Insight on the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.
See: www.strategiceconomics.co.uk
The autumn always brings a raft of news about the economy, particularly how it performed in the first half of the year. This blog reviews the latest UK evidence, providing the context for Dorset’s own economic story in the year to date.
This year, the Office of National Statistics (ONS) has made sweeping revisions to its measures of UK output, especially over the period 2008-11. This is partly to account for changes in the mix of activities in the economy as it evolves and partly to match agreed updates taking place across the EU. Effectively, history has been re-written: we now have a moderately less severe recession in 2008/9 and a gentler downturn through 2010-13. Overall, however, the economic ‘story’ has not changed: the recession was still a deep one and the downturn a long one.
Bringing it all up to date, in the first half of 2014, the UK economic recovery was good: second quarter growth was +1% on the first quarter of 2014 and +3.1% on the same quarter a year earlier (Q2 2013). After the long downturn (the period in which aggregate output stayed below the previous peak), real GDP in the second quarter of 2014 is now estimated to have been 2.6% above the pre-recession peak. The consensus is that UK real growth rate will average over 3% for the year as a whole.
The recovery is being driven significantly by the performance of services. In July, services output was 3.4% above its year ago level and reached a level 6.4% above the pre-recession peak. Business investment is also now more robust. Defined as gross fixed capital formation and strongly led by information technology and other machinery and equipment, investment grew by 1.3% in the April-June period and 9.1% year-on-year. If this trend persists, it offers the hope of a sustained upturn through 2015/16.
In contrast, there are some fundamental weaknesses in the UK economy and the latest numbers suggest these are just as bad as ever. In particular, the first half 2014 figures on the balance of payments and on productivity growth remained awful.
§ The UK current account deficit was £43.5 billion in the first six months of 2014 – a total worth a massive 5.1% of GDP. This is a serious leakage from our living standards and future wellbeing. Like anyone ‘living beyond your means’, this is fine if the resources acquired in the short term are used to boost future growth potential: invest now to consume later. But, there is little sign of that in what is still, mostly, a consumption-led upturn. At some point, the huge external deficit – effectively a tax on future national income – has to be brought down into manageable range (preferably less than 2.5% of GDP). If unchanged, at a point in an unforeseen tomorrow, there will be a crisis of confidence in the UK economy, probably heralded by a fall in the external value of the pound sterling.
§ To make the recovery sustainable and to address issues like the trade deficit, productivity has to grow and, indeed, to accelerate. Sadly, there is absolutely no sign of that yet. The investment improvement outlined above may herald an improvement in future productivity, but the latest numbers are woeful. In the second quarter of 2014, output per hour was still 1.9% below the 2008 peak. On average, in the first half as a whole, it actually shrank a little – flat at best. The ONS call this the “productivity conundrum”. How can we sustain a recovery that creates jobs but deflates productivity and, thereby, undermines real average earnings?
The answer is, you can’t. If productivity does not recover strongly and consistently, the recovery will peter out (some time after the 2015 General Election?). (Without a strong net immigration effect, employment growth could not be sustained.) If productivity does start to shift upwards and accelerate, we can look forward with much more optimism.
All that I have said applies to Dorset as much as the rest of the Union. Sustained growth and jobs requires higher productivity and a better net export performance locally as well as nationally. So, we must keep our eyes on the productivity story and the trade figures as we go forward. The next ONS instalment will come with the third quarter figures, due to be released early next year.
Professor Nigel Jump, 2ndOctober 2014
