UK Recovery? The Feelgood Factor remains elusive

After writing a weekly economics column in this newspaper for a decade or so, along with a fair few elsewhere, I can now finally say I’ve made it. Why? Because, as I only lately discovered, some paragraphs from one of my Sunday Telegraph offerings appeared in a recent economics A-level examination.

“The UK is locked in the most feeble economic recovery in our history,” this column argued back in mid-2013. “Real wages continue to decline … and there’s been little sign of any ‘rebalancing’ away from consumption and towards exports”. Having read this quotation on their exam paper, along with a few more of my choice words, A-level candidates were then asked to “evaluate Mr Halligan’s analysis”, providing evidence to support their views.

Last week, the exam paper came to life and I was subjected to a face-to-face grilling, as I debated my concerns about the UK economy with an impressive group of sixth-form economists at Saffron Walden Country High School in Essex. While we’ve seen undoubted economic improvements over the last 12-18 months, I argued, I still harbor doubts about the nature and sustainability of this recovery, as I did in mid-2013.

Back then, we’d just learnt the UK economy had grown 0.6pc during the three months to the end of June 2013, up from 0.3pc the quarter before. This was front-page news, the first time national income had expanded for two successive quarters since mid-2011. As such, these data were widely viewed as “game-changing” among our political classes. Newly emboldened, George Osborne declared the economy was “on the mend”.

The Chancellor’s words were understandable. The UK had yo-yoed between GDP expansion and contraction for the previous two years, having never properly found its feet since the 2008 sub-prime collapse. Yet it was a long way from certain in mid-2013 that our economy had reached escape velocity. And, as I told my sixth form audience last week, that remains the case today.

Since the summer of last year, the British economy has carried on growing. Up some 0.7pc during the three months to the end of September, GDP has expanded for seven quarters in a row. The UK, as we often hear, is now on course to be this year’s fastest-growing G7 economy.

That’s good. I’m delighted British companies are now investing more. And we’ve certainly seen an unusually strong recovery in terms of job creation. Employment levels are today 4pc higher than at the time of the sub-prime collapse, compared to 3pc lower six years after the 1991 recession. Hundreds of thousands now have a job who didn’t in mid-2013, as unemployment has plunged from 7.8pc to 6.2pc.

Despite that, the Conservatives haven’t generated the politically-crucial economic feel good factor. Yes, the Tories are now ahead of Labour for the first time in several years, according to opinion polls last week. But this has as much to do with disaffection for faltering Labour Leader Ed Miliband than any widespread sense the government can deliver a meaningful recovery. So, ahead of the crucial Autumn Statement in early December, and the general election next May, why is the feelgood factor so elusive?

The reason is obvious if you look at the data. It’s true that UK GDP has just about recovered to its pre-crisis level, and is now 0.5pc higher than in early 2008 (or just over 2pc if you consider recently-implemented accounting changes including various forms of informal economic activity). Yet, factor in a 4pc population rise since early 2008 and GDP per head (even under the new data rules) remains around 1pc lower than before the Lehman collapse.

This is largely explained by falling real wages. Pay has grown overall, but inflation has grown even faster. And quite a few of the new jobs created in recent years, on zero-hour contracts and predominantly in the service sector, have offered wages that are rather low. As a result, in today’s prices, the average weekly wage has fallen from £540 in early 2008 to £480 now. No feelgood factor there.

Consider, also, that while UK house prices have recovered overall, and are up almost 10pc on average since before the crisis, that recovery has been dominated by London, which has seen a 33pc rise – and has otherwise been very patchy. In the majority of UK regions, in fact, house prices are still lower than they were six years ago.

While the housing market helps explain why many homeowners aren’t feeling good about their economic circumstances, the combination of low pay and high relative prices means the dream of property ownership, and the security and satisfaction it can bring, remains elusive for many. This will remain true as long as the UK continues to build so few houses.

Ministers last week trumpeted new figures showing a “strong rise” in housing building in England (figures for the rest of the UK are compiled separately). It’s true that there was a net increase of almost 137,000 new English homes during the 2013/14 financial year and that was 10pc up on 2012/13.

Yet that new figure also remains disgracefully low – almost 40pc below the 224,000 homes built in 2007/08. And even that pre-crisis peak was well short of the 250,000-plus dwellings we need each year, just to keep up with current trends of demographic change and population growth. The reality is almost every post-War UK recovery has been associated with a strong rise in house building – which has not only stimulated the construction industry, but also provided affordable homes for aspirational workers, so spreading the nation’s wealth, boosting confidence and entrenching the economic upturn. None of those characteristics apply to this recovery. On the contrary, we’ve seen a fall in home ownership, greater economic despondence and rising inequality.

The pound has fall by around a fifth in trade-weighted terms since 2008, I told my sixth-form charges, yet British sales abroad have slumped. UK exports were worth £310bn in 2013, compared to £420bn of imports. We’re now sporting the largest external deficit in our history, which acts as a drag on growth. That certainly doesn’t square with a sustainable recovery.

The UK’s national debt, I reminded them, is also spiraling – up from £580bn in 2007 to an astonishing £1,400bn now. It’s heading for £1,600bn by 2017/18, by the way, even if “austerity” is fully implemented.

And then, of course, there’s the potential impact of geo-political risk – Syria, Ukraine, the eurozone et al – on fragile financial markets. The eurozone, certainly, our biggest trading partner by far, still looks very shaky. Having contracted by 0.7pc and 0.4pc in 2012 and 2013 respectively, the single currency zone remains locked in a near-recession. Until it stages a proper bounce-back – and that may not happen until there are painful structural changes – it will remain very difficult for the UK economy to make a full-throated recovery.

Bank of England Governor Mark Carney, speaking at the launch of the quarterly Inflation Report last week, hinted that interest rates are likely to remain at their ultra low level of 0.5pc until next autumn. While that’s reassuring for indebted firms and households, no-one can be sure.

Being a decent economist, as I told my sixth-form audience, isn’t always easy. It’s less about being popular than about insisting on sticking to the facts. And the facts show, unfortunately, that while the UK is in better shape than it was 18 months ago, the recovery is far from secure.

http://www.telegraph.co.uk/finance/economics/11233155/Recovery-The-UKs-economic-revival-is-far-from-secure.html

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