Three reasons why the UK economy will eventually improve

Allister Heath
GLASSES can be half-empty – but they can also be half-full. Amid all the gloom, and the latest useless proposals for an industrial policy from Vince Cable, the business secretary, here are, for once, three reasons for moderate optimism about the state of our post-Olympic nation.

The first is that the UK has become a little less uncompetitive. The Centre for Policy Studies has tallied the numbers. On the World Economic Forum measure of competitiveness, Britain fell from 7th to 12th during the Labour years; it is now back up to eighth under the coalition. On the World Competitiveness Yearbook measure, we slumped from 9th to 22nd during the Labour years; we are now back up to 18th. The Index of World Economic Freedom registered a slump from 5th to 16th during the Labour years; we have since climbed back to 14th place. None of this is especially exciting. But the trend is undeniable, even if in most cases the explanation may be that others have done more to mess up their economies with inane taxes or counter-productive red tape than we have. But there have also been a few helpful reforms from the coalition, hopefully with more to come. There is only one industrial policy worth pursuing: making the UK a better place to conduct business, regardless of sector.

The second piece of progress is that there has been a slight improvement in some recent economic indicators. It is far too soon to know how significant these will be. They may even have zero impact. But the services sector purchasing managers index has gone up, its manufacturing counterpart is shrinking by less, exports are increasing again, real wages are falling at a slower rate and the housing market seems roughly stable.

Last but not least, the individualistic, aspirational cultural revolution started by Margaret Thatcher in the 1980s continues to gain ground; when it comes to employment at least, collectivism is in terminal decline. The proportion of twenty-somethings who want to start their own business is up from 17 per cent in 1998 to a record 29 per cent in 2010, according to the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA). For people in their thirties, the rate has jumped to 25 per cent, from 15 per cent; for those in their forties, it’s 21 per cent, up from 13 per cent. In 1998, just four per cent of 20-29 year olds planned to start a business over the following year; the rate is now seven per cent and 10 per cent for singletons. Generation Enterprise, as the RSA calls it, is Britain’s best hope for a return to prosperity.

ONE of the best arguments against an industrial policy is that no “expert” can accurately predict the future. Take telephony. Everybody used to think that companies that specialised in mobile voice calls would create the value – yet making fancy handsets is where the action now clearly is.

Michael Feroli of JP Morgan believes the release of Apple’s iPhone 5 could single-handedly add 0.25-0.5 percentage points to fourth quarter US annualised GDP growth. He believes 8m units will be sold in the US in the last three months of the year, for around $600, of which $200 would be an addition to imports (which reduce GDP), leaving $400 as a trade margin. The iPhone 5 could thus boost US GDP by $3.2bn, or $12.8bn at an annualised rate (which is the way US stats are always presented), roughly 0.33 percentage points. Given that the US is expected to grow by an annualised 2 per cent in the fourth quarter, Apple’s latest gadget could make a huge difference. Truly astonishing.
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