The Autumn Statement at the beginning of the month contained some welcome news for business.
Economic growth forecast to rise from 1.4% in 2013 to 2.4% in 2014 and 2.2% in 2015.
OECD predictions are identical, albeit that the IMF are not quite so optimistic, suggesting 0.9% for 2013 and 1.5% in 2014.
Other positive announcements in the Autumn Statement included:
cap placed on business rate increases,
ational insurance relief for firms employing workers under the age of 21
and the establishment of a British Business Bank aimed at to facilitating access to finance for smaller firms.
Other good news included the Funding for Lending scheme has been shifted from subsidising mortgages and towards small business loans and the encouragement of more investment in infrastructure projects, albeit that this remains under-funded relative to the scale required, and no new public money has been allocated.
These are ideas suggested in my economic forecast last year, albeit on a less generous scale than I was advocating. The expansion of this type of reform would provide significant benefits to the economy, given that recoveries from financial crises are always credit constrained.
Economic forecasts should not, however, detract from the continued fragility of the UK economy. There are a number of reasons for this.
Growth in 2013 has been driven primarily by an increase in private consumption, as consumers have been dipping into savings and/or taking on more personal debt, and the related increase in house prices (particularly in the South East), stimulated by government subsidies. This is not balanced economic growth. Indeed, the OBR is aware that this is not a sustainable source of demand for future years. Personal debt remains too high and the Bank of England has been asked to prevent future house price bubbles that wreck the economy when they burst.
International economic uncertainty remains. The Eurozone crisis remains simmering under the surface and the US political polarisation over budget matters has only been resolved temporarily. These are the UKÃ¢â‚¬â„¢s two largest markets, thus weakening the benefits expected from a competitive value of sterling.
Office for Budget Responsibility (OBR) economic forecasts rely upon a rapid recovery in business investment, moving from a decline of 5.5% in 2013 to an increase of 5.1% in 2014. Whilst there is some evidence that there is some improvement, to date, evidence suggests that the OBR forecasts are slightly over optimistic.
There will be continued squeeze on living standards for working people, with the OBR forecasting that average wages will yet again rise by less than RPI inflation in 2014 and that real wages will remain below their 2008 levels until at least 2018. Hence, it would not be wise to rely on consumer spending to act as the driver of economic growth based on building up further debts, or borrowing based upon the unreliable expectation of future house (asset) price rises.
Over the long term, UK productivity has to increase significantly if growth rates are to follow. A sharp rise in business investment is needed. However, one other reason that might be influencing low productivity rates may explain why the UK labour market has performed so unexpectedly well in terms of falling unemployment at a time of slow or no growth; and that refers to businesses hoarding labour, on short term, part time or zero hour contracts, rather than laying people off. There are many positive economic impacts arising from this behaviour, but one downside might be a less productive use of those employees.
Current growth remains dependent upon the sizeable level of public policy support that has been given to the UK economy, but which has to be removed at some point in the near future. Interest rates will have to rise from 0.5% as the economy starts to recover, and this will reveal whether low rates have artificially perpetuated unproductive activities. Moreover, the quantitative easing, injected into the economy during the difficult economic times, will need to be withdrawn as things improve, to prevent an unwarranted asset price bubble and future inflationary consequences.
Whilst forecasts certainly point towards a brighter future than we have experienced for more than half a decade, the improvement remains fragile and the UK is certainly not (yet) enjoying a sustainable recovery. To mix metaphors, there might be light at the end of the tunnel, but we are not out of the woods yet!
I wish you all a successful new year!
Professor Philip B. Whyman
Professor Whyman is the Director of the Lancashire Institute for Economic and Business Research at the University of Central Lancashire.