Britain’s Unbalanced Recovery – A Round-up
Last week I argued that Britain’s ‘recovery’ was being driven by a decline in the household savings rate, that there was no sign of rebalancing and so we should remain cautious.
Today we got some pretty dreadful figures from the manufacturing sector and on the trade balance. As Heather Stewart has written at the Guardian:
Tuesday’s official figures showed that manufacturing output fell by 0.8% in May; while the trade deficit widened to £2.4bn. George Osborne is hoping for a powerful revival in exports to help build a more sustainable business model for the country; but it’s hard to detect much sign of it…
After the chancellor took deliberate steps to re-inflate the housing market at March’s budget, with the controversial Help to Buy Scheme – which is already boosting returns for housebuilders – there must be a risk that the long hoped-for recovery in the economy comes on the back of the same old debt-fuelled, unbalanced growth the coalition claims to deplore.
Worse, real wages are continuing to fall, even though we are spending more. As a result, the savings rate has once again fallen to perilously low levels…
As Britain demonstrated after exiting the ERM, it is perfectly possible to have growth, rebalancing and fiscal consolidation all occurring coincidentally, but it requires rising demand in major trading partners. The eurozone crisis has snuffed out all hope of such a benign adjustment for the foreseeable future, leaving Britain again dependent on credit-fuelled domestic demand and whatever success it can achieve in neglected markets further afield.
But, unfortunately, the growth we’re seeing is still “the wrong kind”: that is to say, it’s still being driven almost entirely by spending by households, rather than investment by companies or net exports.
That does not feel like a very solid basis for the recovery, when most people’s earnings are still falling, in real terms, and households are still sitting on a large amount of debt.
Private consumption makes up two-thirds of spending; it plays a big role in determining GDP. In the first quarter of 2013 it rose by 0.3%. If it had matched disposable income it would have fallen by 1.7%, sending Britain back into recession. The fact that it did not owes to the fact that Britons devoted a greater share of income to consumption, saving less and borrowing more
In other words, we are starting to see pretty widespread agreement amongst economic observers – the economy is ‘recovering’ but that recovery is being driven by falling household savings and the UK is failing to rebalance.
Whilst any growth may be better than no growth, this all raises serious questions about how sustainable the current recovery actually is.
To re-use a chart from last week, the impact of the falling savings ratio has been dramatic –and it is unclear if this can continue.