Sunday, September 03, 2023
Better news for the UK - but the search for stronger growth goes on
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

Positive growth surprises are so rare these days that we should celebrate the fact that the Office for National Statistics, searching diligently down the back of the statistical sofa, managed to find some extra growth for the UK a couple of years ago, giving us an upbeat end to the summer.

New official GDP (gross domestic product) estimates on Friday have changed the economic picture to one much more like the "V-shaped" recession and recovery I thought we would see when the pandemic struck and restrictions and lockdowns were imposed. History has been rewritten, so instead of collapsing by 11 per cent in 2020, GDP fell by a slightly less scary 10.4 per cent. And the recovery in 2021 has been revised up from 7.6 to 8.7 per cent.

Most significantly, the revised figures showed that GDP at the end of 2021 was 0.6 per cent above pre-pandemic levels, whereas previous estimates had suggested it was 1.2 per cent below. The revised figures have removed some of the UK's inferiority complex. By the end of 2021, only America and Canada of G7 countries had recovered faster. The new figures are easier to square with other data for the labour market and tax revenues. They are consistent with a small rise in productivity over the past 3-4 years, rather than no growth at all.

These were larger revisions than usual, reflecting the fact that estimating GDP during the uncertainties and dislocations of the pandemic was harder than usual. They do not, however, change the growth dilemma by as much as some of the initial response has suggested.

The UK has barely grown recently, GDP rising by only 0.5 per cent since early 2022. Tacking on recent quarterly growth estimates, assuming they are not also substantially revised, to the new figures would leave UK growth over the past 3-4 years near the bottom of the G7 league, though not at the very bottom, and well below the OECD average.

And this is before the impact of higher interest rates - tighter monetary policy - which surveys suggest is having a significant negative impact in the current quarter, and may have a bigger impact later. The UK is not alone in this. So the search for growth continues, and it goes on beyond these shores. The world is also searching for stronger growth.

This is the season for big international economic gatherings. A couple of weeks ago leaders of the Brics’ countries – Brazil, Russia, India, China and South Africa – met, though Vladimir Putin could not attend in person because of the International Criminal Court warrant for his arrest for war crimes dialling in remotely.

Soon there will be a summit of G20 countries – the big advanced and emerging economies – in India. Rishi Sunak, who has drawn criticism for skipping the United Nations’ General Assembly, will attending this gathering in New Delhi in a few days (September 9-10), and may have a bilateral meeting with China’s president Xi Jinping. The G20, divided as it is on Russia-Ukraine, may not be a meeting of minds.

Hard on the heels of these gatherings will be the annual meetings of the International Monetary Fund and World Bank, this year to be held in Marrakech, Morocco from October 9-15. I would like at this point to have included a clever link to the song by Crosby, Stills and Nash but its lyrics are a bit weird.

All this summitry is probably mainly of interest to those attending, but behind it there is a fundamental question. When will the world economy gets its mojo back and, more fundamentally, where will the growth come from?

Take the Brics gathering. When the acronym was invented for Goldman Sachs by Jim O’Neill more than 20 years ago, before he was ennobled, it did not then include South Africa, the host of last month’s summit, which took advantage of the stray ‘s’ to add itself. Now, Six more countries have been invited to join, including Saudi Arabia, Iran, Ethipia and Argentina.

As for the original Brics, soon it became clear that, of these giants of the emerging world, only China and India really cut the mustard. With its economy once more threatened by the bursting of a property bubble, even China is under a cloud. Its high watermark, of growth averaging nearly 10 per cent a year, is long gone. Now it struggles to hit 5 per cent. Its moment of greatest glory, when it grew strongly during the 2008-9 global financial crisis even as the West suffered what was then its deepest recession since the Second World War, is now history.

We should not write off China, and the criticism of James Cleverly, the foreign secretary, for visiting Beijing, and of Sunak for his proposed meeting with Xi, is misplaced. The reality of international trade is that we have to interact with countries that we do not much like and have plenty to criticise about. In the case of China, the world’s second biggest economy, and the UK’s fifth biggest export market, and second biggest source of imports, with bilateral trade of £100 billion a year, this is very much the case.

In many ways, China is following the script set out by O’Neill two decades ago, which had it slowing to 5 per cent and then 3 per cent as it converged on Western economies. And we should remember that China growing by 5 per cent now adds more to the global economy than it did when growing by 10 per cent 20 years ago.

The Centre for Economics and Business Research (CEBR), a consultancy, describes China as suffering from “growing pains” but not a collapse. Each year it updates its annual world economic league table and recently it has pushed out its estimate of when China will overhaul America’s GDP in dollar terms. In 2015 it thought it would happen in 2025. Its latest estimate, published a few months ago, was that it will not now happen until 2036.

Even so, China is not what it was and three of the other current Brics, Brazil, Russia and South Africa are beset with mediocre growth at best, deservedly so in the case of Russia, which fell into recession last year.

That leaves India. It is the brightest star among the Brics, with growth projected by the IMF at between 6 and 7 per cent this year and next. There are also issues about its leadership, but the UK would love to have closer trade ties. India is only the UK’s 13th largest export destination and 23rd largest source of imports and bilateral trade is less than a fifth of that with China. There are other ties, of course, as with China, including investment and student numbers.

The big question remains, which is when the world will start growing at anything like its normal rate. Advanced economies as a group are growing by 1 per cent or so, emerging economies by 4 per cent. Both are well below normal, which would be 2 and 6 per cent.

Among advanced economies America is the brightest spot and has grown by most in the G7 since before the pandemic. But US growth was revised down slightly in the second quarter and its economy has yet to feel the full impact of higher interest rates, as is the case for other advanced economies.

Tighter policy is one explanation for the malaise affecting the global economy. Nobody has been immune from the impact of the pandemic followed by the inflation shock. Tighter monetary policy means slower growth and a heightened risk of recession.

There is another explanation, related to this. It is no accident that two economies whose governments have just brought forward stimulus measures to boost growth, China and Germany, are also two of the world’s three biggest exporters, the other being America.

World trade, as monitored by the CPB Netherlands bureau for economic policy analysis, has been muted since recovering from its big pandemic fall, sometimes recording small monthly rises, sometimes falls. There is a debate about whether America’s trade war with China, instituted during the Trump presidency, reduced or merely diverted trade, but the World Trade Organisation found that by the end of the 2010s, and before the pandemic, trade restrictions were at historically high levels. Most remain.

Slow growth in world trade is thus at the heart of the subdued outlook for the world economy, and the fact that it is hard to find any genuinely bright spots. The IMF expects world trade to grow by only 2 per cent this year and just over 3.5 per cent next, in each case much weaker than normal.

If the various summits taking place over the next few weeks have any value it would be to try to reinvigorate world trade, which in the doldrums. That matters for the UK and it matters for every other economy. Otherwise we will have to get used to a slow growing world economy.