The news about the UK’s return to growth has been over-hyped. As Lord Heseltine’s report underlines, urgent government action is needed to stimulate the economy
Much publicity has been given to the recent announcement by the Office for National Statistics that the UK economy grew by 1% in the last quarter, meaning that the economy is no longer in a technical recession.
Clearly any good news is to be applauded but we really must be cautious about the hyperbole that has come from government politicians and the City about what this single quarter figure actually means.
In fact, as Lord Heseltine highlights in his report today, the UK is a long way from having a strategy for growth and wealth creation.
There are still many many concerns about the economy and it is far too early to talk about the UK being ‘out of the woods’ or ‘on the road back to normal’.
In previous quarters when the UK economy contracted, politicians were quick to point out that it wasn’t as bad as it looked because of special factors such as the weather or the additional bank holiday. However, those same politicians were less keen to point out that the 1% growth in the last quarter isn’t as good as it looks because of other special factors.
Even the ONS acknowledges that the bounce-back was largely driven by one-off factors such as clawed-back activity lost to the extra bank holiday for the Queen’s Diamond Jubilee and a slight lift from the Olympics.
Also, the figures produced by the ONS are an estimate based on a sample of economic data collected for the purposes of producing GDP figures. Thus they are subject to error and individual figures should be treated with caution. It is much healthier to consider trends rather than single figures. If we look at trends, what do we see?
Well, historically over the last sixty years the UK economy has had an average annual growth rate of around 2.5% even after taking account of periods of economic recession where growth is actually negative. Following such recessions in the 1970s, the 1980s, and the 1990s, the economy soon bounced back to reasonable levels of economic growth. The situation in recent years is very different.
Following the great recession in 2008, the UK economy started to grow again in 2010. But since that time economic growth has basically fluctuated, slightly, either side of zero with small growth in some quarters and small contractions in others. There is no sign, at the moment, of the UK economy returning to anywhere near the average historical growth rate of 2.5% referred to earlier.
There are also huge external forces impacting, negatively, on the UK economy. Internationally, the eurozone crisis is still very much ongoing and there are two distinct aspects to this.
First, if the eurozone breaks up or Greece and/or some other countries leave the euro then his will have catastrophic effects on the UK economy.
Second, even if the eurozone doesn’t collapse, the current uncertainty is having a corrosive effect and is damaging the UK economy. The economies of Europe are slowing and even Germany, the economic motor of Europe, may soon enter recession
Then there are also very large domestic constraints. The levels of debt in the UK are enormous. The present level of debt (corporate, public and private) is as high as it was at the end of the Second World War – around 600% of GDP. This puts a brake on any thoughts of increased investment by businesses or increased consumer spending.
Add to this the insecurity caused by the large scale job losses that will take place in the public sector and this provides a toxic mix of constraints on economic growth.
Finally, we need to consider the situation of small and medium sized enterprises. Because of the high profile of large multi-national companies, we forget that SMEs are the backbone of Britain’s economy. SMEs, employ around 59% of the UK workforce and contribute around 51% of the nation’s GDP.
Particularly important are those SMEs involved in manufacturing since they are key to increasing the levels of UK exports needed to revive the UK economy. For many years, SMEs have been identified by successive governments as having a key role to play in economic recovery and future growth and this is especially true in the current economic situation.
However, all is far from well in the SME sector. Research I have done recently suggests that many SMEs are struggling to survive, let along grow, for two main reasons – a lack of consumer demand and/or a lack of finance for liquidity or investment purposes. The lack of demand is a consequence of the general state of the economy but the financing issue is more a question of the nature of SME business finance in this country.
Many SMEs are faced with a tightening of credit limits from their suppliers, an unwillingness by banks to provide financial support and frustration and derision concerning the seemingly endless stream of government schemes designed to support small businesses none of which seem to work. Consequently, many SMES may not survive and others will fail to take business opportunities because of these financial constraints.
It is time to get away from the hype about economic growth and have a dose of reality. The longer we keep talking about the goal of ‘returning to normal’ in terms of economic growth the longer we will take to realise that the world has changed – and that we must come to terms with the possibility that the UK economy (and other European economies) may never get back to historical levels.
We have to work out how to live with such a situation. Unfortunately, our politicians will never tell us the truth about these matters. Their minds are solely focused on the next election in 2015 and there are no votes in telling voters the facts of life.