Sunday, March 31, 2013
Britain's hidden growth explains the jobs boom
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

This is not a great time to be in the garden centre or outdoor attraction business. If you are a retailer hoping to sell spring and summer clothing lines, this may be time for a quiet weep.

Anybody selling last minute holidays in the sun is probably feeling pretty smug, notwithstanding the fact that this will add to a balance of payments deficit that swelled to a worrying £58bn last year. Our current account is badly overdrawn.

The combination of the bad weather and an early Easter has put gross domestic product(GDP) in the first quarter on a knife edge. It does not take much to tip a fragile economy into negative territory, though both the Office for Budget Responsibility and the OECD expect Britain to avoid the dreaded triple-dip by a wafer-thin margin.

Revisions last week to past data mean the double-dip at the end of 2011 and the beginning of 2012 has now almost disappeared, as we knew it probably would, but that does not change the big picture. An economy that by now would normally be growing well is struggling to gain cruising altitude, for all the reasons we know about.

Today I want to present a slightly more nuanced picture. Some parts of the economy, we know, are growing. A 0.3% rise in service sector output in January, just announced, is the main reason for hoping there will be first quarter growth.

The service sector, which accounts for 77% of GDP, had a milder recession than the rest of the economy and has has a better recovery, growing by 1.1% in 2010, 1.2% in 2011 and 1.2% again in 2012. It is just, 0.3%, above its pre-crisis peak, while the overall economy is still nearly 3% below its peak.
Dig a little deeper into services and an even more interesting picture emerges. Financial services, including insurance, account for just over a tenth of GDP (10.4%) and just over an eighth of services.

They have had a torrid time. Turnover in this broad definition of financial services is 9% down since 2009 - when the economy began to recover - and 12% below pre-crisis levels. Though there is tentative evidence that the decline in financial services is levelling off, it will be a long time before it contributes significantly to growth, as it did in the heady days before the crisis struck.

What happens if you exclude weak financial services from the rest of the service sector? You are left with 66% of the economy and you are left with a picture in which growth has been reasonably healthy by todayís standards. This two-thirds of the economy grew by 6% from mid-2009 to the end of 2012 and is 2% above pre-crisis levels.

Not all of this two-thirds of the economy could properly be regarded as strong. Retail, for example, has been roughly flat in volume terms since the economy turned up in mid-2009. Air transport is down.

There are, however, areas of considerable strength. The motor trade is up 11.4% since 2009, wholesaling 5%, publishing, audiovisual and broadcasting up 15.8%.

What the Office for National Statistics calls accommodation is up 6%, telecommunications 6.3%, computer programming and consultancy 14.6%, arts, entertainment and recreation 6.7%, legal, accountancy and architecture 9.2%, other professional and scientific services 17.4%, and healthcare (including the ringfenced National Health Service) 10.4%.

The fact that these services are doing well may seem to be of small comfort if the rest of the economy is collapsing. Even there, though, the picture is more nuanced than often thought. Within manufacturing, output of capital equipment is up 21% since 2009, while transport equipment, notably cars, is up a stunning 46%.

If you add the parts of manufacturing where growth is good to the lionís share of services doing fine, the result is that 70% to 75% of the economy is growing at a reasonable rate but is dragged down by the rest.

We know what the rest is, apart from financial services. It includes North Sea oil and gas, down 32% since 2009. It includes those bits of manufacturing, including chemicals, basic pharmaceuticals, wood and paper and textiles, where growth has disappointed. And it includes construction which, though marginally up on 2009, it is more than 10% down on this time in 2011.

What are the implications of all this? For British economy-watchers, the biggest current puzzle is why employment has been so strong when recovery is so weak. This, I think, goes a long way to explaining it.

The number of people in work is 3.3% higher than its 2009 recession low point and 0.7% above pre-crisis levels. Service sector employment is 722,000 up on the 2009 low and 490,000 higher than at the start of 2008, when recession struck. Those increases are 2.8% and 1.9% respectively.

The weaker bits of the economy, meanwhile, have not been shedding jobs as much as expected, either because they are hoping for something to turn up, or for safety reasons. So North Sea employment, while not huge, is up over the past three years and manufacturing employment only down by 30-40,000. Employment in financial services, overall, is barely down.

The main exception is construction, where more than 200,000 jobs have been shed since the recovery began. But the big picture is that the bulk of the service sector is generating jobs at a significant pace (while also raising its productivity). The jobs puzzle may have been solved.

The second big question is about those parts of the economy that are dragging down the rest. Some of them may be beyond saving. There are parts of low-value manufacturing which will struggle even with a competitive exchange rate.

The decline of two of the struggling sectors, the North Sea and financial services, is explicitly linked to the unbalanced economy and that huge current account deficit. We still need to sell financial services to the rest of the world. It is important the sector is better regulated but not over-regulated to the point of impotence.

North Sea oil and gas has come through a period in which taxation provided a major disincentive and is now looking up but will take time to turn around. Construction is highly cyclical. The governmentís own test for the Help to Buy initiative George Osborne unveiled in the budget is whether it results in more housebuilding.

The broader message is that most of the economy has been able to grow at a reasonable rate in a very challenging period. Some of the growing parts are the high-skilled sectors we will need in the future. In fact we will need more of them.