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THE INVESTOR
analysis
uk economy
rollercoasterride
All of the latest economic indicators point to the UK surging ahead of its
European neighbours. But is the recovery sustainable, or should we be
strapped in for a turbulent period of ups and downs?
B
ritain’s economy is surging
ahead.The consensus growth
forecast for 2014 is 2.8%,
outstripping all other major
European economies. Credit is
flowing again, average house prices have been
rising by more than 5% a year, retail sales have
been improving and unemployment is down
sharply.And, while services are leading the
recovery, construction and manufacturing are
also showing signs of improvement.
But is this a sustainable recovery, or just a
return to the consumer credit-fuelled binge
that landed us in such trouble back in 2008?
John Hawksworth, chief economist at
PwC, said:‘The housing market is growing
again – in part thanks to the Funding for
Lending Scheme and Help to Buy – and this
has given consumers confidence to spend
more.As a result, the increasing rate of
household savings seen during the recession
has gone into reverse in the past year or so.’
David Kern, chief economist at the
British Chambers of Commerce, believes
it is inevitable that the consumer will
lead the economic recovery given that
consumption will play a key role in the early
stages of the recovery.
Moreover, compared to some other
developed economies, Britain’s recovery so
far has been modest.‘After such a deep and
long recession, we’re starting from a low
base,’ says Hawksworth.‘UK output is still
1% below its previous peak, whereas the US
economy is 7% and Germany around 3%
above their previous peaks.We’re playing
catch-up with the US and Germany.’
Another key difference according to
RobertWood, UK economist at Berenberg
Bank, is that‘whereas the US imposed a lot of
fiscal austerity last year, in the UK we front-
loaded it’. So, with growth now feeding
through, there could be room for some
easing of austerity, such as the increase in the
tax threshold and decision not to increase
fuel duty announced in March’s Budget.
After five years of flatlining, the UK
economy is powering ahead. Kern notes
that the Bank of England’s growth forecast
for 2014 of 3.4% is at ‘the very high end of
the spectrum’, and that its expectations of
11.5% growth in business investment are
‘too high’. However, he does see ‘a moderate
recovery in investment this year’.Wood’s
expectation of 3.3% growth this year is,
he admits,‘towards the top end of the
consensus forecast’, but it is based on
‘a continuation of the recent trend’.
For this nascent recovery to become
sustainable, Hawksworth says that‘business
investment needs to pick up significantly, and
that hasn’t happened yet’. Sustainability also
‘depends on rising productivity and increases
in real wages which, in turn, permit
consumers to keep on spending’.This is an
upward spiral. But we’re not there yet.
‘Growth in business investment always
lags the recovery,’ said professor Charles
Goodhart of the London School of
Economics’ Financial Markets Group and
former member of the Bank of England’s
Monetary Policy Committee.‘Only when
prior capacity is utilised, is there a need
to unlock more.’
Although unemployment has fallen
sharply there is still slack in the system, and
this spare capacity is thought to be holding
back investment.‘Whereas the US suffered
a sharp rise in unemployment following
the financial crisis, in the UK we opted to
share falling output among a larger number
of people,’ says Kern.‘This minimised the
human misery of high unemployment and
helped to retain skills, but at the price of
low productivity and low wages.’
Professor Goodhart agrees that
productivity remains an issue.‘The general
assumption was that productivity would
rise sharply once the recovery began.That
has not happened. Instead, the numbers in
employment increased sharply – though
many of these are in relatively low-paid
or part-time jobs.There will be no sharp
By Jonathan Gregson
