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If you think Britain is on its way back to prosperity, think again, it's a mirage
It is one of the many wonders of our Royal Family that its babies are perfectly, almost eerily, timed with the economic cycle.
UK Plc has been patched-up but not cured and no amount of Royal magic can hide that depressing reality. The economy is in remission – drugged up on cheap money, subsidised credit and rock-bottom interest rates – and out of immediate danger thanks to some limited, emergency surgery by the Coalition. Photo: EPA
By Allister Heath
6:31PM BST 23 Jul 2013
104 Comments
Prince Charles' birth in 1948 coincided with the start of a 25-year period of strong economic recovery, while Prince William's arrival in June 1982 heralded the end of a bitter recession and a quarter century of unparalleled prosperity.
On the face of it, history is about to repeat itself. The new prince will be greeted tomorrow by what will almost certainly be strong second quarter GDP figures and many will be hoping that these will mark the end of the crisis. But that, sadly, is implausible.
UK Plc has been patched-up but not cured and no amount of Royal magic can hide that depressing reality. The economy is in remission – drugged up on cheap money, subsidised credit and rock-bottom interest rates – and out of immediate danger thanks to some limited, emergency surgery by the Coalition. But it would be deeply irresponsible to give it the all-clear and premature to celebrate any uptick in the official statistics.
It is true that almost every single survey released during the past few months has shown a strengthening UK economy. Yet the big lesson from the bubble of the 2000s is that what statisticians deem to be growth can actually turn out to be an unsustainable mirage.
We appear to be falling at least partly into the same trap again, with the Coalition striving to engineer a debt-driven upturn based on the indefinite delaying of any sort of meaningful rebalancing. Rather than this being a genuine recovery, we are merely entering the latest stage in an ongoing bubble that began at the start of the previous decade and which keeps being reflated, with the painful but inevitable denouement still at least another crisis away.
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If you don't believe me, take a look at the evidence. Britain needs to consume and borrow less and to save, invest and produce more. We need to reduce our reliance on consumer and government consumption and focus instead on investment and exports to drive our future growth.
Yet on many measures we are actually still moving in the wrong direction: the savings rate has fallen to its lowest level since the first quarter of 2009, at just 4.9pc. As a share of national income, we invest less than 158 other countries around the world, a breathtakingly poor performance.
It gets worse. Since the economy peaked in the first quarter of 2008, total public and private investment has collapsed by an eye-watering 24.8pc, whereas government consumption is up by 6pc, despite all the cuts.
Even though GDP per person is back to levels last seen in 2004 and remains 7.6pc lower than it was at its peak, consumer spending is down just 2.9pc, making it even more important in relative terms and confirming that the public hasn't properly readjusted to its newly straitened circumstances. The private sector has managed to trim its debt burden over the past couple of years, with a lower stock of mortgages and other kinds of debt but much more effort is required.
Families and non-financial firms' debt is still worth a cumulative 208pc of GDP, which is only back to the levels of 2007, at the height of the credit-fuelled binge.
Tragically, many people, it appears, believe they have done enough but when interest rates begin to rise, they will soon understand the need for much more dramatic belt-tightening. Total public and private debt (excluding financial firms) hit a record 298pc of GDP late last year, pushed up by the Government's still massive borrowing needs.
The current account deficit is also deteriorating: it was 2.3pc of GDP in 2007, 3.5pc in the final quarter of last year and 3.6 per cent in the first quarter of this year, hit by a decline in earnings on overseas assets.
The value of the UK's all-important services sector exports, our one real hope for the future, has remained stagnant over the past year as a result of the continuing decline of the banking industry and our exports of goods are also stuck.
The eurozone remains in crisis; the US is growing only feebly and China is facing a recession, so overseas demand is set to remain weak. The output of North Sea oil and gas has also slumped in recent years.
Perhaps the most pressing danger is that posed by the housing market. In an act of astonishing recklessness, the Coalition has responded to an overvalued, broken property market by subsidising credit further, nationalising risk, artificially bolstering the number of housing transactions and pushing up prices, while failing to liberalise the market to allow the increase in the supply of properties that is so badly needed.
No wonder many existing homeowners are feeling happier – boosting their wealth and allowing them to remortgage and spend is clearly at the heart of Osborne's re-election strategy but it will only make the inevitable day of reckoning even more traumatic.
But, while the list of problems is enormous, it is also important to give the Government its due. It has trimmed the budget deficit sufficiently to stave off an immediate crisis, albeit by relying on tax hikes to raise revenues and quantitative easing to keep gilt yields low.
The collapse in real wages has allowed large numbers of people to price themselves back into work. Total hours worked hit a record 952m during the March-May period. Encouragingly, the number of people employed in the public sector fell by 112,000 in the year to March, while the private sector grew by 544,000. Of course, employment remains much lower as a share of the workforce and unemployment is painfully high but there has been real progress, albeit at the cost of a collapse in productivity.
There have been other useful reforms: corporation tax is falling and the top rate of income tax has been cut. Some red tape has been eliminated. State spending is down very slightly as a share of GDP.
In other areas, however, the pace of change has been glacial, preventing the supply-side, market-driven economic renaissance that Britain so desperately requires. We still urgently need more competition, fewer regulations and improved incentives; more airports, roads and a proper energy infrastructure; and to embrace shale gas while ditching our outdated obsessions with costly, job-destroying renewables. We need a sustainable retirement system, business-friendly universities, a radical reform to our health system and sharply reduced levels of tax and spend. We need the City to start growing again.
Until all of this happens, we will remain mired in an unbearable New Normal of mediocrity, zombie firms and households, squeezed banks, stagnant living standards, unaffordable levels of consumption and artificial, debt-fuelled "growth" masterminded by increasingly absurd interventions in the credit markets. None of the economy's structural flaws have been fixed and we still face a major crisis when interest rates go up. Sorry to disappoint but, despite the Royal baby, the present recovery is a false dawn.
It is one of the many wonders of our Royal Family that its babies are perfectly, almost eerily, timed with the economic cycle.
UK Plc has been patched-up but not cured and no amount of Royal magic can hide that depressing reality. The economy is in remission – drugged up on cheap money, subsidised credit and rock-bottom interest rates – and out of immediate danger thanks to some limited, emergency surgery by the Coalition. Photo: EPA By Allister Heath
6:31PM BST 23 Jul 2013
104 Comments Prince Charles' birth in 1948 coincided with the start of a 25-year period of strong economic recovery, while Prince William's arrival in June 1982 heralded the end of a bitter recession and a quarter century of unparalleled prosperity.
On the face of it, history is about to repeat itself. The new prince will be greeted tomorrow by what will almost certainly be strong second quarter GDP figures and many will be hoping that these will mark the end of the crisis. But that, sadly, is implausible.
UK Plc has been patched-up but not cured and no amount of Royal magic can hide that depressing reality. The economy is in remission – drugged up on cheap money, subsidised credit and rock-bottom interest rates – and out of immediate danger thanks to some limited, emergency surgery by the Coalition. But it would be deeply irresponsible to give it the all-clear and premature to celebrate any uptick in the official statistics.
It is true that almost every single survey released during the past few months has shown a strengthening UK economy. Yet the big lesson from the bubble of the 2000s is that what statisticians deem to be growth can actually turn out to be an unsustainable mirage.
We appear to be falling at least partly into the same trap again, with the Coalition striving to engineer a debt-driven upturn based on the indefinite delaying of any sort of meaningful rebalancing. Rather than this being a genuine recovery, we are merely entering the latest stage in an ongoing bubble that began at the start of the previous decade and which keeps being reflated, with the painful but inevitable denouement still at least another crisis away.
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If you don't believe me, take a look at the evidence. Britain needs to consume and borrow less and to save, invest and produce more. We need to reduce our reliance on consumer and government consumption and focus instead on investment and exports to drive our future growth.
Yet on many measures we are actually still moving in the wrong direction: the savings rate has fallen to its lowest level since the first quarter of 2009, at just 4.9pc. As a share of national income, we invest less than 158 other countries around the world, a breathtakingly poor performance.
It gets worse. Since the economy peaked in the first quarter of 2008, total public and private investment has collapsed by an eye-watering 24.8pc, whereas government consumption is up by 6pc, despite all the cuts.
Even though GDP per person is back to levels last seen in 2004 and remains 7.6pc lower than it was at its peak, consumer spending is down just 2.9pc, making it even more important in relative terms and confirming that the public hasn't properly readjusted to its newly straitened circumstances. The private sector has managed to trim its debt burden over the past couple of years, with a lower stock of mortgages and other kinds of debt but much more effort is required.
Families and non-financial firms' debt is still worth a cumulative 208pc of GDP, which is only back to the levels of 2007, at the height of the credit-fuelled binge.
Tragically, many people, it appears, believe they have done enough but when interest rates begin to rise, they will soon understand the need for much more dramatic belt-tightening. Total public and private debt (excluding financial firms) hit a record 298pc of GDP late last year, pushed up by the Government's still massive borrowing needs.
The current account deficit is also deteriorating: it was 2.3pc of GDP in 2007, 3.5pc in the final quarter of last year and 3.6 per cent in the first quarter of this year, hit by a decline in earnings on overseas assets.
The value of the UK's all-important services sector exports, our one real hope for the future, has remained stagnant over the past year as a result of the continuing decline of the banking industry and our exports of goods are also stuck.
The eurozone remains in crisis; the US is growing only feebly and China is facing a recession, so overseas demand is set to remain weak. The output of North Sea oil and gas has also slumped in recent years.
Perhaps the most pressing danger is that posed by the housing market. In an act of astonishing recklessness, the Coalition has responded to an overvalued, broken property market by subsidising credit further, nationalising risk, artificially bolstering the number of housing transactions and pushing up prices, while failing to liberalise the market to allow the increase in the supply of properties that is so badly needed.
No wonder many existing homeowners are feeling happier – boosting their wealth and allowing them to remortgage and spend is clearly at the heart of Osborne's re-election strategy but it will only make the inevitable day of reckoning even more traumatic.
But, while the list of problems is enormous, it is also important to give the Government its due. It has trimmed the budget deficit sufficiently to stave off an immediate crisis, albeit by relying on tax hikes to raise revenues and quantitative easing to keep gilt yields low.
The collapse in real wages has allowed large numbers of people to price themselves back into work. Total hours worked hit a record 952m during the March-May period. Encouragingly, the number of people employed in the public sector fell by 112,000 in the year to March, while the private sector grew by 544,000. Of course, employment remains much lower as a share of the workforce and unemployment is painfully high but there has been real progress, albeit at the cost of a collapse in productivity.
There have been other useful reforms: corporation tax is falling and the top rate of income tax has been cut. Some red tape has been eliminated. State spending is down very slightly as a share of GDP.
In other areas, however, the pace of change has been glacial, preventing the supply-side, market-driven economic renaissance that Britain so desperately requires. We still urgently need more competition, fewer regulations and improved incentives; more airports, roads and a proper energy infrastructure; and to embrace shale gas while ditching our outdated obsessions with costly, job-destroying renewables. We need a sustainable retirement system, business-friendly universities, a radical reform to our health system and sharply reduced levels of tax and spend. We need the City to start growing again.
Until all of this happens, we will remain mired in an unbearable New Normal of mediocrity, zombie firms and households, squeezed banks, stagnant living standards, unaffordable levels of consumption and artificial, debt-fuelled "growth" masterminded by increasingly absurd interventions in the credit markets. None of the economy's structural flaws have been fixed and we still face a major crisis when interest rates go up. Sorry to disappoint but, despite the Royal baby, the present recovery is a false dawn.
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