The UK economy is still weak and recovery is slow in coming, but we need to keep a perspective. Already there are glaring press headlines on ‘double dip’ (the latest quarter’s unexpected negative GDP growth figures) and the UK’s ‘lost decade’ of weak growth. On present showing, it is argued that the UK economy will not attain its pre-crisis levels until at least 2016.
If the latest UK GDP figures are correct, then the UK has slipped into a ‘double dip’ (two consecutive quarters of negative GDP growth) recession for the first time since the 1970s. Deustche Bank point out that the present UK economic ‘recovery’ (from the recession that began in the middle of 2009) has been the weakest since the 1920s Great Depression.
This apparent latest quarter’s out-turn is a heavy blow for the Government, which is increasingly beleaguered on several fronts. The Chancellor, Mr Osborne, predicted a swift return to growth from the Government’s strong austerity programme. He has now been forced to admit that the UK economy will take ‘longer than anyone hoped to recover from the biggest debt crisis of our lifetime’.
Why has the last quarter’s GDP out-turn been so poor, despite all the gathering positive economic signals of recent weeks? The eurozone crisis is a major factor. Not only is the eurozone an important UK customer, but the recent problems of Spain (especially), Italy and even France are raising new concerns about sovereign risk and the sustainability of the present eurozone. With an already fragile eurozone position, recent events raise new concerns and help to encourage even more caution amongst bank lenders and their regulators.
George Buckley, chief UK economist at Deutsche Bank, says that the UK is now braced for a return to the 1970s when the economy faced the challenges of high unemployment, growing inflation and weak growth. He points out that ‘Fiscal austerity, private sector debt reduction, European sovereign uncertainty and sticky inflation all present challenges to the recovery’.
Some good news, on the other hand, is that two important ‘engines’ of Western economic growth – the US and Germany – have now recovered to their pre–recession (which followed the collapse of the US investment bank Lehman Brothers in autumn 2008) levels. The US recovery in particular looks reassuring, given its size and importance.
Another positive factor is that many informed UK sources point out that it still does not feel like a recession. For example, the chief executive of the accountancy firm Grant Thornton has recently pointed out (Sunday Times, 1 April) the many new opportunities coming through that have led his firm to hire hundreds of new staff. After the most recent GDP figures, the CBI said (Sunday Times, 26 April) that UK manufacturers were at their most optimistic for two years. The Nationwide building society pointed out that UK customer confidence was at its strongest for nine months.
There are now real concerns that these kinds of positive developments will be swamped by the latest GDP figures, which will dominate market sentiment. At the same time, many commentators caution that the latest UK GDP figures are still ‘preliminary estimates’, which may turn out to be overly pessimistic (though they may also turn out to be more negative, of course!).
The latest GDP estimates, for example, were driven strongly by a 3 per cent decline in the construction sector in the first quarter of 2012, but this looks inconsistent compared with the Purchasing Managers Index and the recent, more buoyant experiences of big firms like Redrow and Persimmon. Nevertheless, the latest Glenigan Weekly Newsletter (1 May) refers to a 4 per cent fall in construction project starts for the three months to April, following four months of growth.
GDP figures had to be revised upwards in the recent past because of technical changes to the calculations and this could happen to the latest figures. But we must not put our hope in a ‘re-count’, even though these latest figures are ‘surprisingly poor’ to many commentators (including The Economist, April 28).
The latest UK (and OECD) figures, then, are surely salutary that the UK economy is still weak and recovery is slower than anticipated, despite many positive signals up until recently. But further cutbacks in consumer spending as a result of this latest economic news would not be helpful. There is also a strong view that the UK’s present fiscal austerity programme is generally the right way forward at this time.
A major problem that has to be addressed if the UK is to recover more strongly is bank lending. Over the past 12 months, bank lending to businesses was down 3 per cent and lending to smaller businesses (who are generally more in need of bank finance and who have fewer external finance options compared with bigger firms) was even further down at 10 per cent. UK mortgage lending is also suffering. Recent research (30 April) by the financial firm Experian found that nearly 70 UK firms are now closing each day and nearly two-thirds of these are small ones. Other extensive research (by the research firm BDRC Continental) highlights the severe problems that smaller UK firms now face in getting bank finance.
The Economist (April 28) points out that four major types of spending drive GDP and each of these is being held back. Household consumption (accounting for half of GDP spending) fell by 1.2 per cent in 2011. Factors here include low wage settlements, inflation and heavily indebted consumers still prioritising paying off what they owe (rather than spending more). Government consumption is also shrinking as a result of the fiscal austerity measures.
Stronger trade has not been able to compensate for these pressures on GDP, even with sterling’s 20 per cent trade-weighted depreciation compared with before the financial crisis. A big factor has been the current eurozone crisis – around half of the UK’s exports go to eurozone countries. And eurozone prospects still do not look reassuring in the months ahead.
The fourth kind of spending driving GDP is business investment. This and weak household spending are argued (by the economist Adam Posen, who is a member of the UK Monetary Policy Committee) to be two of the main reasons for the UK’s slow economic recovery compared with the US. UK business investment turned down in the third quarter of 2011 as domestic demand and eurozone prospects apparently weakened. It appears that some big firms are also sitting on cash mountains at the moment. As discussed earlier, bank lending is the other important ‘dampener’ in this sector. With banking risk exposures and respective risk-related regulations increasing, bank funding and lending costs will rise – producing an even more potential ‘dampening effect’ on already fragile bank lending growth.
The latest GDP figures then are certainly a reminder that the UK economy still has a hill to climb. It is to be hoped that the figures will help to stimulate a more positive response in the key area of bank lending.
For a while yet, though, a strong and sustained economic recovery continues to elude the UK. Nevertheless, many informed commentators were surprised with the latest GDP figures and many believe that the signs of UK economy recovery are still there.
Professor Ted Gardener