SO WHERE is “austerity” exactly? By how much has it slowed our economy? And when will household wealth and spending ever recover?
For years the central charge of the government’s critics is that it has cut spending too far, too fast; that there has been little improvement in wages and that the economy has been held back. Jeremy Corbyn at last week’s Labour Party conference painted an unsparing picture of a miserable Britain straining under the austerity yoke.
What follows is not an attempt to deny that many households are feeling the pinch and that formidable problems exist. The Redcar steelworks shutdown is a reminder of our vulnerability to trends in the global economy. We could – and should – be doing more to grow our skills base and our presence in growth areas such as IT, knowledge-based businesses and biomedical science.
But there is another and more hopeful picture than that painted by Corbyn. It can be found in the annual “Blue Book” in which the Office for National Statistics (ONS) has incorporated new data showing a series of upward revisions to the UK’s economic performance.
The most significant revisions to growth were for the years 2011 to 2013, where calendar year GDP growth was revised up by 0.45 percentage points, on average.
These revisions imply that, despite the minor downgrade to 2014 growth estimates, GDP is now thought to be 5.9 per cent, rather than 5.2 per cent above its peak in the first quarter of 2008. And the UK economy has grown by 12.8 per cent since its trough in mid-2009, versus a previous estimate of 11.9 per cent.
The annual figures show consistent growth since 2010, accelerating from 1.2 per cent in 2010 to 2.2 per cent in 2013 and 2.9 per cent in 2014 .The uplift to the GDP data translates directly into productivity. ONS figures show output per hour worked rose 0.9 per cent quarter-on-quarter in the second quarter of 2015, the strongest increase for four years. This lifted the year-on-year increase to 1.3 per cent from 0.5 per cent in the first quarter and 0.2 per cent in the fourth quarter of 2014.
Meanwhile, start-up business rates, while slowing over the past 12 months, have climbed to record levels. And the latest Purchasing Managers Survey for construction activity in September shows the business activity index improved to a seven-month high. It is also well above its lifetime (1997-2015) average reading. Output improved in all three sectors with house building rising to a 12-month high. There was also a pick-up to seven-month highs in both commercial activity and civil engineering.
All this is in striking contrast to the critique of the SNP’s favourite international economist, Joseph Stiglitz, and others such as Paul Krugman, that the government’s pursuit of austerity has smothered economic recovery. It is by no means clear how this counter-factual would have contended with the impact of higher levels of annual borrowing and government debt on business confidence and, as critically, international buyers of UK government debt. But the fact is that the recovery has been stronger and more sustained than the anti-austerity critics predicted.
Arguably the most eye-catching statistics were those on the balance of payments current account, the UK’s Achilles’ heel. The balance for the second quarter is now reckoned at minus £16.8 billion compared with a consensus estimate of minus £22bn. This, as Oxford Economics (OE) points out, is the second consecutive quarterly narrowing in the deficit, bringing the current account deficit down to 3.6 per cent of GDP.
What’s more, the current account shortfall across 2014 has been revised down from 5.9 per cent to 5.1 per cent of GDP. “Although still large by historical standards”, says OE, “the recent current account gains might make policymakers less worried about the extent of borrowing from abroad required to finance the continued UK recovery”.
Driving most of the turnaround has been a £6bn improvement in the trade deficit and a nearly £5bn improvement in net investment income. What is striking, says OE, is that the improvement was down to the part of the current account that for the past 30 years has been intractably lacklustre – our net sales of goods and services.
Bear in mind that this improvement took place in spite of a strengthening of the pound by almost 6 per cent on a trade-weighted basis in the first half of the year.
All very well. But what of pay and household wealth? Here, surely, is where austerity has hit hard. But that is not the picture that emerges from the ONS data. Real disposable income is up 3.7 per cent year-on-year. Wages in the private sector are now growing by a remarkable 4.4 per cent annually in real terms while employment is at an all-time high.
This improvement is reflected in rising housing activity and mortgage lending. Last week the Bank of England reported mortgage approvals up markedly to a 19-month high of 71,000 in August and more than 20 per cent above the November 2014 low.
And the strong September CBI Distributive Trades Survey shows UK consumers still very much alive and kicking despite a difficult summer. Latest hard data shows that retail sales volumes rose 0.2 per cent month-on-month in August and are up 3.7 per cent year-on-year.
But here we hit a persistent problem – a level of growth still overly dependent on the consumer while the manufacturing sector is still struggling. It looks more unbalanced than ever. Purchasing managers report that manufacturing expansion slowed in September to a three-month low and only marginally above June’s weakest level since April 2013.
The overall picture is of UK growth being driven by strong domestic demand – looking at the second-quarter figures, household consumption grew by a robust 0.8 per cent on the quarter, supported by a solid 2 per cent rise in household disposable income.
Arguably we need to see more “austerity” in consumer activity – spending and personal borrowing in particular – and greater stimulus for manufacturing. That is easier said than done when the global economy is slowing and export markets are jaded. But the critique that our economy can now barely manage a pulse and that households in aggregate are struggling under the yoke of spending constraint does not at all accord with reality. «