Today’s Economist has a rather cheering front page.
Amid the gloom and point-scoring, though, something welcome is happening: growth at last appears to be returning to Britain’s economy. The squeeze on real take-home pay is easing as inflation falls and wages edge up. Business surveys suggest activity is picking up. The fall in GDP in the second quarter of this year now appears to have been the result of an extra bank holiday; the effect will reverse as businesses return to normal, which suggests the current quarter will see a positive figure for GDP growth. The country’s recovery is likely to be modest. But that is much better than nothing.
The Times yesterday struck a similar note with a story headlined “UK economy perks up as pressure eases on incomes”. The Telegraph argues that the “state of the economy is slowly improving”, whilst the BBC reports today that:
Official data showed the UK service sector bounced back in July, raising hopes of an economic recovery in the third quarter of this year.
The theme then seems to be that growth is finally returning, as Treasury spokesperson told yesterday’s Times:
“There are signs the economy is healing: the deficit is down by a quarter, inflation has halved and employment is rising, with more than a million private sector jobs created in the last two years.”
So, is all well?
Far from it.
To understand what is happening in the economy right now, we need to look at the context. The longest double-dip recession since the Second World War seems to be coming an end and, whilst that is obviously welcome, it is far from unexpected.
No one seriously expected the UK economy to continually contract until living standards reached Dark Age levels and the end of a completely unnecessary double dip recession should not be taken as vindication of the Government’s approach.
I say completely unnecessary recession as that’s what it was. The Bank of England has identified four reasons driving the weakness in demand which plunged the economy back into recession – the Eurozone crisis, weak credit growth, the squeeze on living standards and the ongoing austerity programme.
Now obviously there isn’t much the Government could do directly about events in Europe but we should remember that our own economy has performed worse than the Eurozone over the past year and that is because of a collapse in domestic demand. Europe doesn’t hold up as an excuse for our own recession.
As for weak credit growth – this was always going to be a problem after a financial crisis but the Government took far too long to take action on it – Project Merlin was a failure and there are question marks over Funding-For-Lending. Vince Cable’s British Business bank is a welcome step but it won’t be operational for another 18 months.
The squeeze in living standards is another long running problem that predates the crash, but government action here (e.g. the VAT rise, cuts in tax credits) have exacerbated it.
Then there is austerity, where a front loaded fiscal adjustment squeezed the life out of an economy that was showing signs of recovery.
The longer run picture is of an economy that has been stagnant since mid 2010. A return to weak growth can’t be seen as a sign of success.
If the economy does begin to recover can we call it a meaningful recovery if wage growth for those in the middle and the bottom remains very weak? If living standards continue to fall? Should we hail a recovery in the jobs market if the jobs being created (as now) represent under-employment, precarious work and involuntary part-time jobs? What will a recovery feel like if it is accompanied by unfair changes to tax credits? If public service provision is weaker? If household debt rises? What will the regional picture look like? Will we see a recovery concentred in the South-East with much less growth across the UK?
An historically weak recovery, and one that doesn’t work for ordinary people, can’t be allowed to be chalked up as a success.
I shouldn’t even have to write that a weak recovery isn’t a sign of success but given some of the recent press coverage, I feel a genuine concern that almost any growth will be taken as a victory for the Chancellor and a sign that he was right all along.
Take the recent performance of the labour market. Welcome falls in the headline rate of unemployment have brought it down to 8.1%. This has been celebrated despite the rise in under-employment, the continuing falls in real wages and the unbalanced regional picture.
Most political journalists now seem convinced that the UK labour market is a ‘good news’ story for the Government.
Look across the Atlantic and we see an unemployment rate also at 8.1%. There this is seen as terrible news for the President and political journalists ask ‘can Obama win despite the economy?’
Expectations matter and expectations are on the floor.
Hopefully the economy will start to grow again in this quarter but a weak recovery following an unnecessary double-dip can’t be seen as a vindication of the Government. We should have returned to stronger growth two years ago, instead unemployment is higher than it should, growth is weaker than it should be and we are all poorer as a result.