Is the UK economy seeing the 'wrong kind' of green shoots?

Person shopping Nearly all of the economic growth seen in the past year has been due to consumer spending

I hate green shoots. Or rather, I hate being asked about them, because when people ask whether I can see green shoots in the economy, they're not really asking about the first, tentative signs of growth. We've had those for ages. You don't see employment rise by more than 430,000, in a year, without quite a lot of green shoots.

No, what people really want to know is are we finally seeing the "proper" recovery we've been waiting for. Right now, I'm afraid the answer to that question is no.

The economy does seem to have more momentum than it has had for a while. With any luck, forecasters will be revising up their UK growth predictions over the next few months, not revising them down.

But, unfortunately, the growth we're seeing is still "the wrong kind": that is to say, it's still being driven almost entirely by spending by households, rather than investment by companies or net exports.

That does not feel like a very solid basis for the recovery, when most people's earnings are still falling, in real terms, and households are still sitting on a large amount of debt.

Encouraging signs

Today's PMI survey from the services side of the economy was better than expected, with the main activity index stronger, in June, than it has been in more than two years, and new orders rising to their highest level since 2007.

There's also been encouraging signs from manufacturing and construction - previously the weakest part of the economy.

All of this has forecasters expecting to see that the economy grew by at least 0.5% in the second quarter of this year, up from 0.3% in the first quarter.

Growth was so uneven in those first three months, with March a lot stronger than January, that the economist Geoffrey Dicks actually thinks the second quarter estimate could be a lot higher - even as high as 1%. But even growth of 0.5% would be the fastest we've seen in nearly two years (if you ignore the heavily distorted period around the Olympics).

Still, even that fact reminds us how far we are still from a "normal" recovery, or even the fairly mediocre upturn that the government was banking on in 2010.

Growth at an annualised rate of 2% would not usually be a cause for such celebration. And the recent revisions to past GDP data mean we are even further from our 2007 level of output than previously thought.

Michael Saunders, at Citi, calculates that UK living standards - real GDP per head - are now 7.6% lower than at the end of 2007. At this stage in past recoveries, income per head has typically been about 8% higher than when the downturn began.

What is more, nearly all of the meagre growth that we have seen in the past year has been due to growth in consumer spending.

ONS graph Profile of the economic downturn in the UK relative to selected economies

You would always expect it to play a big role - it accounts for the lion's share of the economy. But it was depressing to see, in those new figures, that business investment had been even weaker than previously thought, with a record low rate of investment, net of depreciation in the first quarter, and business investment 30% lower than it was in 2007.

Exports in the first quarter of 2013 do turn out to have been slightly stronger than thought, but net exports have also played a minimal role in our recovery to date.

Savings cut

You might wonder where all that consumer spending is coming from, at a time when real household incomes have continued to fall. The answer, very clear in the revised numbers, is that it has come from households saving less.

The Office for National Statistics now reckons that households saved 4.2% of their income in the first quarter of 2013. That's down from 7.4% the year before, and the lowest in four years.

It's possible that households can continue to carry the recovery on their shoulders. After all, people have made some modest progress towards cutting their debt.

Graph showing the saving ration and unsecured lending to individuals The saving ratio and unsecured lending to individuals

Figures out today from the Bank of England show that households, on average, increased the amount of equity in their homes by £8.8bn in the first quarter of 2013.

That's the 20th quarter in a row in which people have paid back more mortgage debt than they have taken out, after a decade in which things were very much the other way around.

But, real earnings are still falling. Household debt is still well above its long-term average, as a share of the economy. And the savings rate cannot fall indefinitely, to finance higher spending.

Mark Carney won't be the only one hoping that companies finally do start investing, as the Office for Budget Responsibility hopes - and exports start to show a lot more life. Otherwise he will face the same deeply sub-optimal choice that has faced at least the past two Bank governors, between imbalanced UK growth, and no growth at all.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 33.

    29.The J Hoovers Witnesses 'NASA is in the public sector'

    Indeed and how is that afforded? By the dynamic enterprise of private companies in the USA. We need a public sector but it has to be funded from the private sector - hence the required rebalancing.

  • rate this

    Comment number 32.

    Let them eat cake from Costa.

  • rate this

    Comment number 31.


    The economy is being rebalanced between the public and private sectors. This is happening, as the job statistics show, and is a good thing. We need a bigger wealth creating private sector and a smaller wealth consuming public sector.


    Come on, I'm not having that.

    The rebalancing was supposed to be away from Services and 'the City' to Manufacturing, Construction & Exports.

  • rate this

    Comment number 30.

    Let's look at the facts:
    1. Food is in an inflation trend. (even bare basics are either more expensive or lower quality)
    2. High street prices is in a deflation trend to clear old stock. (and new stock sizes are being reduced)
    3. House prices are on the rise again far and beyond the 4X average annual salary norm. (re-inflating the bubble)

    Green shoots? The fact is, your experts are talking PAP!

  • rate this

    Comment number 29.

    "We need a bigger wealth creating private sector and a smaller wealth consuming public sector".

    NASA is in the public sector, and the brilliant Mars Rover etc. show what can be achieved when an outfit is not run by ex-public schoolboys, who do not believe in the public sector.

    There's no reason why it should not produce even more wealth than it already does, by e.g. education.

  • rate this

    Comment number 28.

    Due to drop value pound working in hotel industry i have seen a lot more tourists visiting the UK from all over world .
    As with all problems in Spain and Greece helping persuade more brits to holiday at home.
    This really has boosted the Leisure and tourism industry in country. They are also spending money in the shops.

  • rate this

    Comment number 27.

    24. The J Hoovers Witnesses "
    "The problem has always been the debt bubble"

    100%. But what are we going to do about popular psychology?"

    We could start by having a level playing field with other forms of 'investment' by getting rid of the capital gains tax exemption on the main home.

    Then limiting the security a lender can secure to say 3 times earnings.


    25 D Skinner is NOT the Party!

  • rate this

    Comment number 26.

    2.harbourmaster 'Whatever did happen to rebalancing the economy!?!

    The economy is being rebalanced between the public and private sectors. This is happening, as the job statistics show, and is a good thing. We need a bigger wealth creating private sector and a smaller wealth consuming public sector.

  • rate this

    Comment number 25.


    "Every one wants a cushy banking job on retirement"


    Not Dennis Skinner. There are probably a few more like him too.

  • rate this

    Comment number 24.


    "The problem has always been the debt bubble"


    100%. But what are we going to do about popular psychology?

    Most graduates now are saddled with it, and it's quasi-normal among them. That, coupled with ever-receding prospects of real property ownership means a debt-financed live-for-today approach is fully understandable for the poor loves.

  • rate this

    Comment number 23.


    Yes, but if that 5% growth is all in London and the south-east then it WILL be a sign of 'overheating, bubbles and the wrong kind of growth'

  • rate this

    Comment number 22.

    16.Big JC

    "13. TheWalrus999 . That is unless Stephanie & the BBC have their beloved Labour Government in power by then!"

    Haven't you yet worked it out - the Labour Party, The Tory Party and the other one are all the same party with indistinguishable policies all determined to do what the other lot do.

    Every one wants a cushy banking job on retirement.

  • rate this

    Comment number 21.

    On Austerity:


    Austerity or not matters not one jot when it comes to getting the economy going again and providing jobs.

    The problem has always been the debt bubble and its inevitable consequences - compounded by the most appalling mismanagement in our 'wonderful' banks (and by regulators).

    First get the basics right - money must be properly priced or Capitalism does not work!

  • rate this

    Comment number 20.

    Well done the B.B.C. We have some of the most positive news for a long time on the economy and the B.B.C. try to present it in a negative light. When will you understand that when you run down the economy you cost people their jobs. That is real people, living in the real world. Please remember not everyone is on the B.B.C. gravy train.

  • rate this

    Comment number 19.

    We are saved. Mr Carney & his best boffins are trying to crack the 'face on the note problem'. The 30 second decision will be debated at the highest lvl with free lunches and transport all round.
    Put a picture of a wind turbine on one or are they male also?

  • rate this

    Comment number 18.

    Green shoots that can only presage a worse disaster - I'll agree with that!

    House prices rising quickly, for example - a disastrous debt bubble - YET AGAIN age deeper more inevitable and less escapable bankruptcy for banks etc.

    The Torygraph had it about right today on the front page - we are in it for another 20 years.

    WE MUST get the idiots to raise interest rates to start the deleveraging!

  • rate this

    Comment number 17.

    11 Mr Jones

    > Irrespective of Green Shoots, we must all agree that austerity is the right policy. More public spending for economic growth leads to more debt which eventually leads to going bust.

    I agree, for the UK. Austerity here has reduced gov't borrowing without the kind of economic freefalls seen in some Euro countries. Those countries do need significant changes in policy (and currency).

  • rate this

    Comment number 16.

    13. TheWalrus999 . That is unless Stephanie & the BBC have their beloved Labour Government in power by then !

  • rate this

    Comment number 15.

    "real GDP per head - are now 7.6% lower than at the end of 2007"

    Why do economic commentators get so hung up on returning to the previous GDP high achieved at the end of 2007. The previous 2007 high was a fictitious peak achieved by the previous 10 years of government overspending/public debt binging.

    It’s about as useful as the acres of wasted text spent talking about double/triple dips.

  • rate this

    Comment number 14.

    The government could do a lot more through the tax system (accelerated capital allowances) and planning system to encourage business to spend all the money they are hoarding. Alternatively they could just bring in an emergency tax take of 10% on all balances above £2m. That would clear the deficit and get cash moving !


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