The State of the UK Economy: A Brief Overview

Filed in Economic News and Opinion by on August 25, 2013 0 Comments

Since the Conservative-Liberal Democrat Coalition was formed in 2010, economics has been paramount to any judgement of their success. For three years the UK economy has bumbled along with little to no growth and a deficit reduction programme that is only slowly bringing down the deficit, while many individuals are feeling the effects of changes to benefits, taxation and public spending.

Measures to boost demand such as council tax and fuel duty freezes, as well as raising the personal allowance on income tax, are offset by falls in real income. Cuts to the top rate of income tax and corporation tax were seen as a measure to revive British entrepreneurialism but evidence of this is difficult to see.

Unemployment has consistently remained close to 8% and unemployment amongst the young (16-24) is close to a million, with schemes aimed at helping the young criticised. Wages too, in both the public and the private sector, have had little positive news; inflation is outstripping any rises and most workers are seeing pay freezes.

Yet, despite all the doom and gloom and after nearly three years of economic stagnation, has 2013 seen the beginning of change in the UK economy?

There are actually positives to come out of 2013 so far. The economy has grown for first two quarters in 2013; 0.3% in Q1 and 0.7% in Q2 – an increased revision from an initial 0.6%. This has fuelled hopes of a UK recovery after a double-dip recession and fears of a triple-dip. The 0.7% growth is the fastest since 2010 (excluding the growth after the Olympics) but is most important because of the large effect export demand has made with a 3.6% increase. As a major economic policy of the UK government has been to bring about ‘export-led’ recovery, this export growth has been a welcome relief.

The good export news appears as if it will continue after a survey of 700 companies by the Manufacturing Advisory Service found many were now planning investment in new capital equipment and premises. Ideally a growth in business investment should further boost exports and with it demand and employment opportunities.

Other good news surrounds retail. In July demand for retail services rose 0.8% from last year, especially on summer fashion and outdoor items. Overall retail sales for July increased 1.1% as consumers made the most of the hot July weather. With the hot weather passing, there still remains confidence that retail spending will remain high amongst consumers. Retail sales are a key indicator that consumer confidence has returned to the economy and consumers are more willing to spend and, with fewer shops now empty compared to April’s peak, perhaps entrepreneurialism is making a comeback in the British economy.

Confidence in the UK economy’s 2013 performance so far appears cemented by predictions from the CBI that total UK growth will be 1.2% not the 1% previously thought. Likewise, Toscafund – a hedge fund manager – believes the UK economy will outpace the US economy for much of the rest decade.

State of UK Economy.

With all this apparent optimism and pleasing statistical data, what is to worry about the UK economy? The answer is actually quite a bit.

The first major concern is where most of this growth is coming from. Despite improving export figures and a rise in business investment confidence, UK economic growth is being driven by consumption, in spite of the fact that most UK workers are not having a pay rise or rises are considerably less than inflation; real wages are still 9% below the 2007 peak. While no one can deny growth is back in the UK economy, many Britons may not feel like it is. Lower wages have driven up in-work benefit, increasing the burden on an already cash-strapped state.

This has raised fears that the consumption-led growth is just another debt-fuelled mini-boom which owes its growth to payday lenders. With an economy that is still largely unbalanced following the financial crisis, and high levels of public and private debt (debt-to-income ratio is on the rise); consumption-led growth means we should be fearful about what actually is underpinning this growth. The country is, effectively, borrowing its way out of economic stagnation.

Despite improvement in demand for exports, the UK trade deficit has hardly fallen over the past years from 2.2% of GDP even with a cheap Pound that should favour exporters. Concerns must be raised then over whether the UK is producing enough of what is being demanded by importers abroad.

The situation is similar in investment. While manufacturers in 2013 may feel more confident and thus more willing to invest, investment in the UK is just 13.5% of GDP, with the global average at around 25%. Staggeringly this placed Britain 159th out of 173 for investment as a percentage of GDP; the likes of Mali and El Salvador came higher and the countries below were a mix of sub-Saharan African states and the worst hit European nation. British investment is worse than any other G20 nation with the exception of Italy.

This is a problem both now and the future as investment boosts current GDP and establishes the productive capital that economies run on. While it is good news that firms are more inclined to invest in this productive capital, it will be a relatively long process until the UK is anywhere near average investment levels given that investment is a time consuming process dependent on both domestic and international political economics.

So the British economy is certainly a mixed bag; there are reasons to be optimistic in but many areas there are long-term concerns. Things are picking up in some of these areas of concern, notably investment confidence. However, with an unbalanced economy with a banking sector still failing to fulfil one of its fundamental operations – lending – economic growth can never be anything but a worry.

A new economic model needs to be developed in the private sector, for a short time at least. Firms cannot sit by as workers suffer from stagnant wages, and must be prepared to suffer lower profits for the benefit of long-term growth. However, all must welcome the return to growth but efforts by both the private sector and the Government must be made to ensure growth, and with it economic recovery, is sustainable. And all this without even a mention of the deficit…

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My name is Matt and I am currently a politics student at the University of Durham. My main academic interests are in British politics (especially the Labour Party and post-war elections) and the history of political thought. I also have an interest in the link between economics and politics - especially in a globalised world. The educational and entertaining capabilities of journalism and reporting on complex political and economic issues are something I wish to share with readers.