DO LAST week’s GDP figures create a case for optimism about the economy? At face value, no. The first quarter rise in GDP was just 0.3 per cent – an annual rate of growth of 1.2 per cent. Over the past year, the UK has grown by just 0.6 per cent. This is far from satisfactory at first sight – and well short of the 3 per cent or so growth we enjoyed before the financial crisis.
But that is the wrong benchmark to assess recent economic performance against. We know our pre-2007 growth had insecure foundations. It was sustained by easy money, cheap imports and excessive confidence in economic policy-makers, which has now disappeared. And this has not just affected the UK. Growth across the Western world has been sluggish in the aftermath of the crisis – reflecting a New Normal of weak growth that will continue through the mid-2010s.
The IMF estimates that this year GDP in the “advanced economies” – which includes the US, Japan and the leading European economies – will be just 3.7 per cent above the peak of the cycle in 2007-8. At the same stage of the early 1980s and early 1990s recoveries, output had recovered to a level of 15 to 16 per cent above the peak.
While UK GDP has yet to recover its early 2008 peak, there has been a very big drag from three particular sectors of the economy, which make up less than 20 per cent of output and about 10 per cent of jobs: financial services, North Sea oil and gas, and construction. With the exception of finance, the services activities which make up the bulk of our economy are doing well, which is why employment has increased so strongly. The private sector has created over 1m UK jobs in the past two years.
And taking into account growth before the crisis, as well as the last few years of disappointing economic performance, the UK scores well in relation to its peer group. As the chart shows, the UK comes second behind Germany among the G7 in terms of the rise in living standards (GDP per head of population) achieved since 2000.
The UK economy has some weaknesses, but it also has hidden strengths. While we no longer have the large manufacturing base which sustained our economy in the nineteenth and early twentieth centuries, we still have some world-leading manufacturers – in sectors like aerospace, high-technology engineering and pharmaceuticals. Our car industry achieved an all-time record level of exports last year.
The common characteristics of the sectors where the UK remains competitive in manufacturing are the deployment of knowledge, technology and skills. There is no future for us trying to compete in low wage, labour-intensive manufacturing industries that have migrated to emerging economies like China, India and Indonesia.
We also have some highly successful services sector businesses, which compete effectively on world markets. The output of UK business and professional services has been growing at about 5 per cent a year during this recovery. These are services that we sell to the rest of the world on the basis of our experience, reputation, knowledge and skills.
Education is another successful UK exporter – attracting overseas students who pay fees and spend money in the UK economy. The creative industries – music, fashion, art and design – are another area where the economy has a strong competitive edge, helped by the global reach of the English language. Tourism, culture and heritage are yet another UK success story – hopefully boosted by the Olympics last year.
We should recognise these pillars of success and build on them. The UK’s future is as a high-skill, high-tech economy – selling products and services to the rest of the world which depend on our knowledge, reputation and experience. We have a flexible labour market and the potential to create many new dynamic and innovative businesses, as long as regulatory burdens and excessive taxation do not get in the way.
In the New Normal economy affecting the whole Western world, our GDP figures will continue to look poor in comparison to the 1990s and 2000s. But if we continue to reinforce success in areas where our economy has a competitive edge, the UK should still be able to perform well compared to our peer group of economies in northern Europe and North America.
Andrew Sentance is senior economic adviser to PwC and a former member of the Bank of England’s Monetary Policy Committee.