My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
Every little bit of information adds to our knowledge, and changes our perceptions. In recent days we have had a flurry of such information from the official statisticians. Let me try today to steer through it, and try to answer some key questions about the outlook.
The questions are these. Can the consumer continue to be the mainstay for the economy during 2017? Will imports and exports respond to the weak pound? Are businesses already throttling back on investment and will they continue to do so?
There is another question, and it is whether Britain can move away from a growth model which depends excessively on consumer spending to something more sustainable. The London School of Economics’ Growth Commission, whose first report four years ago was very good, published a second report on last week. More in a moment on whether it has some of the answers.
Starting with those statistics, the second release of gross domestic product figures for the final quarter of last year were rather bitter-sweet. They confirmed the expected upward revision of growth to 0.7% for the quarter, which is above-trend, but they also showed a surprise downward revision of growth from 2016 as a whole from 2% to 1.8%.
Amid the uncertainty of last year, 1.8% growth was perfectly respectable, exceeding most of the G7, though just below Germany. But it was driven, to an almost embarrassing extent, by consumer spending.
While the economy grew by 1.8%, consumer spending rose by 3.1%. The consumer, in fact, accounted for all of Britain’s growth last year and a little more, 1.9 percentage points. Government spending also contributed 0.2 points of growth. The circle is squared by the fact that business investment fell, subtracting 0.1 points from growth, and that net trade, exports minus imports, also acted as a drag on growth, to the tune of 0.4 percentage points. Investment and export-led growth it was not.
Though last year’s £2.7bn fall in business investment was the first since 2009, it confirmed that investment has been a persistent weak spot for the economy. GDP is 8.6% higher than its peak prior to the 2008-9 recession, while GDP per head is up by 1.8%. Overall investment in the economy, including business investment, was however lower last year than in 2007.
What about exports? Net trade – exports minus imports – boosted growth in the final quarter of last year, but does so quite rarely, and may have been distorted, according to the Office for National Statistics, by trade in gold. Export volumes were down on a year earlier, while imports were up.
In the short-term, the outlook for the economy will be determined by the interplay of consumer spending, investment and foreign trade. As is now familiar, the issue for consumers is whether they will try to spend their way through the squeeze on real incomes arising from higher inflation.
We have information on the part of consumer spending accounted for by retail sales. Official figures show that retail sales volumes fell in November, despite Black Friday , fell again in December, despite Christmas, and in January, despite the sales. The CBI distributive trades survey suggest that they have remained subdued this month. British consumers, who you write off at your peril, may just be pausing for breath. But it will be surprising if spending growth this year and next comes close to last year’s 3.1%.
On business investment, there is little in the surveys to suggest an imminent collapse, but little to suggest much growth either. Investment looks likely to tread water until there is greater clarity about the outlook.
Exports are the wild card. The latest figures were distorted, but stronger growth in Britain’s main markets, including the EU, is helping, as should the pound’s big fall. But, while consumer spending has tended to outperform expectations, exports have tended to underwhelm. It remains to be seen whether this time is different.
What about beyond the next couple of years? The LSE Growth Commission’s new report says that now is an ideal time to tackle some of the economy’s longstanding weaknesses, which include low productivity and over-dependence on consumer spending.
The report has a string of recommendations in the four key area of skills and training, industrial strategy, openness (to trade, inward investment and people) and the supply of finance to growing businesses. Britain, it says, has relied too long on migrant labour to plug the holes in an inadequate education and training system. The rise of self-employment has further discouraged sufficient spending on training, and the playing field needs to be tilted back to employees. Britain achieves the worth of both worlds by under-investing in plant, machinery and other capital equipment, despite the tax incentives to do so, while also under-investing in training and skills.
While this country has a world-leading financial centre and a highly competitive financial services sector, there remains a problem with the provision of finance to high-growth businesses and to infrastructure projects.
What the LSE Growth Commission describes a s a new chapter in Britain’s growth story will require continued good access for the two-third of exports that go to either the EU or America, as well as the rapidly growing “frontier” economies elsewhere in the world. It will require, it says, “access to finance for businesses and innovation, including flexible regulation of challenger banks, increased support for the FinTech sector, reform of equity markets, a boosted role for the British Business Bank and a new infrastructure bank”.
There should be a new British state aid law, the LSE argues, both to allow the government to step in a more flexible way than currently allowed under EU rules but also to preserve the most useful aspect of those rules, tying ministers’ hands in a way that stops them propping up uneconomic sectors.
A record deficit on the current account of the balance of payments and a tradition of chromic under-investment speak of a badly unbalanced economy. I have barely scratched the surface of the LSE Growth Commission report but it offers plenty of ideas for turning over a new leaf. And it is more coherent and comprehensive than anything the government has yet come up with.