The last quarter of the year will be a testing time for the government. With its honeymoon period well and truly over and the complete package of the public sector spending cuts subject to detailed media scrutiny, questions will once again be raised about the sustainability of economic recovery. This probably seems strange coming after the UK economy recorded its third successive quarter of positive growth, and at the fastest quarterly rate (1.2 percent in Q2) for nine years.
But, as somebody once said, statistics are like a bikini. What they reveal is seductive, but what they conceal is vital.
A breakdown of the latest GDP figures shows that, in industrial terms, construction grew by a massive 9.5 percent in just three months and on the spending side, six quarters of destocking finally gave way to restocking. Near double-digit quarterly growth (an annual rate of more than 40 percent) is unsustainable in any industry and particularly while asking whether spending growth will be strong enough to sustain demand when stocks are back to “normal”.
It is the shape of growth as much as the headline number that is important. In the pre-recession period, overall growth was buoyant but it was disproportionately dependent on consumers who spent and borrowed and a government that spent and borrowed. The other bits of the economy, investment and trade, underperformed and the unbalanced GDP profile was always likely to end in tears.
Commentators and policymakers have therefore been talking about a rebalancing, with trade and investment assuming a larger role. This is making a virtue of necessity, given the government’s financial pressures and the difficulties in the personal sector (the debt overhang, slow growth of earnings, higher prices of many essential items, higher taxes and so on). In this context, a more competitive currency and global growth are key to recovery in the UK. So, since the recovery has now lasted half as long as the recession, what progress has been made to rebalance?
There is only some modest comfort for the chancellor ahead of his spending cuts announcement in the latest set of national accounts. The most positive news was on investment, which rose by 1.4 percent in the three months to June, while Q2 this year was 3.7 percent higher than last. In real terms, however, investment is still lower than in 2008.
Disappointingly, the contribution from net trade (the difference between exports and imports) was negative for the fourth consecutive quarter. Weaker sterling has not provided the export bounce expected, perhaps because the UK’s key market, the European Union, has been sluggish or perhaps because companies have used sterling’s fall to rebuild margins.
Worrying from HM Treasury’s point of view was the continued growth of government spending, the target of chancellor George Osborne’s attention on 20 October. In the period covered by the election campaign and the first two months of the new government, spending rose by one percent after adjusting for inflation. Had spending been held at the Q1 level, GDP growth would have slipped under one percent.
These figures have ensured that the chancellor’s announcement will be examined rigorously for clues about the sustainability of recovery. Consumer spending growth has been positive but constrained, but with earnings growth still slow, above-target inflation and tax increases in the pipeline, it is unreasonable to expect more in 2011. The evidence that the private sector is now ready to fill the gap left by a public sector in retreat is mixed at best.
Getting the public finances in shape, however, was always going to be a tightrope walk without an obvious safety net other than interest rates staying historically low. As much as anything, it will be a test of nerve and it has to be hoped that Mr Osborne does not lose his balance.
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