Fortnightly insight into 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
Several recent business surveys suggest the second quarter of 2013 saw an improvement towards recovery in the UK economy.
1) Recent PMI series releases indicated output and employment growth in May across the regions, with a good improvement here in the south west.
2) The latest British Chamber of Commerce survey suggests real growth of 0.6% in the quarter just ended.
3) ICAEW, MAS and other business surveys have been getting stronger through the spring, with increasing order books and confidence perhaps heralding more investment and hirings later in the year,.
So, the good news is that a recovery seems to be underway and its speed looks to be increasing. Annual real growth in 2013 may be better than the first half consensus of forecasts (about 0.+6% for the year as a whole).
The bad news is that many aspects of the underlying lack of competitiveness in the UK economy remain to be resolved. ONS has just released a series of crucial UK data up to the first quarter of 2013 that show the overall lack of competitiveness persists.
1) Real GDP was revised for the last few years, removing the ‘double dip’ (2011/12) but deepening the recession (2008/09) such that aggregate output was still some 3.9% below the pre-downturn peak in the first three months of this year – significantly worse than previously thought.
2) With employment falling less than expected, the severe decline in real GDP has caused an awful record on UK productivity. Uniquely – 5 years after the previous peak, GDP per hour worked was still below pre-downturn levels by some 4.8% in quarter one.
3) From January to March 2013, the UK current account deficit was over £14.5 billion; £2bn up on a year earlier and amounting to an unsustainable 3.6% of GDP. This is a huge deficit to have to fund which, with the large public sector deficit, puts a drag on business and household growth potential.
These three headline statistics underline the structural weakness of the UK economy and the need for rebalancing, with greater emphasis on investment and exports than domestic (consumer or government) spending. Without higher productivity and a lower external deficit, a sustained and sustainable recovery will be difficult.
Theoretically and ideally, a cyclical economic recovery would allow the structural weaknesses to be addressed more easily. It is important that any relief over a return to forward momentum does not stop plans to build competitiveness. The ugly news is that it is easier to invest in innovation, skills and other improvements for the benefit of long term productivity and international trade when growth is generating surpluses. But, this is often a time of relative neglect, when the short-term drive to meet increasing customer orders and satisfy share/stakeholders’ desire for higher returns takes the eye off long run incentives to invest in competitiveness.
The good news is that the economy may be recovering. The bad news is that major rebalancing investment will be needed if a recovery is to be sustained. The ugly news is that business and state aspiration and motivation must not be diverted from the need to raise long-term potential, repairing productivity and trade weaknesses. Without that, UK finances will remain vulnerable to future shocks.
Professor Nigel Jump
