Strategy & economics

Take me to your leader

14/03/2014

Richard Jeffrey

Richard Jeffrey

Chief Economist

I was listening to the radio this morning, to an apparently surprised if not bemused commentator who was discussing prospects for the UK economy in 2014. Paraphrasing his words, “Who would have thought it,” he said, “the UK is expected to top the leaderboard for growth in the major industrial economies.” He went on to note that even the Organisation for Economic Co-operation and Development is forecasting strong growth. I then listened to an interviewee who asked us to recall that it was as recently as August last year that people were fearing a double (or was it triple) dip recession.

Many years ago, I used to enjoy a comedy programme that, before the advent of some new and even more bizarre turn of events, used the tagline “Imagine my surprise…”. We have had rather too many of these situations in the economic and financial world over recent years, but should we be so surprised by the UK leading the way in terms of growth?

Your starter for ten: which of the G7 nations posted the strongest compound average growth rate during the sixteen years prior to the recession? You know the answer already; it was the UK. Why sixteen years? Partly because I wanted the right answer, but more because this for many countries encapsulated the period of growth following the early ’90s recession and before the most recent downturn – so it is not an entirely arbitrary choice. Over this period, the UK grew by an average 3.3% per annum. The US was close behind at 3.2%, and then Canada at 3.0%. Lagging behind, with quite a gap, France averaged growth of 2.0%, Germany and Italy 1.5%, while bringing up the rear was Japan at a mere 1.1%.

So, perhaps it should not be the greatest surprise, after all, that the UK looks set to be amongst the better performing industrial economies in 2014. In fact, I think it is likely to be the North American economies that top the rankings, and the normal process of extrapolation may have resulted in some forecasters becoming a little over-optimistic for the UK. Nonetheless, we should enjoy the fastest year of growth since 2007. It should also be a year in which workers begin to see some real increases in take-home pay. So far during the recovery, income per person employed has been caught in a vice between low wage inflation and comparatively high consumer price inflation. The reason for being more positive is that the UK seems poised to enter a new phase of growth. To date, the most worrying feature of the recovery has been the failure of capital spending to rebound. As a result, productivity growth has been virtually non-existent (this, by the way, explains why a comparatively dull rate of expansion in the wider economy has been accompanied by surprisingly rapid job creation). But 2013 saw the first glimmerings of a revival in companies’ capital spending. If this continues, then the UK will find itself back on a more sustainable and broadly-based growth path. There will still be more to do in terms of rebalancing the economy – the trade deficit, for instance, remains worryingly wide and debt levels in both the private and public sectors are way too high. But good news is still good news.

So, should we see it as disappointing that growth has yet to reach the rate averaged during the sixteen-years prior to the recession? When listening to other economists discussing recent developments, I am often left with the impression that it will be not be until growth starts with a ‘3’ that we will be able to conclude that we have returned to normal. I beg to differ. The reason that the recession was so deep, was that the economy was encouraged to grow irresponsibly fast during the decade prior to the recession. It is not a simple coincidence that debt levels rose so fast and excess demand became so evident during this period. Growth, debt and excess demand were causally linked. It might have seemed fun while it lasted, but our top ranking on the G7 leader board was bought at a massive price. As dull as this might seem, I would much prefer to see growth of 2.5% than 3.5%.

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