The Dismal Science Strikes Again
There is nothing quite as hated as a false dawn and there is nothing as finite as the hapless politician who gets caught out having proclaimed one. That was the lesson in 1992 when former Chancellor Norman Lamont said that he was seeing “green shoots” in the UK economy, growth did return but within months Lamont had been shown the door for calling the recovery too early. That would explain why, in the wake of some more positive news on the economic front for the UK, coalition ministers have been a touch more reserved for fear of making the same mistake.
Firing the starting gun on a string of good news for the economy was the ONS who, in late June, confirmed that the double dip recession of 2012 actually never happened. In addition, on the first day in July the Purchasing Managers Index (PMI) showed some of the strongest growth in two years for manufacturing and services (the latter being crucial as it takes up some two thirds of UK output), as well as positive signs in construction. Other surveys of consumers also enforced the positive mood as those surveyed felt the most confident since May 2011. Furthermore, growth appears to have spread outside of the cockpit of London and the South East, as the Chambers of Commerce report that growth is picking up in Scotland and the North East, two areas usually left behind when recovery kicks in. Even more surprising is that on the 10th of July, the ONS reported a fall in income disparity between the rich and poor.
This string of good news resulted in several organisations like the CBI, Barclays and the IMF to all raise their forecasts for UK growth for the next few years. Normally, this would be a time to celebrate, but there is a sour tone in the economists who analyse these results, and to find out why, we have to look no further than the ONS’s export and investment data.
Looking at the way the UK economy is taking shape it is clear that the “march of the makers” that was promised by the present Chancellor has not materialised, the UK seems still to be exporting containers full of air, private investment has been lacklustre at best and there has been no seismic shift in the makeup of the UK economy away from services and to manufacturing. What’s more, real incomes have fallen to 2003 levels and consumer confidence, despite being relatively high, is still very much in the red. Even the reduced income inequality has been created as a result of everyone losing out, and the rich losing out more, rather than the ideal of everyone getting richer and the poor more so.
The fact is that despite all the damage done by the financial crisis the UK economy has remained balanced on consumer spending balanced on house prices. Large state backed measures like the Help To Buy initiative have improved the outlook for the UK economy and have primed it for solid improvement by 2015 (imagine why) but it has been at the expense of attempts to forge a superior economy out of the financial crash. Even if the UK economy converts positive data into hard growth and employment, this is certainly a reason for the coalition to feel modest about its performance
But nobody is questioning the need for growth, the UK is one of the few major economies to still not fully recover from the financial crash, before drastic interventions in the housing market people were talking about a Japanese style lost decade for the UK, a fate worse than death it would seem. For better or worse, a return to the status quo is what is on the cards for the UK economy if nothing is done, and, thanks to the UK’s insignificance in the EU and George Osborne’s economic restrictions, nothing will be done for now.
To a certain extent this is an understandable move from George Osborne, with the eurozone crisis having effectively scuttled the first, more promising, false dawn back in 2011, it is easy to see from Osborne’s perspective the merit in easy, well orchestrated growth to come to the rescue of both the nation’s finances and the Conservative Party’s MPs. Neither is his predicament really his fault; with the well intentioned straightjacket he imposed on himself in terms of spending, Osborne simply doesn’t have to money to engineer a phoenix like revival in exports and investment, nor does he have the mandate or the time needed to solve the euro crisis single handed.
But what of forging new alliances with other countries outside of the EU, ministers always bemoaned the fact that Ireland got more British exports than China, India Russia and Brazil combined. Whilst it did sum up the feeble attempts made by the previous government to boost export earnings, this seemed to be proposing the right idea, but the wrong clients. The failure of the UK to fully exploit the 2.5 billion people that live in the BRICs was easily predictable due to their low currency values and their affluent middle class (the mainstay of import interest in the BRICs) being little more than a rounding error in the overall population. Even with sterling at a severe low, the UK was never going to gain any more than a handful of trade deals with the BRICs that would come to anything permanent. This wasted early energy and drive on countries that were never going to deliver much in terms of export earnings anyway.
So the UK is stuck. There seems to be no way to force a change in its economic mechanics without breaking Osborne’s limits, and no way to force a revival in export interest without superhuman negotiating skills. So the UK is drifting towards the same toxic mix of debt, borrowing and consumer spending that made it so exposed to financial shocks last time around. And the UK cannot seem to do anything about it.