Beneath the bonnet: Weak first quarter growth points to problems ahead
Is first quarter GDP growth of just 0.3 per cent something to worry about? On the one hand, it is the slowest rate of growth since 2012. On the other, growth came in this low on four occasions even during the golden years of UK economic expansion between 1993 and 2000.
To escape from this “on the one hand this, on the other that” style of reasoning, we have released a new paper that looks beneath the bonnet of the UK economy to assess how sound the recovery really is. It finds an unbalanced economy in which the surface picture flatters to deceive.
On employment, although the total number in work and the employment rate are both at record levels, the data shows this is largely due to a steep rise in self-employment, and the income from this kind of work has at the same time plunged. The scale of zero hours contracts also points to the underlying weakness in this area.
On labour productivity, after each of the recessions in the 1970s, 80s and 90s, productivity rebounded strongly. This time round, there has been almost no rebound at all. Without productivity growth, sustained real wage growth is impossible, while the choices that governments have to make are far harder.
Household income also rebounded sharply after each of the three earlier recessions. This time round, it is still barely up on where it was in 2009.
Most importantly of all, Britain’s financial surpluses or deficits for the household and company sectors, and with the rest of the world, are all poorly placed. The household sector – barely in surplus – needs to save more not less, something which won’t help growth. The balance of payments deficit (5.3 per cent of GDP) is already well above its long-term average. And while the corporate sector deficit (the first since 2002) is a relatively bright spot (at 1.5 per cent of GDP), it is pulling the economy towards growth less strongly than it did on average over the 20 years to 2007.
The public sector deficit is coming down, but these other sector balances look more like the end of a period of growth than the early stages of a sustained recovery. That does not explain the first quarter’s 0.3 per cent figure, but it does suggest that it is not just an aberration, a brief interruption in an otherwise smooth path towards sustained growth.
The state of these other balances contrasts unfavourably with another year long ago when, like 2014-15, the public sector deficit stood at 4.5 per cent of GDP and the economy was recovering from a deep recession.
Back in 1995-96, the other sector balances were set fair for sustained economic growth. The household sector was still saving like mad (with a surplus of 7 per cent of GDP), the corporate sector was strongly borrowing to invest (a deficit of 3.4 per cent) and the balance of payments deficit was small (0.9 per cent). This, in short, was an economy in which investment was driving growth and where the main policy challenge was to encourage households to spend more and drive growth in living standards.
The other day, Conservative politician Ken Clarke was quoted in an interview with the New Statesman as saying that he thought “the single biggest issue affecting the country at the moment” is that “we still have not created a rebalanced, modern, competitive economy, which can start producing sustainable rises in living standards”.
Not only does our paper support that judgement, it also shows why the person who was chancellor of the Exchequer in 1995-96 has good grounds for saying it.