UK growth latest
As expected, the UK economy grew by around 0.6% in second quarter of 2013, according to provisional estimates released by the ONS today. This follows 0.3% growth in the first quarter and, with two consecutive quarters of positive GDP the UK economy is ‘officially’ growing. While fears of a triple-dip recession now seems a thing of the distant past, numbers are, of course, purely relative, and growth of 0.6% is certainly not enough to compensate for three years of stagnation. To put things into context, today’s positive figures mean that the UK has experienced negative growth for four out of the last seven quarters. However, perhaps the best news was that all four main sectors of the economy experienced positive growth, with the largest contribution coming from the service sector.
The 0.6% rise comes on the back of other positive news on retail sales, which grew by 2.2% in June 2013. This follows more good news earlier in the week on inward investment into the UK, which grew by 22% last year, and confirmed that the UK is the EU’s main destination for overseas investors. This also comes on the back of upbeat reports on improving business confidence. The more settled outlook for the Eurozone has clearly helped improve confidence, and with the housing market picking up, a glorious summer, and a royal birth, there is enough good news around to generate a minor ‘feel good’ ripple.
The key to any recovery is, of course, that it is sustainable. A sustainable recovery means one that is driven by increases in aggregate demand that are not wholly funded by credit, and one which generates real jobs. A sustainable recovery also requires substantial improvements in aggregate supply, including better infrastructure and, significantly, a better educated, more skillful and more productive workforce.
Credit is, of course, an essential facilitator of household spending, and of business investment, but if spending is funded out of borrowing, rather than from current income and output, future repayments create a dead-weight constraint in the future – in other words a debt-funded recovery it is not sustainable. If new spending is based on real output then it indicates that firms are successful, profitable, and can either pay higher wages justified by increased productivity, or they can employ more people justified by increased demand. Hence, the real key to sustainable recovery is a reduction in unemployment.
While many economists are arguing for more growth based on increases in exports and investment, both are notoriously volatile. Of course, growth based on investment in new technology is only beneficial as it generates short term aggregate demand as well as increased capacity and competitiveness. Hence, the good news this week on the UK’s FDI is, perhaps, the most eye-catching. The other worry is the housing market, especially in London and the South East. The housing market is also based on credit and growth rates above 5% are not sustainable in the long run. A rampant housing market will, like the North Sea oil boom in the early 1980s, distort our perception of what is happening in the real economy. Of course, the housing market could easily provide a piggy back ride for the economy for 2 or 3 years, but the market is, largely, an illusion if it is funded by increasing mortgage debt rather than increases in real incomes derived from a growing and sustainable real economy.
On the supply side here is, of course, a skills gap which acts as a significant constraint against sustainable growth given that, in a globalised economy, UK firms will only compete if they can access skilled labour. So, as the school holidays begin the end of term report on the UK economy is ‘improvements have been noted, but…could do better’.