A wasted decade? No, it will take even longer for UK to recover

 
Allister Heath
GIVEN the certainty that interest rates will eventually shoot up, plus the massive black hole in most people’s retirement plans, you might expect that the Great British public would be putting more money aside for a rainy day. If so you would, sadly, be spectacularly wrong.

The UK’s household savings ratio has fallen back to its lowest level since the first quarter of 2009, at just 4.9 per cent, down from 6.7 per cent across 2012 as a whole. Partly out of choice (people aren’t especially keen on delayed gratification, and interest rates on savings accounts are abysmal) and partly out of necessity (wages are collapsing in real terms because of elevated inflation) workers are spending more than 95 per cent of what they earn. So much for the rebalancing from consumption to savings.

That, to me, was almost as depressing as the news that the UK economy remains 3.9 per cent smaller than it was at its peak, following revised GDP statistics showing that the recession was deeper than previously thought, with output collapsing by 7.2 per cent. But if you thought those figures are dire, wait until you hear about the next one: real GDP per head remains 7.6 per cent below the pre-crisis peak and at the same level as it was in late 2004. That means two things: first, that productivity has plummeted even more shockingly than previously believed; and second, that the so-called “wasted decade” we are facing will actually turn out to be a wasted 13-14 years at least, if we are lucky.

Even so, the new figures actually contained two pieces of better news. As Andrew Sentance of PwC points out, when one excludes the declining oil and gas sector, the new figures suggest that there have been only two quarters of contraction in the UK since mid-2009. Both were due to one-off shocks: extensive snow in the fourth quarter of 2010 and the Jubilee bank holiday in the second quarter of 2012. Second, while there has been very poor growth in the non-North Sea sector since the end of the collapse, there was no double-dip recession after all, which means that acres of newsprint and hours of TV time were allocated to describing a phenomenon that our official number-crunchers now tell us was a statistical mirage all along.

Apart from that, it’s all bad. Michael Saunders of Citigroup has crunched the new figures, and they are exceptionally gloomy. If we compare the first quarter of this year with the first quarter of 2008, which is when GDP peaked, consumer spending is down 2.9 per cent in real terms, investment is down an astonishing 24.8 per cent (with reduced private and state expenditure) and government consumption is up by six per cent (so much for the belt-tightening). The level of real investment is at its lowest since 2001, largely because inflation on the GDP deflator measure is now thought to have been higher than previously expected. Even the current account deficit is getting worse: it was 2.3 per cent of GDP in 2007, 3.5 per cent in the final quarter of last year and 3.6 per cent in the first quarter of this year. Crippling the City, the UK’s exports powerhouse, has backfired spectacularly, as has the UK’s reliance on the Eurozone as its main export market for goods.

Economic growth in nominal terms, unadjusted for inflation, is also worse than expected: the economy grew by just 2.2 per cent year on year in the first quarter, a development which might mean that Mark Carney (who clearly has some sympathy with nominal GDP targets) will decide to loosen monetary policy even further when he takes over next week.

We need to move towards a society where nearly everybody saves substantially more, where we produce relatively more and consume relatively less, and where we work more productively. That will of course have a transitional cost. But unless we bite the bullet we will never sort out the problems crippling our economy.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath