Our economy is much rosier than it looks
Posted on July 30, 2011
Best of British: domestic manufacturers like Land Rover are increasing their share of overseas markets
The announcement by the Office for National Statistics that real GDP growth was just 0.2 per cent in the second quarter, following essentially no apparent growth at all in the previous six months, is rather disturbing, at least on the surface. It is particularly so to those of us who generally see the post- global credit-crisis glass as half-full rather than half-empty. Within hours of the announcement, UK markets actually responded with “relief”, with a slight sell-off in interest-rate futures and a modest rise in the pound.
There were probably two reasons for this. First, it wasn’t as bad as some were fearing, especially following the interesting intervention from Vince Cable earlier in the week (he claimed that “Right-wing nutters” threatened to create a new financial meltdown). There is no immediate rationale for those arguing for some fresh monetary easing.
Second, and related to this, the ONS actually delivered a slightly positive surprise by suggesting that the headline 0.2 per cent rise was distorted by “special factors”, probably including the weather and the royal wedding. Without these special factors it might have been as high as 0.7 per cent. Whether this is true or not, it makes it much less likely that the Bank of England could contemplate any special new measures.
Unless the underlying economy loses considerable momentum in the coming weeks, the third quarter of the fiscal year should be much better.
In my judgment, the UK economy is probably stronger than these figures suggest. It is also the case that the ONS is still systematically underestimating the country’s economic performance. It would be my guess that actual GDP growth in the past two years is 1.5 to two per cent stronger than has been reported, and within 18 to 24 months from now data revisions will show this to have been the case. Not that this makes anyone feel better about life now, ranging from Chancellor George Osborne to those either unemployed or worried about losing their jobs.
There are two reasons why I think growth is not so weak. First, proven monthly indicators show an economy that recovered post-crisis much more strongly than the official GDP data of the past 12 months or so. The combined average of the monthly manufacturing, services and construction economic indicators have a very close historical relationship with eventual real GDP growth.
Second, and consistent with this, the employment picture has been nowhere near as dire as many expected, and still expect. While there are major challenges in the public sector, private-sector employment has been enjoying strong gains for much of the past 12 months. If the economy was as weak as the GDP numbers suggest, how can this be the case?
There is one piece of evidence that points the opposite way, and that has been the most recent data on the deficit and government spending and revenues. These suggest that despite all the belt-tightening the deficit is barely different from what it was this time a year ago. Therefore, I suspect the Chancellor is rather focused on where the economy goes short-term, and is keeping his fingers crossed that the ONS is right. If the economy doesn’t show a genuine bounce-back in the third quarter, and the deficit numbers show little improvement into the autumn, then the Government’s current strategy is going to be questioned more intensely and the rating agencies might be finding some new victims.
These latest numbers come at the most delicate time for the world, especially the developed countries. As everyone knows, last week the euro leaders put another rescue package together for Greece, and are probably thinking beyond that to other countries. It is not entirely clear to me that this is going to succeed, as it leaves the future of the European Monetary Union in some kind of limbo. It seems to me that, as unpalatable as it may be to many British observers, and the German taxpayer, to keep the EMU in existence, the path to a genuine euro- denominated bond has been opened.
While I can see this as the endgame, the road is likely to be slippy. If that were not enough, we have high- stakes poker going on in the US over the strategy on debt in the White House and on both sides of the political fence. My suspicion is that we will get a debt-ceiling agreement and some sort of budget deal agreed. Stronger GDP numbers in the UK might have made the US debate easier to predict, but not all can see beyond American borders.
Luckily, we still have our friends in the so-called BRIC economies (Brazil, Russia, India and China), and judging by many meetings I have enjoyed with the business world in Britain during the past couple of weeks, I still think that the future is less dire than many here continue to believe.
As tough as it is on the high street, the UK economy is not just about houses and the retail industry. Indeed, retailers who sell at the luxury end of the market continue to enjoy a very strong performance from their overseas buyers, as do many companies who are focused on exports.
Just last weekend we had some friends staying, one of whom is employed in a machine-tool parts company in the Midlands. He described his business as booming and mentioned that his firm, and many of its UK clients, are regaining their market share from overseas, including China. He also mentioned that they have a shortage of skilled workers.
The view from the plane at 40,000 feet – which is where I spend a lot of my time – seems to me that gradually the UK is adjusting to a post-crisis world in which the consumer is going to take a lesser role, and manufacturing an increasingly important one. No bad thing, either, so long as the policy-makers here, and especially in Washington, don’t give us another huge diversion.
28 July 2011 Jim O’Neill
For more news and updates, assistance with your visa needs or for a Free Assessment of your profile for Immigration or Work Visa’s just visit www.y-axis.com