Growth of a sort, but what about rebalancing the economy?
The UK productivity paradox, a slowing down in investment financing, too much consumer borrowing, worries over the fragility of the manufacturing recovery, slumping GDP figures, a fall in construction figures - there's plenty to be glum about but not all the news is bad.
Recent GDP figures showed the UK’s economic growth easing in the final quarter of 2014 to 0.5%. Global headwinds slowed manufacturing output and construction contracted, while services (especially retail) continued to grow strongly.
Overall growth for the year came in at 2.6% - down on the official forecast of 3% - but still a respectable rate of growth, especially in the context of ongoing Eurozone stagnation and deflation.
With the General Election less than 100 days away, the news of an easing up in the pace of growth should have come as uncomfortable news for Chancellor Osborne. He still claimed that at 2.6%, growth was the “fastest of any major economy” and the strongest since 2007. It shows how bad things really were from 2010 to 2013 if we now get so excited about what is essentially a trend rate of growth.
Nevertheless, the sharp drop in oil prices of late should simultaneously boost household spending, cut manufacturing costs, and fuel growth in 2015. Not surprisingly, the E&Y Item Club – which uses the same model of the economy as the Treasury – recently raised its forecast for 2015 UK growth to 2.9%.
Growth in Q4 of 2014 was reliant on the UK’s dominant services sector, which accounts for as much as 80% of UK output. This sector grew by 0.8%.
But Q4 also saw construction falling by 1.8% and manufacturing by 0.1%. So much for the ‘March of the Makers’. Rebalancing – at the national level at least – stalled in the latter part of the year. And it’s telling that only the UK’s dominant services sector is back to its pre-crisis strength.
Moreover, there is again a concern that the consumer led recovery has again been built on more borrowing. On that, it should be noted that prior to the financial crisis, the debt to income ratio in the UK was around 170%. The Office for Budget Responsibility (OBR) reckons it will reach over 180% by 2020, and currently stands at 146%. ‘Rebalancing’ seems more like shifting the burden of debt from the public to the private sector, so far at least.
What’s really been puzzling economists, though, is the UK’s so-called ‘productivity paradox’. What they really mean by this is that they don’t know why, since the 2008-9 financial crisis, the UK economy seems to have all but lost its ability to improve output from existing labour and assets.
Partly that was because when the downturn hit, firms – especially in manufacturing – hoarded skilled labour.
Workers at JLR and many other firms voted for pay cuts to keep their jobs. As output dropped but employment remained relatively stable, so productivity fell. That was actually a positive news story as it meant unemployment didn’t rise as much as had been feared.
But that doesn’t explain why there hasn’t been a decent pick up in productivity since. What’s termed ‘multi factor productivity’ (one way of looking at the efficiency of producing output from a mix of inputs) actually reduced economic growth by 0.5% last year. That might have something to do with access to finance for investment. For example, bank lending to manufacturing slowed in December according to banking industry figures. The British Banker’s Association (BBA) reported that growth in bank lending to the manufacturing sector more than halved in the last six months and declined by £624m in December, compared to a £217m expansion of credit in the previous month.
The figures also show that borrowing by companies outside of the financial sector contracted by £15.7bn in 2014, compared with a decline of £11.6bn in 2013.
Overall, what recent figures tell us is that while manufacturing had a ‘good’ 2014, it still has some way to go to recover the ground lost during and after the 2008-9 downturn.
And a sustained manufacturing recovery is still not guaranteed as the latest GDP figures show. Doubts over the durability of the manufacturing recovery centre on fragility in key export markets, low levels of investment spending, concerns over the impact of high energy costs across the sector (on which the recent fall in oil prices should help), and issues of skills and access to finance down the supply chain.
The fall in oil prices, which will spur economic growth and cut manufacturing costs, has come at just the right time for the sector, and the wider economy. But it also shows quite how ‘locked in’ we are to growth based on fossil fuels. That needs to change.
Professor David Bailey works at the Aston Business School
The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of The Information Daily, its parent company or any associated businesses.
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