Wednesday, 10 July 2013
Is the UK economy on the up?
In the 2013 Spending Round in June George Osborne said he was taking decisions to "secure the recovery". Yesterday talk of recovery increased when the IMF revised its prediction for UK growth for this year from 0.7% to 0.9%.
However the same upward adjustment in UK growth is not replicated globally. Last April the IMF was predicting 4.1% growth in 2013, now it says just 3.1% will be achieved. This may be reflected in the UK by another set of disastrous figures for manufacturing and industrial production (down 2.9% and down 2.3% respectively in the last year), and a widening of the UK's already substantial trade deficit. So much for the economic rebalancing Osborne promised in 2010 ...
The extra 0.2% growth the IMF is predicting is not much to get excited about - especially when in 2010 Osborne's newly formed Office for Budget Responsibility was predicting growth would be 2.9% this year. However, the IMF revision is among a number of positive signals about the UK economy.
Last week the Services PMI - a survey of purchasing managers in the services sector (which accounts for 75% of the UK economy) - indicated growth at its fastest rate for over 2 years. The respected and independent National Institute for Economic and Social Research predicts that growth in Q2 of 2013 will be 0.6% (while Markit suggests 0.5%).
The prospects for George Osborne therefore seem to be looking up. However, all may not be what it seems. With no let up in the decline of household income, what is supporting this stronger growth in the services sector? As Duncan Weldon shows clearly and insightfully, household income is falling, but household spending is rising - eating into savings that recovered after the 2008 crash, but are now declining again (see graph below).
What does this mean for the sustainability of the nascent UK recovery and for households? Well, as Weldon concludes, "a falling savings ratio really is underpinning our recovery. The 'new economic model' looks increasingly like the old one". This is even more so the case with the increasingly unreality of rising house prices, underpinned by the bubble-inflating Help to Buy scheme.
The overall households savings ratio masks the reality that for many households they are not eating into their savings, but in fact sinking deeper into debt (good news for payday loan companies like Tory funders Wonga). For many people - including the 500,000 that are reliant on food banks - there is a real crisis emerging. Many are struggling to pay rents - especially with tax credit and housing benefit cuts to those in and out of work.
With pay continuing to rise below inflation, and benefits similarly capped and being cut in cash terms for hundreds of thousands of households, the recovery looks very fragile. There can be no sustainable recovery through increased consumer debt. That way paves a renewed round of loan, credit and mortgage defaults - and with the state lacking the capacity to perform the sort of bailouts that were necessary in 2008 and 2009.
The economy may well be on an upward trend at the present time and this could extend into the latter part of the year. But while economic growth in 2013 is likely to far outsrip the OBR's modest 0.6% prediction, in 2014 growth of 1.8% looks perilous, as does 2.3% in 2015.
The upturn in the UK economy is built (again) on an inflating debt bubble, and the longer it inflates the more damaging the final bang when it bursts. As the manufacturing figures show, there is no evidence of rebalancing, no prospect of a revival in workers' incomes (through pay or benefits), and no substantial investment that could at least stimulate medium term growth and create jobs (in fact unemployment remains stubbornly around 2.5 million).
So while Osborne will be cheering green shoots and patting himself on the back - most gratuitously at party conference in the autumn - the underlying problems of the UK economy remain unresolved, and any temporary respite may only be storing up greater problems for the future.