Optimistic? Pessimistic? You choose

 
Allister Heath
BRITAIN is in a strange place. The economy is simultaneously making progress while also disappointing. Yet the fact that the recovery is proving to be such a mixed bag is hardly a surprise given the massive size of the bubble that is still deflating today. At the height of the craziness in 2006-07, domestic demand was 5-6 per cent higher than what the economy could comfortably cope with: GDP itself was 2-3 per cent too high, while the trade deficit was 3-4 per cent of GDP. No wonder recovering from all of that madness is proving so painful. So for the sake of balance, here are three bad developments about the UK economy – and three pieces of good news.

PESSIMISTIC FACT 1
Average take home pay has been falling after adjusting for inflation since the coalition came to power. Real disposable incomes fell 2.7 per cent year on year in the first quarter, the biggest drop since 1977; no wonder consumer spending fell 0.5 per cent. But the rot started under Labour: real disposable income rose just £4 a week between 2004/05 and 2009/10, the Centre for Policy Studies calculates.

PESSIMISTIC FACT 2
A sound economy invests as well as consumes; yet the UK has largely forgotten how to do the former. Private and public consumption as a share of GDP hit a record 86.2 per cent in 2010. Consumption was 8 per cent higher as a share of GDP in the UK than the European Union average; only Greece was worse, according to Citigroup.

PESSIMISTIC FACT 3
The economy is going through another soft patch. The Royal Wedding didn’t help: the services sector was down 1.2 per cent in April as a result. The manufacturing recovery is slowing: the purchasing managers index fell to 51.3 in June, compared to 52.0 in May. Supply-chain disruptions caused by the Japanese earthquake have hit car production, but there are also broader, more global factors at play which suggest a slowdown. Growth in the second quarter could be feeble.

OPTIMISTIC FACT 1
Rebalancing is proceeding apace. Business investment has jumped 8.2 per cent since the recession stopped. Exports of goods are up 21 per cent, thanks in part to sterling’s 25 per cent devaluation. Deleveraging is also going well. Non-financial companies’ debt fell to 108 per cent of GDP in the first quarter of this year, down from 123 per cent in the third quarter of 2009. Household debt has dropped to 103 per cent from 111 per cent in the second quarter of 2009. Both groups’ combined debt is down 18 percentage points of GDP over the last year, the biggest reduction of the last 25 years.

OPTIMISTIC FACT 2
Jobs are becoming easier to find, even if there is still a long way to go. Public sector employment was cut by 140,000 in the year to the first quarter – but this was more than compensated for by an increase in private sector employment of 520,000.

OPTIMISTIC FACT 3
The strong jobs growth seen over the past year suggests that the economy has grown faster than the official stats suggest. In particular, everybody from the Bank of England to the property industry knows the official construction figures are all over the place. Strangely, the Office for National Statistics has yet to revise its figures.

allister.heath@cityam.com
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