The British Economy is Recovering, the Future is Safe, or is it?
Since spring last year Britain has been in recovery mode. The country is slowly getting back on its feet after the worst recession in living memory. Surely that means our future as a world leading economy is secure. But is it? Perhaps we are simply climbing up a rather precariously balanced economic ladder and, similar to what happened in 2008, we will have another spectacular fall from grace.
At the start of 2013 there was an air of apprehension around any predictions for the future. As the year progressed cautious optimism began to creep into the psyche and by the end of the year the country appeared to be feeling much more buoyant. This year has started very differently; there is now a clear split in terms of what the ‘experts’ believe with regards to the economy, and they are not afraid to share these opinions. The gloves are well and truly off. On one side of the fence you have the group of experts who believe the type of recovery we are witnessing is the right type of recovery for long term prosperity; the director-general of the Confederation of British Industry, John Cridland, said: “We are starting to see signs of the right kind of growth.” On the other side there are people such as the business secretary, Vince Cable, who in January said: “The shape of the recovery has not been all that we might have hoped for.”
There are also those who are caught in the middle of the debate and this certainly seems to be the case with George Osborne, who during a visit to Hong Kong in February said: “the recovery is not yet secure and our economy is still too unbalanced” whilst reinforcing the need to not avoid making “more hard decisions”. This is despite the Bank of England upgrading its growth forecast for 2014 from an estimated 2.8 per cent in November to 3.4 per cent. Those who believe that this recovery will not fix the country’s economic woes long term are focussing on increased household debt; one of the key factors that worsened the recession in 2008. Senior economist Tony Dolphin of the Institute for Public Policy Research said: “We should be alarmed that growth is being driven by exactly the same mix of factors that contributed to the depth of the last recession.”
Those on this side of the debate also point the finger at the Government’s Help to Buy scheme claiming that it is encouraging a fresh housing boom without leading to an extra supply of homes and increasing house prices. Figures from the Office for National Statistics in November showed that prices were 5.4 per cent higher across the UK in November compared with November 2012 but are increasing by more than twice that in London which is given economists a cause for concern.
In retaliation those who are firmly supporting the recovery believe that a housing bubble in London should not be of concern, Mark Carney, Governor of the Bank of England, said: “We are now seeing house prices begin to recover, so it is a more generalised phenomenon… Much of what’s driven in London, of course, is not mortgage-driven but is cash-driven.”
For me and for H+H it is very interesting to hear what people outside of the UK think about the UK’s recovery. H+H is a Danish owned company and I recently had the opportunity to attend a reception at the Danish embassy during which the delegates were given an overview of the outlook for the economy and political development. When the Danish economy is in recovery it typically begins with export growth followed by business investment and it is only after this that the country sees growth in consumer spending. It was pointed out that this is the opposite of what has been happening in the UK.
The view of the Danish embassy is that the UK’s economic recovery has been instigated primarily by increased confidence in the stability of the Eurozone region and UK financial institutions beginning to lend again. This has led to the recovery being driven by internal private consumption rather than exports or business investment. The presenters were of the opinion that the UK recovery is unsustainable unless there is an increase in the level of goods being exported and UK businesses start investing the cash they have been holding on to throughout the downturn. As a country we have a handful of export success stories such as Jaguar Land Rover exporting cars to the Far East however, the Danish embassy commented that the UK is still losing market share in global export markets.
When speaking in Hong Kong, Chancellor Osborne acknowledged the fact that the recovery is relying on consumer spending as opposed to business development by saying: “We cannot rely on consumers alone for our economic growth, as we did in previous decades. And we cannot put all our chips on the on the success of the City of London, as my predecessors did. Britain is not investing enough. Britain is not exporting enough.”
The Financial Times’ chief economics commentator, Martin Wolf, in his recent article entitled ‘hair of the dog risks a bigger hangover for Britain’ was fairly damning of the consumer credit led recovery the country is experiencing. He said: “Now, in the UK, people are celebrating the restarting of the very process that ended in this huge disaster.” He concluded by saying that export-led growth is one way out of getting caught up in the vicious cycle of consumer credit but acknowledges that this simply “shifts the credit growth abroad.” His preferred option would be the much more radical monetary financing of government deficits. Rather ominously he finishes the article with the line “remember that credit addiction is dangerous.”
I personally find myself agreeing with those who believe that this is not the best type of recovery for securing the future stability of the British economy. It would be much better for the long term if the recovery was led by export and investment as opposed to one driven by consumer credit. However, it is much better to have the latter than no recovery at all.
Increased mortgage borrowing by consumers last year created a 23 per cent increase in housing starts in England which resulted in a similar growth in demand for Celcon Blocks and other building material. I believe the country will continue to benefit from the growth brought about by the recovery at least until the end of 2015 but it is less clear whether it will be sustained in 2016 and beyond.
Hopefully we have enough time for the current consumer led recovery to turn into an investment recovery and consequently one driven by export before another ‘credit crunch’ darkens the country’s doorstep.