The Great Stagnation?

05/02/2010

As we stumble out of recession, will the UK's economy ever get back to boomtime growth?

by Adam Forrest

Great Britain crawled out of the recession last week, but the bunting remained unfurled. No fanfare, just an almighty grumble, as politicians and commentators vied to find the most withering remarks about the economy’s slug-like emergence into sunlight. “Never has an end to a recession been so underwhelming,” moaned one international investment banker, from a firm specializing in derivatives and debt markets. His type knows a thing or two about leaving people disappointed.

Most shrugged their shoulders at the announcement of 0.1% expanded GDP – the first sign of growth since late 2007. Outside the bonus-giddy City, few are feeling flush, and it’s difficult to see how the recovery will pick up pace anytime soon. Rather than the traditional ‘U’ shaped recovery (a steady curve back up), economists are now warning about the dreaded ‘W’ – the ‘double dip’ recession that sees things get worse before they get better.

Others are talking about an even more discouraging pattern: an ‘L’ shaped movement in which the economy flatlines, growth-less, for many years to come. Chancellor Alistair Darling conceded there will be “further bumps along the way – we are not out of the woods yet."

Bleak news for Gordon Brown and his government, who were hoping they would be able to paint a more cheery picture of Labour’s economic crisis management in the run up to the general election. If the economy does contract again in the first three months of 2010, the next set of GDP figures - out on April 23, less than two weeks before the expected vote – would surely torpedo any chance of an upset.

Whoever is on power after spring, the big challenge will be creating the conditions for getting back to growth. But where is the next boom coming from? What will provide another big wave of employment? How do we avoid a Great Stagnation?

Labour will continue to argue than Tory public spending cuts will jeopardize the currently fragile recovery. The party is also entitled to point out how unemployment has risen far less than in previous downturns. The figure stands around at a less-than-expected 2.5million. This is at least partly down to increased support for Jobcentre Plus, the Future Jobs Fund, and the guarantee of training, work experience or a job given to 18-24 year-olds after six months out of work.

Nicola Smith, senior policy officer at the TUC, believes have been better prepared and are still better placed to avoid the mass unemployment experienced under the last Tory government. “There’s been a lot of government intervention this time, and we do have a far better welfare-to-work infrastructure than in the early nineties,” she says. “There’s a better set of tools to respond to recession. PT workers have greater protection, and employers are now used to flexible working. The Jobcentre plus networks have been able to react very quickly, particularly for young people.

“We’re seeing large proportions moving into back into work before they hit six months on benefits, which is good because that’s usually when disengagement and demoralization and the risk of long-term unemployment can kick in,” she continues. “It might also be something to do with employers making an effort to keep hold of skilled workers. They have learned to value the importance of the skilled workforce."

Nevertheless, Danny Gabay, the only economist who correctly predicted the tiny 0.1% growth rate, is wary of any optimism. Gabay, a director at City consultancy firm Fathom, believes ‘unit labour costs’ are rising faster than at end time since the mid-seventies, suggesting a national workforce inflated beyond the means of struggling companies (and in the public sector, beyond the public purse). “Labour is very expensive in the UK at the moment,” he says.

“We’ve lost 6% of our economy, but only 1% of jobs. You could see that as a good thing of course, but it suggests we’re carrying excess labour. With tepid recovery likely, there could be an aftershock of unemployment. My fear is that employers spent the storm hunkering down and now that the storm has passed they could be (thinking about) making the hard decisions they put off last year. We could see unemployment rise again in a new wave.”


Many, of course, have taken part-time jobs, short-term contracts, reduced hours or freelance work because they have little choice. The PT workforce stands at a record high of 7.7million. Two-thirds of people made redundant during the recession were paid 25% less when they managed to find another job. It means less money splashed on gym memberships, double lattes and city breaks; while many struggle with the grim reality of just getting by.

Only the deluded would imagine another boom in consumer spending just around the corner. Martin Weale, director at the National Institute of Economic and Social Research, believes diminished disposable incomes mean there is a “significant risk” of a double dip recession. “People have big debts and they can’t afford to spend,” says Weale. “They have chosen the recession to pay off debts and save more sensibly. So a (spending) recovery is likely to be sluggish.”

With interest rates likely to remain rock-bottom low, there is some good news for many homeowners. Yet Graham Turner of EFC Economics expects all the excitement over six straight months of rising property prices to cool off slightly. “The property market has done a lot better than people expected, but the south east is still significantly outperforming the rest of the country,” he cautions. “Increase in mortgage approvals has been limited. We’re seeing some slowing after the initial recovery bounce in property prices last year. I’m afraid the optimism might well dissipate.”

Could it be good old manufacturing – Britain’s once-celebrated ability to build things – help us get back to proper growth? Despite high profile job losses and foreign takeovers, the car scrappage scheme has boosted the sector significantly, with a 2.6 per cent increase in car sales in the last quarter. The government measure ends next month however, so overseas markets may well offer the biggest lift.

Jeegar Kakkad, chief economist at the manufacturing industry body EEF, has high hopes for export-led recovery. “It’s encouraging to see manufacturers doing well relative to the rest of the economy. We’re beginning to benefit from the weaker pound in the export market - it makes UK goods all the more attractive. Now the global economy is beginning to recover, more orders are coming in.“We do really well with machine tools; the rubber industry in the UK still does well,” Kakkad continues.

“Anything connected to oil and gas infrastructure, because of our experience and expertise in the North Sea, we do well at. These might not be the sexy industries, but these are things we’re good at. In the longer term, over the next decade, green energy technology, the nuclear industry – these could be sources of growth and jobs. There are optimistic stories out there.”

Gabay, who advises clients in the City on the big economic trends, accepts the UK’s financial services will play a less dominant role in future. “Something will take its place,” he concedes. “It could be biotechnology, green technology- something we’ve never heard of it. Some of the clever people going into the City could be doing more useful things – they might stop coming up with models for derivative markets and build bridges instead."

However successfully the ship has been steadied, however admirably Britain re-balances its economy, there are still storms raging across the Atlantic that could blow everything off course. “Even if we get everything right - which in the last 12 months the government probably has – we’re still relying on the US,” Turner notes. “We don’t live in an island any more, in economic terms. If America stumbles in 2010, there is a real sense we could be heading for a double dip and we don’t have the policy options we had when we entered the crisis.”