Investment decline + reliance on consumers = bad news for the economy
The new official GDP figures out today paint a worrying picture for the longer term, despite many of the headlines. Our economy is severely imbalanced – totally reliant on consumer spending to stay afloat, with no sign of the Chancellor’s promised rally in investment. That’s particularly concerning as we seek to build a sustainable future outside the EU.
Looking at the ONS’ second take on 2016 Q4 GDP, the news on quarterly growth is positive, with an upward revision to 0.7% from 0.6% for 2016 Q4. The economy may have defied the predictions of post-referendum decline, but in the detail the story is still of mediocre growth and intensifying imbalances.
For calendar year 2016, growth is 1.8%, the lowest since 2012 – and well below norms in economic expansions (see here). The story is similar on the more timely growth rate comparing 2016 Q4 with 2015Q4, which shows growth of only 2%.
The demand breakdown shows an economy increasingly reliant on the consumer. These imbalances come through most clearly on calendar year figures, which are more stable and less prone to statistical volatility.
The chart below shows household consumption growing by 3.1 per cent in 2016, continuing a run of stronger and stronger figures; growth was last higher in 2004, in the heady days of the consumer credit boom.
Conversely business investment declined by 1.5 per cent, the first negative figure since 2009 – the peak of the economic crisis.
Household and investment demand, percentage growth
The full story can be seen looking at the contributions to calendar year GDP growth for all demand components. Apart from the big and growing red block for the consumer, overall GDP has been supported only by a very modest increase in government spending and by a small rise in ‘other investment’ (that also includes some government activity but is mainly due to house building). Trade continues to be a drag on the economy.
GDP expenditure breakdown, contributions to calendar year growth (percentage points)
These trends started well before the referendum, continuing the serious under-performance of the economy since 2010 (beyond the mini-boom ahead of the election). The previous Chancellor made great play of the need to end the unbalanced economy. Into the 8th year of a living standards crisis, this scale of reliance on the consumer seems more dangerous than ever (see also our debt work). Mark Carney was drawn on this yesterday at the Monetary Policy Committee appearance at the Treasury Select Committee; here an extract from the Guardian’s most entertaining business live commentary:
Moreover business confidence is hardly likely to have been supported by Brexit. At the Autumn Statement the Chancellor made great play of £23bn of infrastructure spending, but in reality public investment will still be lower as a share of the economy than over the last parliament (here). The Government can and must go much further, not only to protect the economy in the critical months ahead, but also to start rebuilding what they have destroyed.