I was right to be sanguine about 2010’s UK growth prospects; the daily warnings from the mainstream media that a double-dip recession was imminent turned out to be complete nonsense, as I argued time and again throughout last year. One shouldn’t believe everything one hears on TV. The economy grew by around 1.7-1.8 per cent, corporate profits bounced back, the stock market rose and the UK added far more jobs than it lost.
The indicators that correctly predicted renewed expansion last year – such as the purchasing managers’ indices – all suggest that the private sector will continue to recover in 2011. Today’s quarterly survey of finance directors from Deloitte – another useful piece of data – is even more upbeat, suggesting that strong corporate spending will more than offset the cutbacks to public spending as the year progresses. Emerging markets are continuing to boom, as is Germany; America’s short-term growth prospects look better than they have done in ages.
All of which means that the UK’s private sector employment will continue to rise, but the recovery won’t be as strong as after previous recessions because the UK labour market is now far more regulated. Britain’s anti-City mindset and general unattractiveness to multinational firms will also act as a break on growth, tax revenues and jobs. Nearly everybody will notice the impact of surging costs on their living standards, as well as declining house prices. Wages will continue to rise at a slower rate than inflation, which will overshoot dangerously. The Bank of England will be forced to put up rates by the second half.
The tightest quarter is likely to be the first, as today’s VAT hike hits consumer spending. But the spending cuts will turn out to be moderately expansionary, reassuring investors and companies that the UK is once again being governed responsibly. We shouldn’t forget that the coalition is only proposing to cut by a cumulative 3.3 per cent in real terms over the next few years (and on the OECD’s figures to reduce the government’s share of GDP from a crippling 51 per cent in 2010 to a only slightly less crippling 49.9 per cent in 2011, hardly a revolutionary change).
The coalition won’t collapse in 2011 – even though the Lib Dems will lose their bid to change the voting system and the trade unions will organise massive anti-cuts protests. To his credit, George Osborne will largely stick to his guns; while spending in cash terms will probably overshoot, inflation will also come in higher than expected, keeping down real spending and reassuring gilts investors.
A bigger risk is that external events flare up to such a degree that they tip the UK back into crisis. A Spanish or Italian sovereign panic, a massive terror attack, war in the Korean peninsula or a nuclear conflict in the Middle East could all achieve this. Longer term, the UK – and the rest of the global economy – face huge challenges. New bubbles are building and the seeds of fresh crises are being planted thanks to economically illiterate global monetary and fiscal pump-priming. But the most likely outcome for Britain this year is another year of decent, unspectacular growth of around 2 per cent. Fingers crossed.