The most feeble recovery in our history
What are we to make of these latest figures on British national income? The UK economy expanded by 0.6pc during the three months to the end of June, reported the Office for National Statistics last week. That’s twice the growth rate we saw during the first quarter of 2013 and equivalent to a relatively buoyant annual expansion of 2.4pc.
Among our political classes, this latest GDP data is widely viewed as “game-changing”. The Tories, while not wanting to tempt fate by claiming to have spotted the “green shoots of recovery”, are nevertheless cock-a-hoop. The economy is “on the mend”, says George Osborne, the newly-emboldened Chancellor. On the surface, at least, that seems plausible.
For most of the last two years, the UK has yo-yoed between economic expansion and contraction. These new numbers amount to the first time since mid-2011 that national income has expanded for two quarters in a row.
Between March and June, the economy grew at its fastest rate since the third quarter of 2012, the time of the London Olympics. Aside from that one-growth boost last summer, the latest 0.6pc expansion represents the quickest growth since the second quarter of 2010.
The GDP fine-print also shows that all four main UK sectors – services, manufacturing, construction and agriculture – grew over the last three months. Again, that hasn’t happened since 2010. So nobody could credibly argue these latest statistics aren’t good news.
Despite that, it would be foolish to suggest that the British economy is out of the woods, or that a sustainable recovery is now probable or even likely. Grave economic dangers lurk on the global horizon – not least in the shape of the Eurozone bond market and the oil price. What’s more, the growth we’re now seeing in Britain is, I’m sorry to say, largely illusory – the result of still massive government borrowing and on-going money-printing, which in turn has kept headline interest rates artificially low.
So I’m happy the UK growth figures are looking up. I’m pleased, too, that British firms and entrepreneurs may now invest more and for those whose employment prospects have improved. It’s also good news that these latest numbers help to undermine the claims of Ed Balls and his followers, who continue to argue that even more state borrowing and spending is the route to UK prosperity.
That’s actually the route, in contrast, to national oblivion, courtesy of a currency collapse, soaring inflation and a disastrous creditors’ strike – a set of outcomes that would make today’s “austerity” and related economic sluggishness seem like paradise.
To welcome these latest GDP numbers, though, and the support they provide to Osborne, is a very long way indeed from conceding that our current economic policy mix is optimal, or even close to being correct. Britain’s current economic policy can only be described, in my view, as slightly less bad than it would be were the dishonest and deeply counter-productive views of the Coalition’s opponents to prevail.
If you think that judgment too harsh then consider that we remain locked in the most feeble economic recovery in our history. While other leading Western nations like Germany and the US have more than recovered the GDP losses sustained during the sub-prime crisis, the British economy, even after this latest growth flicker, is still 3.3pc smaller than at the time of its pre-Lehman peak.
Beyond the headline numbers, real wages continue to shrink as inflation – which has been above the Bank of England’s 2pc target for more than three and a half years now, despite extremely weak growth – continues erode purchasing power. Including population growth, British GDP per head is actually some 7pc below its 2007 peak.
There has been no sign, either, of the “rebalancing” away from consumption and towards exports and investment that the Coalition said it wanted. Back in 2010, Osborne declared his confidence in “a march of the makers”, claiming that manufacturers would power growth via a surge in exports. It hasn’t happened. Despite the pound falling some 20pc against our main trading partners in recent years, UK exports have slumped, doing nothing to foster growth, improve our national accounts nor tackle the chronic job insecurity felt by millions.
Last year, UK exports were worth £310bn compared to £420bn of imports, landing us with an absolutely massive trade deficit, second only to America in absolute terms. Despite our matchless trading heritage, Britain’s external sector remains a drag on net growth, adding to our ever-deepening indebtedness.
This weak export performance is a big reason why manufacturing output remains more than 10pc below where it was prior to the credit crunch. And for all the government’s rhetoric about the UK being “in a global race” and our exports “reconfiguring towards the fast-growing markets of the East”, the sale of British goods in the largest emerging markets – Brazil, Russia, India and China – amounted to just £27bn in 2012. That’s 5.2pc of total exports, or less than we sell to Belgium.
Britain’s construction sector has also failed to deliver. The 0.9pc growth registered between March and June was only compared to a deep decline the quarter before. Accounting for a chunky 6pc of our economy, the building industry remains 16pc smaller than it was prior to the credit crunch.
It shouldn’t be the government’s job to export on behalf of British companies or to subsidize the construction sector. But it is the case that the Coalition has shirked some tough decisions that could have bolstered manufacturing, exporting and construction activity – in terms of cutting red tape, easing our still ridiculously prescriptive planning laws and, above all, fixing the banking sector in order that it may once again provide a steady stream of finance to responsible and credit-worthy businesses and households, so facilitating the growth the UK economy and our public finances so desperately need.
Taking such decision requires vision, grit and a fierce determination to take on entrenched vested interests – be they public sector administers or land-banking property developers. In so many parts of our economy, despite our free-market image, the UK remains in the grip of anti-competitive cartels, driven only to strive for self-preservation through lobbying and legislation – not least in our financial sector
The 2008 crash, despite the undoubted human suffering, was an incredible opportunity for reform. Yet we created in its aftermath a financial services industry that, previously hooked on private sector credit, is now addicted to central bank largesse.
So, yes, the UK has now grown for two consecutive quarters. Yet our national economic debate remains just a political parlour game with little relation to reality. For all the talk of “austerity”, Osborne will by 2015 have borrowed more in 5 years than Gordon Brown did in over a decade. The UK’s national debt is now £1,100bn, up from £580bn in 2008 and set to soar above £1,500bn over the next few years.
Under the guise of “quantitative easing”, we’ve expanded our base money supply by a jaw-dropping 350pc since 2009, leaving the gilts market propped up by an unprecedented system of circular-financing between the Treasury and the Bank of England that owes more to a tin-pot dictatorship than one of the world’s biggest economies. And the reality is that nobody knows how QE will end.
A 0.6pc GDP expansion is better than we’ve recently seen, as I’ve said. Yet, when it comes to the UK economy, there’s still little reason to smile.