THE COMING year looks like it will be a good one. At the start of each of the past five years, the economic scales have been tilted downwards, and the challenge has been to look for factors which might have tipped them back up. The balance is now reversed, and the onus lies with the pessimists to prove their case. Not that there are any shortages on this score. King Canute of Twickenham, aka business secretary Vince Cable, has solemnly commanded that house prices must stop rising, for example, for fear of a new bubble.
But at least Cable’s concerns have some backing in reality. The most pervasive negative myth, for it is indeed a myth, is that the current recovery is driven by consumer spending – specifically spending fuelled by more debt and lower savings, and therefore unsustainable. This is simply untrue. In most Western economies, overall output stopped falling at some point during 2009. Since then, the percentage increase in GDP has been more than that of consumer spending.
The latest official data relates to the third quarter of 2013. From the trough of the recession in 2009, GDP in the US has grown by 10 per cent, and consumer spending by 8.9 per cent. In the UK, the figures are 5.2 and 3.5 per cent respectively. The same point applies to the main Eurozone economies. In Germany, output has risen by 9.9 per cent and personal consumption is up by 4.8 per cent. In France, the figures are 4.1 and 2.4 per cent.
The main driver of the recovery has been corporate investment. In the US, it has risen by 30 per cent since 2009 and in the UK by 19 per cent. The increase has been only 12 per cent in Germany, but here there has also been a big rise in net exports.
It is France which is the basket case. And it is public spending which is the country’s problem. In national accounts, there is a category labelled “public sector consumption”. Basically, this is the cost of employing public sector workers, their salaries, pension contributions, and so on. In the US, spending on public sector consumption has actually fallen by 5 per cent since 2009, with over half a million net jobs cut from the public payroll. Yet total GDP has expanded by 10 per cent. In Britain, despite the rhetoric of cuts, public sector consumption has risen slightly, by 2.5 per cent, half the speed of the increase in GDP.
In France, public spending growth has outstripped GDP growth, rising by 5.3 per cent since 2009. Corporate investment has grown slightly faster, by 7.4 per cent compared to the 4.1 per cent figure for GDP. So since 2009, out of these four big economies, France has had the lowest GDP growth, the lowest growth in personal consumption, the lowest growth in corporate investment, and the highest growth in public sector consumption spending.
The Labour leader Ed Miliband said last year that French President Francois Hollande is “leading the debate in Europe” to “find that different way forward”. But whatever desperate labour market and tax reform proposals Hollande comes out with this year, one of the safest predictions for 2014 is that Miliband won’t be repeating the praise.
Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Why Most Things Fail: Evolution, Extinction and Economics.