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

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  • rate this

    Comment number 53.

    That giant thinktank the House of Lords is poisoned by the presence of ex politicians. There are too many Lords anyway, and as Dennis Skinner has cropped up, politicians and civil servants should follow his example...if they can't stay in the Commons or Civil Service, they should GO AWAY.
    Replace them with ANYONE ELSE and there is a chance govt might be influenced for the better.

  • rate this

    Comment number 52.

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

    In terms of financial wealth you have things upside down. It is the government sector which is financing the the private sector, not the other way round. The deficit acts as a subsidy to the private sector.

  • rate this

    Comment number 51.

    I agree with NJ (50).
    Services are merely passing the money around. We are not generating real wealth. Money being passed around is taxed which is good for government but not putting any more money into the economy.

  • rate this

    Comment number 50.

    So glad we are back to selling each other goods and services, sucking in imports in the process, now all we need is a housing boom to get us back to the crash. Let's take a leaf from the Hitchhiker's Guide to the Galaxy, and declare the deciduous tree leaf as the basic unit of currency, then come the autumn we can all be leaf millionaires, silly, but isn't that equivalent to Quantitative Easing?

  • rate this

    Comment number 49.

    more from PRAVDA labours mouth piece

  • rate this

    Comment number 48.

    Saving less? - it is surprising that there is not widespread dis saving. Regardless of surveys if businesses are not investing it is because they still have little confidence in the future - it is what they do not what they say that matters. When unemployment dips below 2m is when there is a true recovery - even 50,000 a month will take the economy to well in 2014 before that marker is reached.

  • rate this

    Comment number 47.

    never mind we will all be saved by the enormity of shale gas...
    but once again, this is a terrific bluff by the government, this is not the US, we don't have anywhere near the amount of correct drilling equipment,(no exploration required, people were drilling in their backlots as the money went straight to them) even if we want to poison the water supply
    Get some proper advisors GO not the Lords.

  • rate this

    Comment number 46.

    Growth driven by debt,
    when will you all realize that this system cannot work, you cannot have continual growth.
    we need an economy based on sustainability.

  • rate this

    Comment number 45.

    Will Ms Flanders EVER find anything positive to say about the UK economy? She missed - or rather ignored - the news yesterday about exports surging and she's even whingeing about this good news - which has taken most analysts pleasantly by surprise. What else to expect from Ed Balls' mouthpiece?

  • rate this

    Comment number 44.

    The "wrong type of growth" eh? Could this view have anything to do with you thinking it was all doom and gloom as recently as the 2012 Autumn Statement?
    You never know, maybe G. O. knows what he is doing - just a thought.

  • rate this

    Comment number 43.

    there are many thinktanks analysing our economic woes, but which thinktanks are producing ideas which might grow the real economy, not same old numbers.
    Green shoots are technological ideas, social innovations, medical advances, nanotechnology, optonics,new media, new art.
    Sir Gregory Winter, Martin Rees, David Deutsch for PM, or just give them funding for as many phDs as they can manage.

  • rate this

    Comment number 42.

    Our large pool of often quite bright, young unemployed is easily exploited, but sadly for them I suspect in ways which offer little in the way of decent jobs, pay or conditions.

    That is, very much, the wrong kind of growth.

  • rate this

    Comment number 41.

    35. bigmouth.
    Thanks for that; now...why is it 'drivel'? In addition to her points, nominal GDP is now 16% below its previous long term trend. The path for real output, which had been generally expected to be revised upwards recently, was revised downwards by 1%. Productivity growth, which had been stable at about 2% per annum for decades, has dropped to minus 1% per annum since the 2007 crash.

  • rate this

    Comment number 40.

    37.efan ekoku

    "...Mars Rover cost what, and has provided exactly how much economic benefit?..."


    I'd say it's too soon to tell. But how much has public health, education and infrastructure cost, above the economic benefit it has provided in the UK? (since you're apparently so fond of the assertion that it's a net wealth consumer)

  • rate this

    Comment number 39.

    Whats more worrying is that many economists and politicans are looking to the property market to drive growth in the economy. This will only serve to create a boom which will distort the economy.

    Back to basics - reduce borrowing, deficit thus debt burden.

  • rate this

    Comment number 38.

    @22 JFH
    totally right.
    except last govt followed totally wrong dogma to the bitter end, whereas this current lot change the goalposts on pensions, tax, regulation, education as and when the weather changes...
    dare I suggest that ex physicist Merkel nurtures growth more than all the hacks studying PPE at Oxford, 'born to rule?' where the only growth policy taught seems to be LEND'n'SPEND..

  • rate this

    Comment number 37.

    "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,"

    Sorry I had to laugh at this; Mars Rover cost what, and has provided exactly how much economic benefit?

    And the chip on your shoulder appears to be rather large too.

  • rate this

    Comment number 36.

    The idea that growth comes from a button pressed by someone on a desk in Whitehall is a common misconception.

    The prevalence of cheap money is driving a consumer revival at the moment but that has a limited life span. It is possible that it might be sufficient to boost some commercial investment but the overall current picture remains gloomy.

    I am putting it down to the better weather.

  • rate this

    Comment number 35.

    more drivel Flanders

  • rate this

    Comment number 34.

    "House prices are on the rise again"


    Bank and BBC propaganda to prop the bubble. In London, for special reasons (e.g. QE loss of currency confidence) the boom goes on. They're falling still elsewhere but the average shows a small rise.


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