Wednesday, 24 July 2013

Britain's recovery?

How is Britain's recovery hanging on? Recent indicators from the ONS reported a 0.3% growth in the first quarter of 2013. However, one can never be too careful with Britain. After all, haven't we seen the UK going in and out of recession two or three times in the past 3 years? And it was always less than a percentage point upwards or downwards.


The labour market however has remained resilient, with unemployment still around 7.8%. During the recession employment is reported to have fallen only by around 2% from peak to trough, while total hours worked have fallen by around 4%. It is rather interesting how the labour market was struck much less than initially expected. Even though a lot of public sector jobs were lost in the midst of the coalition government cuts, this hasn't translated into the labour market that severely. There can be several potential reasons for this, some of which I covered before, but the fact remains that the labour market recovery was much more robust  than the recovery of the economy as a whole. It is in fact already around 500,000 above the 2008 peak. 
Source: ONS
However, many are still rather careful. First of all the ONS has revised the total fall of UK GDP since the start of the crisis, which is estimated to be 7.2%, thus representing one of the biggest slumps since the Great Depression. This means the British economy will have to experience several years of above-trend growth in order to catch up on it's pre-crisis trend. The underlying factors of the British economy make this all but likely. Exports are stagnant, investments are down 25% since the peak, and the real wages experienced a 2% decline. This is why Britain is currently lagging behind other developed countries (see graph below).

Another problem is declining total factor productivity, which is a good way to explain why even though more people are getting employed and are working longer hours, GDP growth is still stagnant. Some attribute this to Britain's flexible labour market, where private sector firms faced with worsening prospects didn't cut jobs, but cut wages instead. The major job losses actually only came from the public sector. And according to the latest data it appears that many of these workers have managed to reallocate themselves into the private sector. Nevertheless, declining wages combined with low productivity and low investments is bad news. 

Business investment is particularly worrisome. There is a problem from both the supply side and the demand side. On the supply side there has been a serious lack of funding offered to SMEs (20% down since 2008), with the latest annual decline around 6% suggesting that the gap is still widening. The banks are further trimming their balance-sheets and building up equity due to new regulations being put in place. This makes it even harder for SMEs to get the necessary credit. On the demand side business owners and managers are reluctant to go into risky ventures (just like the banks actually). One of the things that certainly isn't helping in re-encouraging the business owners to invest are Britain's constraining planning laws. 

Source: The Economist
















As always signs of potential recovery are welcomed by the government. Osborne was brave to declare the economy "coming out of intensive care". Even the IMF has for the first time revised UK's growth predictions upwards to 0.9% for this year (up from 0.7% predicted earlier). This is still far from what Britain needs to get back on it's pre-crisis trend and thus cancel out the 7.2% total drop. Particularly with respect to the aforementioned underlying factors. It will be extremely difficult to turn the economy around if most of these trends remain unchanged, and if the policymakers continue with hit and miss policies. A 0.3% growth isn't really growth at all. It's a continued stagnation. It's another Japan.  

P.S. John Van Reenen from LSE has a good text in the Economist raising similar issues behind the interpretation of Britain's recovery. I can't say I agree with some of his recommendations on what should be done, but he raises a few good points. 

2 comments:

  1. The new report estimated a 0.6% for the second quarter, so things could be improving. Even though you're probably right, the fundaments in Britain are wrong..

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  2. We're all happy when it's sunny :)
    just wait for the first clouds and things will go back to "normal"

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