ONE reason why some trains are running late is, apparently, that we are facing the wrong kind of hot weather. It’s pathetic – but sadly hardly a unique problem for this country. It is equally clear that the UK economy is now enjoying the wrong kind of growth, as I have been arguing for months.
The IMF has hiked its forecast to 0.9 per cent this year, which while still poor would be far better than what we have seen these past few years – but sadly this increase won’t be built on solid foundations. The economy will feel healthier over the next year or two but the “growth” will be merely statistical and utterly unsustainable.
The UK needs to boost its output of goods and services. It needs to increase its exports. It needs to save more and deleverage. It needs to invest more in viable projects and consume less. Needless to say, it is tricky to pull off all of these changes at the same time, especially if key export markets are doing badly. But that is no excuse for the UK’s sad performance, which belies the slight improvement to the overall growth picture.
It is not just that yesterday’s manufacturing figures were poor. May’s increase in the output of the water, oil and gas industries was offset by a 0.8 per cent slump in factory output, despite increasingly upbeat industry surveys. A greater problem is that the overall trade deficit widened in May to its largest level this year, with exports falling for the second month in a row and imports increasing.
The reason this is an issue has nothing to do with mercantilistic nostrums – the erroneous views that imports are bad and should be discouraged; in reality, they are the only purpose of exports – and all to do with the fact that this shows that the rebalancing from consumption to production is not happening. The trade deficit figures don’t matter in of themselves – but they demonstrate a deep underlying problem. A still profligate government combined with loose monetary policy is fuelling domestic demand that a crippled supply-side cannot fulfil, hence the rise in imports.
Even worse for our long-run health, the UK is still failing to invest. A devastating calculation from The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP – truly appalling. We were beaten by Paraguay but just managed to do better than Trinidad and Tobago, Sierra Leone, Cote d’Ivoire and Greece. Not all capital expenditure is good: companies can spend money on projects that turn out to be duds, misled by artificially low interest rates. Governments can allocate cash to white elephants, such as HS2 that cost more in foregone resources than generate in extra GDP. But sensible investment projects are the only way to generate sustainable growth. A country’s GDP depends on how many hours are worked, and the productivity of the workforce – and that, in turn, is directly linked to human and physical capital.
There are several reasons for this dearth of investment. Large British firms are flush with cash but feel that they cannot make suitable, tax, inflation and risk adjusted returns from spending more on factories and computers. This is bad news for our future productivity performance. At the same time, many of the projects that would be viable – such as building new airports, or accelerating housebuilding – aren’t happening because of ridiculous red tape and the anti-growth bias in the planning system, which has only just started to be tackled. Investment in dwellings did grow by 3.7 per cent year on year in the first quarter. But there is only one real answer: we need a supply-side revolution, a bonfire of planning red tape and lower taxes on capital to make it more worthwhile for firms to spend. Without that, the present modest recovery will eventually be remembered as nothing more than another false dawn.
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