Yesterday, whilst most the commentariat was focusing on Ed Miliband’s big speech, we got revised numbers for UK GDP from the ONS.
As the headline growth numbers were not changed this generated little interest from most commentators. However there were substantial changes to the components of GDP, changes which paint a mixed picture of the state of the recovery. The FT reported it in a broadly positive light, whilst Bloomberg was more negative.
To me the revised Q2 numbers paint a picture of a strong recovery built on fragile foundations – foundations that Mr Osborne is about to demolish. The UK economy is entering the danger zone.
Taking the good news first; the contribution of inventories to growth was lower than expected and the contribution of private investment was higher. Inventory rebuilding can only ever be a temporary prop to growth – eventually companies will stop stockpiling if final sales don’t improve. The less dependent the recovery is on inventory building, the better.
The increase in investment is also obviously to be welcomed, as I’ve often argued the collapse in investment has been the real driver of the recession. If this increase is repeated and built upon in the coming quarters, I’ll be a lot more sanguine about our economic prospects. However, if final demand doesn’t improve I struggle to see why businesspeople will keep investing.
On the negative side Bloomberg tellingly choose the headline “U.K. Growth Fueled by Jump in Government Spending”. Remember back in July when the first estimate was released George Osborne said:
“Today’s figures show the private sector contributing all but 0.1% of the growth in the second quarter, and put beyond doubt that it was right to begin acting on the deficit now.”
It turns that Government actually (directly) contributed the most to growth since since 2008. And the large jump in construction spending (the biggest since 1963) was probably also heavily dependent on the public sector.
As Commerzbank economist Peter Dixon argues (in the Bloomberg report):
“The more the contribution of government now, the more we’re going to miss it when it’s taken away, we’re going to see much slower growth.”
Potentially more worrying was the reliance on consumption, which contributed about one third of the growth. Households increased their spending by 0.7% in the quarter even whilst their incomes fell by 1.6%. This was possible as the saving rate (the amount of income saved by households) fell to 3.2%. As the FT notes, the level of household savings has now fallen to near pre-recession lows. The OBR expects this rate to rise in the coming quarters as households rebuild their balance sheets. IT certainly can’t fall much lower, so in future the growth in consumption will be more closely linked with the growth in household incomes. Incomes that will be hit by the January rise in VAT.
The recovery so far has been built around three pillars – government spending, a sudden rebound in investment and consumption fuelled by falling savings. George Osborne is about to directly remove the first of these pillars and possibly undermine the third. Whether investment will continue to rebound is now the big question.
I’m not alone in being worried as we enter the danger zone. Adam Posen, of the Bank of England’ MPC, seems equally concerned.
The UK faces a long period of sluggish growth, with high unemployment and falling prices, unless the authorities act quickly to stimulate the economy, an influential adviser to the Bank of England has warned.
Sounding the alarm over the possibility of years of stagnation, Adam Posen, an external member of the monetary policy committee, rejected the upbeat arguments issued on Monday by the International Monetary Fund about the economy’s nascent recovery
Against this background (and with the prospects for exports, Osborne’s preffered panancea, looking increasingly ropey), I’m afraid I can’t agree with Kitty Usher’s call for Ed Miliband to become more hawkish on the deficit.
Yes Labour need to show how they would go about reducing the deficit in the medium term, but the real risk now isn’t the deficit, it’s the propect of a renewed slump.