Can UK economy stay top of the league?

Arsenal in training

Why is the British economy like my favourite football team, Arsenal FC? We're both top of the league - by a margin (blimey, it's been a few years since I said that).

If the latest Markit survey of business activity and orders is accurate, the British economy is growing at a remarkably rapid 1.3% in the last three months of the year - which would be faster than any other rich developed economy.

The UK is growing significantly faster than Germany and the US, for example - and probably faster than Japan, which in my strained analogy is Liverpool FC, whose under-performance has endured even longer than Arsenal's.

If that estimated British growth rate is accurate and sustained, UK GDP in 2013 will rise over 3% - which is significantly faster than any mainstream economist is currently predicting and would be a return to growth rates we haven't enjoyed since the financial and economic crash of 2007-8.

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The economy and Arsenal are a bit thin in defence and attack”

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So the question about the British economy is the same as the question about Arsenal. Is the current success built on solid foundations - it it sustainable?

Probably the first thing to say, if you're an Arsenal supporter or a British citizen, is that any recovery will do, after six bleak years (longer for the Gooners).

But the worry would be that the economy and Arsenal are a bit thin in defence and attack.

What do I mean?

Well, after the election, the hope of the government was that this would be a recovery different from all others in modern times, one led by exports and business investment, in order to reduce the UK's economic dependence on debt-fuelled consumer spending and economic activity linked to a booming housing market.

To use the ghastly jargon, the economy would be rebalanced, so that we would gradually reduce the deficit between what we buy from the rest of the world versus what we sell abroad - a deficit that has put the debts of the UK on a rising trajectory for 30 years.

It was a bit like the hope of Arsenal that it could win the Premier League without spending record sums on world-class players, or paying those inflated wages of more than £100,000 a week.

Shoppers in Birmingham

Well, business investment plummeted in 2008 and has never properly recovered. And the gap between exports and imports has remained stubbornly wide.

In fact in the first three months of the year, the UK's deficit with the rest of the world was a shocking 5.5% of GDP, before narrowing to a still too-wide 3.2% in the second quarter.

The result has been a failure by the UK to restore economic output back to where it was in early 2008, which has contributed to a painful and persistent squeeze in living standards.

Ozil with ball Expensive signing Ozil in action

And there has been an analogous absence of any trophies in the Emirates' cabinet, as a consequence of a policy decision not to splash the cash on superstars.

But 2013 has been a year of modest ideological shift (should we say U-turn?) by Wenger and Osborne.

Arsenal's Wenger relented and forked out £42m for the balletic and brilliant Ozil, and has allegedly smashed through the wage hierarchy at the club in the process.

And the British chancellor belatedly concluded that it was highly unlikely that the UK economy would gain what economists call "lift-off momentum" without the traditional boost to the morale of British consumers from a reviving housing market. So George Osborne launched versions one and two of the Help to Buy scheme, which provides many billions of pounds of taxpayer loans and guarantees for house construction and house purchases.

Here is the thing. Respective revivals based solely on a few star midfield players or on debt-fuelled consumption would end in tears.

So can the recoveries be underpinned - in the case of the economy, by businesses belatedly starting to invest and getting better at selling to the rest of the world; and at Arsenal, by reinforcement of defence and attack in the January transfer window?

And here the football analogy implodes.

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The economic recovery could be self-immolating in a way that I don't think could happen to Arsenal”

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Arsenal can afford to invest in new players having been prudent in the way it has managed its finances in boom years and lean years.

By contrast, the UK economy is still shouldering record and rising debts, equivalent to more than five times the value of economic output (based on aggregating household, business, financial and government debts).

Which means that the British economic recovery could be self-immolating in a way that I don't think could happen to Arsenal.

What do I mean? If the Bank of England became concerned that the speed of growth was becoming inflationary, it could push up interest rates much faster than is currently implied by its so-called "forward guidance" on this.

And with household liabilities still equivalent to some 140% of household resources, and with an estimated five million households shouldering excessive debts, sharp rises in interest rates would cause profound misery.

That misery would not be confined simply to people. It would also infect our banks (again), which would suffer significant losses as borrowers discovered that they could not afford to pay interest rates above today's abnormally low rates.

So if you think there's pressure being Osborne or Wenger, it is probably as nothing compared with the burden on the Canuck governor of the Bank of England, Mark Carney.

If he and his colleagues raise interest rates too soon and too much, there's a risk the recovery will be suffocated at birth, or worse. Were he to raise them too late, there is a danger that the financial precariousness of households and banks would actually be worsened, as they ship in more debt - and the anti-inflation credentials of the Bank would be undermined, perhaps fatally.

Now what would Alex Ferguson have done?

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 775.

    There has been a global savings surplus for 20 years.
    Not in the UK

    Possibly not in the US, either.

    Definitely in Japan.

    IIRC, when the Govt there wanted to raise cash for the Fukushima clean up, they issued a bond & there were fears the take-up would be insufficient. The Japanese public raided their piggy-banks & it was paid for out of personal savings in short order.

  • rate this

    Comment number 774.

    High Growth has 2 advantages when facing a huge debt crisis. 1st, growth improves tax receipts, but 2nd, the debt as a ratio of GDP drops.

    Growth and inflation combined are used for this. If our growth plus inflation is 5%, then our debt is 5% easier to pay off at the end of the year than at the start.

    Inflation and growth kill debt, so small wonder that the interest rate is staying low.

  • rate this

    Comment number 773.

    @772 workphil99 "Why do we confise everyone by reporting our growth rates differently from most of the rest of the world"

    I presume by "we" you mean the US? Certainly quarterly rates are mandated for the European Union by Eurostat, for sound economic and statistical reasons. Can you imagine how ridiculous we would find the suggestion that annualised UK GDP for 2013Q4 might be over 5%?

  • rate this

    Comment number 772.

    At 770, the US growth is annualised at 2.8%, compared to the 1.4% quarterly growth indicated for the UK in Q4. Why do we confise everyone by reporting our growth rates differently from most of the rest of the world.

  • rate this

    Comment number 771.

    The UK economy has contracted in 4 out of the last 5 4th quarters including the last 3, but the GDP figure for 4Q 2013 will probably be in positive territory when it is released in January.

    As Robert Peston indicates, if you think that there is a cost of living crisis now, wait until interest rates go up, which they will do eventually, and see what effect this has on mortgage repayments...

  • rate this

    Comment number 770.

    Well apparently the US economy grew by 2.8% in the 3rd quarter, over double the claimed UK rate. So our time at the top lasted all of 24hrs. Or perhaps it shows that, given the US shutdown, impending fiscal cliff and astronomical budget deficit, the figures are a poor reflection of reality. When I see living standards rise again I'll believe the hype.

  • rate this

    Comment number 769.

    "and yet the jury (BBC) decide that it was nothing to do with him."

    It was a global meltdown doncha know? Of course the blinkers hid the fact that the 'global meltdown' had its overheating source in the City where Brown encouraged ever more risky products to make the economy look larger than it was.

  • rate this

    Comment number 768.

    the core answers need answering why have we got low paid eastern europeans over here taking low paid jobs and at the same time we have millions who want to work on the scrap heap?the whole system stinks and all 3 parties are to blame.

  • rate this

    Comment number 767.

    @765.Perhaps senior Directors and MP's should be subject to a psychiatric review?
    Might be equally valid to have subjected them to more RIGOROUS performance assessments in the future,given some of their past track records? Especially those working in the fields of banking/finance. Maybe some LEGAL accountability is also called for in these matters too?

  • rate this

    Comment number 766.

    I know mentioning Suicide rates is tasteless, but every fudged Statistic, every cut service, every lost job, or penalised benefit claimant is a real person.
    A real person whose life may be ended by the next fraudulent wheeze.
    Anyway, the Banksters get to keep their bonuses, dodge their taxes and ignore everyone else.

  • rate this

    Comment number 765.

    How's the Suicide rate doing ? Does that increase GDP ?
    Presumably fewer heads to divide the Fantasy football money over, so yes.
    Why do these Politicians hate British people ?
    Is it because their on their Downton Abbey Fantasy trip and want the peasants to touch their forelocks.
    Or are they just psychopathic ?
    Perhaps senior Directors and MP's should be subject to a psychiatric review?

  • rate this

    Comment number 764.

    757 jgm2 (me)

    'and yet the jury (BBC) decide that it was nothing to do with him.'

    The parallel runs deeper.

    Just as O.J's supporters (mainly fellow African Americans) decided that, hell, even if he is guilty it don't matter, this was all about sticking it to 'the man', so Brown's Labour supporters (inc BBC), decided that, yeah, so what he wrecked the economy, lets stick it to 'the man'.

  • rate this

    Comment number 763.

    @760. So nice to know that my taxes are being spent on keeping folks out of work, while enriching wealthy foreign property owners - whom we're told consist a large part of the Capital's property scene. Presumably having made a decent return on OUR investment on THEIR behalf,they'll all be off sometime B4 the bubble bursts,leaving us to meet the social/financial costs of said policy?

  • rate this

    Comment number 762.

    As one of many Arsenal supporters on the front line at the Beeb I don't suppose you would have been allowed to compare them with the power companies - i.e. mostly foreign owned, foreign run with sky high prices!

    To answer the question the economy needs further re-balancing towards productive services and manufacture to sell abroard or reduce imports to be sustainable.

  • rate this

    Comment number 761.

    And Pilkington Glass is closing a factory.
    The Real economy does get mentioned now and then.

  • rate this

    Comment number 760.

    759 mocker

    'Thing is HMG is busily propping up the housing market, with its taxpayer funded lending scheme is it not?'

    Indeed it is. This is a far less subtle (though much cheaper way) of stoking house prices and the economy than employing 1m additional public sector workers at a cost of 30bn a year of borrowed cash and watching what they decide to do with their sudden windfall.

  • rate this

    Comment number 759.

    @755. Difficult then? Doing anything to reduce demand for London property,& any knock on effect in the SE, might just cause a nasty case of negative equity to raise its unpleasant head again eh? Thing is HMG is busily propping up the housing market, with its taxpayer funded lending scheme is it not? Perhaps we should be wary of any export led recovery after all? If that's indeed what we've got?

  • rate this

    Comment number 758.

    Nice one Robert! Any comment about the players getting muddy/glory OR the fans on the terraces? Not to mention those that have never gone and cheered along? Has Arsenal changed because they are arsenal or have they changed because the premiere league made them?

  • rate this

    Comment number 757.

    754 Concerned

    'What does not seem to be understood by the electorate is the level of overspending achieved by Brown.'

    Gordon Brown is the O.J.Simpson of politics.

    There he was, absolutely bang to rights, his 'miracle economy', perched on a mountain of debt blown up in his face, and yet the jury (BBC) decide that it was nothing to do with him.

    No wonder he looked so pleased during the 'crisis'.

  • rate this

    Comment number 756.

    Support the incentive to work and to pay taxes. Benefits for workers is a subsidy to companies?
    Agreed - one of Brown's biggest mistakes - poorly targeted and over generous tax credits let employers off the hook.
    Along with ignoring Frank Field's report which suggested some fairly radical and overdue reforms to welfare - then promptly having him dismissed.


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