reason stock markets have been rising, with London’s FTSE-100 just closing on a four-and-a-half year high. Higher Western share prices, though, also reflect the prospect of yet more QE. Low productivity means further “extraordinary measures” will cause even more inflation, sooner, than they otherwise would. That won’t stop them happening, of course, but they won’t spark sustainable growth.
“A new global race of nations is under way today,” said David Cameron last week, in his historic European speech. That’s obviously true, yet the UK seems to be preparing not by playing to our advantages but, as productivity falls, by tumbling down the value-chain instead.
Britain is “in limbo”, the economy doing enough to avoid systemic meltdown for now, but failing to establish a meaningful recovery. The government can’t live without growth yet it can’t seem to contemplate, either, the really bold actions that would snap the UK out of its torpor. We find ourselves, then, in a complex predicament – not easy to fit in a headline.