Comment: A different world lies beyond the recovery

Bill Jamieson

Bill Jamieson

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IT’S a week we won’t care to repeat: a nightmare return to the industrial relations chaos of the 1970s that threatened to shut down not just Grangemouth but a large swathe of industrial Scotland.

Everything seemed to stop while we followed this showdown drama. But by the end of the week we were cheering a wake-up to Planet Reality: the demons and the dinosaurs were back in the museum.

And the relief was not only over a local catastrophe avoided but the avoidance of an outcome that would have derailed Scotland’s recovery. For the other cause for celebration on Friday was news that the UK economy overall grew by 0.8 per cent in the third quarter.

This is the fastest rate of growth since the second quarter of 2010, and is the first time since 2007 that the UK has had two consecutive quarters of above-trend growth.

According to Citigroup’s UK economist Michael Saunders, we are now on course for growth of 3 per cent next year – and, judging by the latest business surveys, the final figure could be even higher.

How is this forecast justified? The latest consensus forecast for GDP growth of just 2.2 per cent next year is, he argues, too low. The quarter-on-quarter gains in real GDP would need to slow to just 0.5 per cent to hit that consensus forecast, and there is no sign of such a slowdown in business surveys or other lead guides. “Growth this year is likely to be about 1.5 per cent, well above the start-of-year consensus, and another year of above-consensus growth probably lies ahead for 2014 as well,” he adds.

The latest figures show service sector output up by 0.7 per cent quarter-on-quarter, manufacturing up by 0.9 per cent and construction up 2.5 per cent. The breadth of the recovery as much as its strength is little short of astonishing, given the pall of gloom that hung over our prospects this time last year.

Questions inevitably crowd in. How healthy a recovery is it? Can the pace be maintained? And what, looking longer-term, are likely to be the drivers of growth over the next five to seven years? The recovery has not been brought about by big increases in public sector infrastructure spending, though this may have helped on the margin. It has been fuelled by ultra-accommodative monetary conditions (historically low interest rates and quantitative easing), reduced downward pressure from business and household deleveraging, reduced headwinds from the Eurozone crisis and a recovery in household confidence – all this despite a continuing erosion in real household incomes.

Low mortgage rates have helped improve household finances while a marked increase in mortgage lending has helped housing market sales and activity.

Consumer and business confidence have reached near record highs, the housing market is picking up – albeit more slowly in Scotland – and lending to both consumers and businesses has increased.

But there are problems. There are worries about the shape of this recovery. We are not yet seeing a strong upturn in business investment and in exports – vital components of the rebalancing we need to see away from over-dependence on the financial sector and on consumer debt. Investment remains weak, well below its pre-financial crisis share of GDP. And that leaves us more dependent on consumption to drive growth.

The current pace of recovery has already caused Bank of England Governor Mark Carney to sound a cautionary note about his previous forward guidance of less than two months ago that monetary conditions would remain loose until unemployment (now 7.7 per cent) fell below 7 per cent – a level not expected to be reached until 2016. But with the marked change of recovery pace, it is now more likely to be reached a year earlier. Some now see tightening as early as the spring of 2015.

Meanwhile, there are concerns over inflation, as the recent spate of energy bill increases and intensifying pressure for wage increases as employment rises will put the Bank’s inflation target at risk of a serious and persistent breach.

Finally, the international context is not as encouraging as it was, with the IMF earlier this month cutting its forecasts for global growth. And it is unlikely that the UK would be able for long to sustain a growth rate above the historical average.

The CBI’s latest quarterly industrial trends survey for October reflected a moderation ahead. While it reported a sharp rise in business optimism, there was little improvement, on balance, in the prospects for capital investment. The index for building investment rose, but for plant and equipment it weakened. The index for the past three months’ change in stocks of finished goods rose, while that for output expected in the next three months fell notably. The CBI’s monthly survey data was even more telling, with a worsening in the orders balance from plus 9 to minus 4, and in output expectations from plus 33 to plus 9. “The UK economy may soon run out of good news,” warns Monument Securities economist Stephen Lewis.

That should not be allowed to downplay the strength of the improvement now under way. But it focuses attention on what are likely to be the drivers of growth ahead.

A familiar refrain of this column is that the economy emerging from the sharpest convulsion in 100 years is different in nature and dynamics from the one that entered it. The huge innovations in information technology and e-commerce are not only driving epochal changes in business services and in retailing but also in the UK’s business composition. We are seeing an explosion in the rate of micro-business formation and the rise of the internet entrepreneur, able with a small outlay to market goods and services worldwide.

As challenging will be intensifying pressure for a reconfiguration of Britain’s high streets and town centres away from domination by retail and towards social, leisure and recreational activity.

If we do nothing, our high streets decay and die. That is why this recovery portends major changes not just in our economy but in the way we live now.

Twitter: @Bill_Jamieson

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