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 recovery is real. The question is whether it can be sustained. In December, the Office of Budget Responsibility (OBR) said “Ultimately, productivity-driven growth in real earnings is necessary to sustain the recovery.” So far, however, growth has been consumer-led and, particularly in some areas, housing-driven. To boost productivity, and then earnings, in order to keep the recovery going and to turn it into a real upturn, we need to see signs of more investment and exports. Luckily, recent signs have been more positive.
First, the revisions to the latest official UK GDP figures for the final three months of 2013, issued at the end of February, showed a better balance of growth. Net trade made a positive contribution and investment was 8.5% higher than in the same period a year earlier. Moreover, because the ONS only really captures fixed investment and misses much ‘intangible’ innovation, this measured increase may under-estimate the potential impact on growth. One swallow does not make a spring but it does suggest a change is in the air.
Second, the Purchasing Managers Survey from Lloyds/Markit in January showed another month of increases in the activity and employment balances for SW England (including Dorset). Both measures reached highs well above the national averages. SW businesses seem to have been growing output and jobs better than others in recent months. This second swallow may indicate that spring is coming.
Third, the Institute of Chartered Accountants’ (ICAEW) latest survey (Q1 2014) records a sixth consecutive quarter of higher UK business confidence and calculates a record high. More firms are indicating higher capital investment with the prospect that business cash surpluses will become more active, fuelling investment increases, this year. It still voices concern about exports, however. Sadly, SW business confidence slipped in the latest period, moving from one of the highest to one of the lowest. A mixed picture from the ICAEW then – not a clear view of a swallow in view, but a ‘definite maybe’.
Fourth, the recent Manufacturing Advisory Service (MAS) Barometer finds that 78% of SW businesses expect sales to increase over the next six months – the highest ratio since Q4 2010/11. Moreover, most businesses are planning higher investment of some kind and 28% are planning investments in new capability for new products and processes. Such a rise in innovation-led investment is to be warmly welcomed. This further swallow probably means forecasts of a more sustained economic spring can be hardened.
Returning to the OBR statement, then, it is possible to see an improving investment picture presaging higher productivity. This could mean more workers will see earnings rising faster than general inflation this year. This will not make up for the ground lost in the last five years, but it supports the outlook for a sustained upturn. At the very least, the swallows in the wind suggest an economic spring is imminent.
It could yet turn into a disappointing summer. Rebalancing is far from complete and ‘shocks’ are possible. For example, current events in Ukraine, potentially bad for international trade and finance, could derail all our optimism… Let’s hope not. Indeed, let’s hope the swallows of higher investment and exports will have a productive breeding season and will fill the air with their delightful economic chatter in the months ahead.
Professor Nigel Jump, 4th March 2014
