It was generally expected that the
(PBR) was going to be boring and the Chancellor did not disappoint. It was
his tenth, and he probably hopes his last, such statement which, not
surprisingly, proved to be a bit of a non-event. Brown saves the specifics on
tax changes until the March Budget and interest rates are the preserve of the
Monetary Policy Committee, so he was never going to break new ground.
The PBR did, however, offer Brown the chance to remind everyone of how well
the economy had performed during his nine-year tenure at the Treasury, a chance
he accepted with alacrity. He delivered the usual litany of statistics on
growth, jobs and inflation at breakneck speed, displaying typical mastery and
selectivity of the key numbers. Although 1992 (the UK’s exit from the ERM) is a
more appropriate starting point than 1997 (New Labour’s first election victory)
for the UK’s recovery from long-term decline, the Chancellor’s contribution has
been substantial and his record impressive.
A second justification of the PBR is the insight it gives into how the
authorities see the economy shaping up in 2007. It has to be said that Brown has
a pretty good forecasting record. Last year, when most independent forecasters
were predicting another year of subdued activity after the dip in 2005, the UK
performed better even than the usually optimistic Chancellor was expecting. GDP
is thought to have risen by an above-trend 2.75%.
So, when Brown says that this year GDP growth will not only climb to 3% but
be better balanced, his view has to be the starting point for any discussion of
the short-term outlook, particularly as it dovetails in several key respects
with the MPC’s expectations. It is now generally accepted that the personal
sector, the key driver of growth for several years, is under financial pressure,
leaving a gap the Chancellor believes will be filled by investment and net
exports. Reconfiguring activity in this way will also offer a more secure base
for growth in the medium term.
The pain in the personal sector is now emerging. With a £1 trillion debt
overhang, a rising tax burden, but only slow-growing incomes, the rise in
housing repossessions and the numbers in arrears with mortgages have been on the
cards for a while. Even more emphatic is the dramatic surge in insolvencies
which, after nine months of 2006, were 15% higher than in the whole of 2005.
Recent survey evidence shows consumer confidence ebbing, which probably
contributed to growing worries among retailers about high street spending in
2007. Conditions in the labour market, moreover, offer little encouragement to
the hard-pressed consumer sector. Job creation is falling short of the growing
supply of labour and one of the key measures of unemployment has climbed to
5.5%, the highest since 2000.
None of this need be bad news for the economy, provided there is something to
offset slower household spending growth. Investment is a prime candidate. But,
since business investment accounts for only 9.5% of GDP, compared with
two-thirds for private consumption, capital expenditure has to grow by 7% to
compensate for every 1% fall in household spending.
Unexpectedly, it managed this in 2006. In Q3, investment rose by 3.1% in real
(inflation adjusted) terms, the seventh successive quarterly increase and a jump
of 7% in 12 months. It is, however, too soon to claim a sustained investment
rebound is underway, and on the scale necessary. In current values, the amount
of spending remains at a low level and firms are currently able to take
advantage of weaker prices to upgrade their capital stock.
Trade is another candidate to fill the gap, but interpreting export and
import data is bedevilled by
fraud . The authorities valued this at £11.2bn (out of total UK trade of
£493bn) in 2005. In the first nine months of 2006, MITC fraud was estimated to
have doubled. But, taking the numbers as published at face value, exports do
seem to have picked up after declining in 2002 and 2003. Even though exports
rose by a robust 9.3% in 2005, however, imports were up by 7.4%, and converting
this into cash values meant the balance of payments deficit deteriorated.
Evidence of a marked improvement in the UK’s trade overseas remains elusive
and 2007 could well present a more difficult overseas trading climate. The
dollar has weakened and the key US market is slowing, which could choke off an
important source of export sales. And, even though sterling is likely to weaken
against the euro, slower growth may dampen export prospects in euroland.
So, at the start of 2007, the prospect of 3% growth this year looks
optimistic. Most analysts agree that consumer price inflation (the CPI) should
ease back within the 2% target in the first half of the year, which would create
room for bank rate cuts if growth falls short of expectations. This will do
little to help the economy in 2007, but it will make life a little easier in