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
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    Comment number 173.

    @171

    http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=YBUS&cdid=YBUY&cdid=YBVB&cdid=YBVE&dataset=lms&table-id=7

    These are the official statistics. People on zero-hours contracts get paid for the hours they actually work, so they are likely to be more accurately measured than full-time hours.

  • rate this
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    Comment number 172.

    #168, 170 Grounder

    See article on 12/6/13 for link to LSE Paper.

    http://www.bbc.co.uk/news/business-22874889

    There have been further explanations provided on productivity. People needing to work longer hours, take part-time, 0 hours, self-employed especially undertaking multiple jobs just to try & make ends meet on minimum wage.

    When have you lived on a minimum wage, 0 hours contract?

  • rate this
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    Comment number 171.

    #168, 170Grounder

    168 - Cite source of figures quoted & evidence, for statements made, please. 170 suggests there is none. Research quoted previously, by the LSE's Centre for Economic performance, proves the point in 167.

    How can time actually worked on 0 hrs contracts be accurately be measured? More hours worked for less pay = hollowed out, (hour glass) or polarised economy & society.

  • rate this
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    Comment number 170.

    @169 Was it not ever thus?

    In part, the new high is a simple function of a larger workforce. The accuracy of the statistics is open to question, of course, but there is (as yet) no evidence of systematic distortion within the Labour Force Survey. The "productivity puzzle" may prompt suspicion, but real people working longer to keep their jobs is also a plausible factor.

  • rate this
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    Comment number 169.

    @168 Grounder
    Have difficulty with that number when I walk past pubs at 3 or 4pm in central London where they are already doing a roaring trade with lunchtime 'laties' colliding with 'afterwork earlies' ...

  • rate this
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    Comment number 168.

    @167 At 950.5 million per week, total hours worked is now at an all-time high. Average weekly hours worked per full-time worker (37.4) and part-time worker (15.9) are both above typical levels for the past decade and the average for all workers is at the mean (31.9). No evidence there for "dilution" by zero-hours or part-time employment, just declining productivity.

  • rate this
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    Comment number 167.

    Q: Is the UK economy seeing the 'wrong kind' of green shoots?
    A: Yes, or at least not enough of the right kind of growth, i.e. exports and manufacturing.

    We've discussed on these pages previously, the limited positive effect of the 430,000 new "jobs", in self-employment, zero hours and part-time work.

    At least the builders & the bankers are still making profits & bonuses. Rebalancing economy?

  • rate this
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    Comment number 166.

    @164 I'm sure they could invest more. Whether they should remains (for me) an entirely open question. If a company cannot itself get a satisfactory return on their accumulated capital, it should (under capitalism) distribute the surplus and allow its owners to invest in a more profitable opportunity (or spend it). Too high a benchmark for profitability does block profitable investment, however.

  • rate this
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    Comment number 165.

    UK should have picked up a few intelligent traits from Germany - they have not been in a rush to sell off the family silver, and the British could not wait enough to dispose it off. Where has all the heavy industry gone?

  • rate this
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    Comment number 164.

    @159. Our Co are investing in super fast fibre ( not BT!), but I think they could invest more and not just pour it all away in divis. Total amount divis- over the 6 years will be circa 100 million!!

  • rate this
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    Comment number 163.

    Obviously, there is no alternative for manufacturing jobs that have been lost and majority of capitalists have been very speculative in shipping out these jobs to low cost destinations. Social costs are tricky to comprehend if the Logic Funnel is narrow.

  • rate this
    +1

    Comment number 162.

    "....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..."

    Excuse for seeing through this but isn't the economy driven by consumers - investment is for new products or process improvements to meet consumer demand. Chicken or Egg???

  • rate this
    +1

    Comment number 161.

    Austerity is effective if applied in good times - because it then trains you to develop "good habits" and stay within limits in future. In crunch times, one cannot and should not look beyond the short term - you need a spark to jump start your motor, and that is exactly what consumer spending can do for you.

  • rate this
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    Comment number 160.

    @140 Sin
    Could be if they got on and did it!

    Unfortunately, the Coalition have been throwing money around just like the previous Govt. If you are going to cut, then CUT AND STOP SPENDING new money.

    Cuts though without fiscal & economic reform are probably part futile mabe almost completely so..

  • rate this
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    Comment number 159.

    @153 It all depends where you measure from. Quarter on quarter, investment in machinery and equipment was up 12% in Q1 2013, but down 6.9% year on year. Transport equipment was up 217.4% quarter on quarter, but down 25.1% year on year.

    So the quarterly improvement has not yet made up for the deterioration in the previous three quarters. But are these shoots also the wrong shade of green?

  • rate this
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    Comment number 158.

    @102 PJ
    Disagree.

    At its purest & cleanest, economics merely outlines choices. Economics will always seek 'to do better' and will detail 'better' in the options offered but the choices are down to the people via politics.

    Politics is a 'dirty' business. ;-)

  • rate this
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    Comment number 157.

    156

    True,

    But one issue is that banks have to keep much more 'cash' in the BoE as a security net. The added cash reserves that they could achieve would allow them to be able to lend more.

    I guess the real issue is that banks themselves on inward looking and look at only their balance sheets, and are not really interested with the wider economy.

  • rate this
    +1

    Comment number 156.

    155

    I agree.

    Poblem is why would banks want to do that when they currently borrow at 0.5% and lend at

    4 to 20 times 0.5%

  • rate this
    -1

    Comment number 155.

    A modest increase in the interest rates could help investment. This is by encouraging private sector saving and encouraging overseas investments. This would give the banking sector more 'cash' to lend to business. This in turn will allow for increased business investment hence increased employment. The result of this would be greater expenditure by newly employed staff in the local economy.

  • rate this
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    Comment number 154.

    @131 A reasonable theory, but the data (still subject to multiple future revisions) show the volume of imports falling at the same time as spending has increased. This is evidence against the "sucking in imports" thesis. It could still happen (so the MPC talks down the pound) but there is no evidence - yet (that I know of) - that it has happened on this occasion.

 

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