There are four reasons why the future of the UK economy, both internally and externally, does not look good. No sustainable recovery can occur till these four obstacles have been cleared, and of that there is no sign. First, the collapse in business investment has been devastating: it is still 25% below its pre-crash level. What this means is that industrialists are still not convinced that the relatively small and very late turn-up, generated in the wrong way by consumer borrowing and the artificial Help-to-Buy bribery, signals any long-term recovery of demand. The £800bn cash stockpile on which the big corporates are sitting is still not being used to invest. According to the Economist Britain is actually 159th lowest in the world in terms of business investment. Until that is massively turned around, Osborne’s contradictory ‘expansionary fiscal contraction’ will continue to be the fraud it is.
Second, there are no productivity gains in sight, quite the reverse. Employment, albeit much of it part-time or at or below the minimum wage of £6.31 an hour or indeed subject to zero hoursc contracts, has increased but without any corresponding or greater increase in output. UK productivity is therefore at almost the lowest ebb in the EU, and without a real and continuing rise in wages (now 9% in real terms below the 2007 level) there cannot be the productivity gains to embed growth.
Third, the UK debt overhang is growing, not reducing. If by 2015 total government debt is nearly equal to total GDP and is still rising at 8% a year (as it is at present if special factors are discounted) plus the current account deficit is still continuing to run at the very high (and rising) rate of 4% of GDP, and with no realistic prospect of either ratio improving, the UK’s situation becomes increasingly unsustainable. Similarly, the budget deficit is not going down appreciably either. In 2011 it was £118bn and in 2012 this had hardly fallen at all at £115bn. The 40% cut in public spending budgets and the £18bn cut in benefits and hence in consumer demand, plus the £40bn further intended cuts after 2015, has produced searing pain, yet next to nothing improvement in the national accounts which was supposed to be the whole aim of the exercise.
Lastly, the external situation has now significantly deteriorated. The attempt of Japan, the world’s third biggest economy, under reflationary Abenomics to break out from two decades of deflation has, for the moment at least, stalled as equities have faded. In addition the recent little revival in the Eurozone has now reversed, with the latest growth almost evaporating at 0.1%. Though this partly reflects the weakness of Italy and Spain, both Germany and France have also fallen back significantly.
Against that background this little surge in UK growth is not going to go far. It was triumphantly noted two months ago that the PMI index of industrial confidence had hit 60 (where 50 is the balance between optimism and pessimism). What was not said was that this had already happened 3 times before since 2010 and then had fallen back. It was also not noted that the manufacturing and construction sectors had fallen a huge 15-20% since 2007, so that any rise in confidence was from an extremely low base.
Against this gloom what is desperately needed is a robust and determined demand from Labour that only public investment can now save this country from semi-permanent austerity. What is holding the party back?