The UK is definitely recovering but we simply don't know if it will last - Hamish McRae - Business Comment - The Independent

The UK is definitely recovering but we simply don't know if it will last

Economic View: It is not only boring snoring to go around saying there is no recovery. It is plain wrong

Two questions. Is the UK recovery real? And is it sustainable? It has become pretty clear that the answer to the first is yes, though you need to acknowledge the uneven nature of economic performance between the different regions. But the answer to the second is more nuanced. If you focus on the demand side, we have a recovery led by consumption. If you look at the supply side it is one led largely by services. Both are fuelled by very easy money and that at some stage will have to be reversed, but for the time being you have to be very pessimistic not to admit that there is quite a lot of growth around.

There are two sorts of economic data. There is the macro-economic stuff, which obviously includes GDP and employment, and also the purchasing managers' indices (PMIs), which give the best forward-looking indicator for what is likely to happen in the next few months. This is all strongly positive. You can see in the left-hard graph what has happened to GDP, together with a growth indicator developed by the capital-markets team of Royal Bank of Canada, looking at these PMIs. That suggests growth in the third quarter, the one that has just ended, of 1.2 per cent or nearly 5 per cent expressed at an annual rate.

The other sort is the hard data – hard numbers of what has actually happened, things such as car sales and so on. These are also positive. Indeed, September car sales at 403,136 units were the highest for over five years, up by more than 12 per cent on the previous year. Another bit of hard data that is worth looking at is tax revenue. There are some distortions but one encouraging number here is that in the first five months of this financial year total tax revenues were up 8.4 per cent on the previous year. In August VAT revenues were running 4.4 per cent up, which is good news because VAT covers something like 40 per cent of the economy. If that 40 per cent has been doing all right the chances are that the other 60 per cent will have been doing OK too.

I find this pretty conclusive. It is not only boring snoring to go around saying there is no recovery. It is plain wrong.

The more interesting issue is about sustainability. The argument runs something like this: it is of course better to have a recovery than not have one, but in an ideal world growth would be sustained by a mixture of exports and higher incomes at home. We don't really have that.

Part of the problem is weakness in our main markets. The balance of payments dipped further into the red earlier this year. Physical exports to the eurozone, which, unfortunately, is still our largest market, were poor, and while service exports remain strong they are not yet big enough to cover the gap. We don't have to run a current-account surplus, but we are attracting foreign investment from overseas. However, the deficit ought not to be more than, say, 2 per cent of GDP, and it pushed up to 4 per cent.

Barring some further disaster in the eurozone, prospects are slightly brighter. The latest export data is a little better. The eurozone taken as a whole seems to be nudging back to growth. And the artificial depression of the pound earlier this year, when it was talked down by the previous Governor of the Bank of England, has reversed itself. This is helpful because while you need a competitive exchange rate, an excessively depressed one pushes up your import costs and cuts export revenues – neither of which we need.

So, slightly better export prospects; what about domestic demand?

There are two big puzzles. The first is how people manage to increase consumption – buy more cars for example – when incomes remain depressed. The obvious explanation, that people are running down savings, does not really work because savings are not bad. The savings figures are difficult to interpret but it is clear people are still paying off mortgages faster than they need to, rather than borrowing more against the value of their homes.

The best explanation is to say there are several factors at work, of which the most important is rising employment. We as individuals are not seeing much of an increase in our income, maybe the reverse. But there are more of us in work and therefore the total pool of money available to buy stuff is rising. Add in slightly easier access to credit, money spent by foreigners here, spending funded by wealth rather than income, money from the payment protection insurance settlements by the banks, and increased consumption is not so surprising. Sustainable? Probably yes, but expect any build-up to be gradual.

The other puzzle is what on earth is happening to productivity. Have a look at the right-hand graph. For the past 40 years productivity has risen steadily in good times and bad. Then suddenly in 2008 it stopped rising and started to fall back. So a trend that seemed utterly solid has completely broken down. There are all sorts of possible explanations of which my favourite is that we are finding it almost impossible to measure output in the service industries, which is probably higher now than we think. But whatever the explanation, this is crucial for the durability of the expansion.

It is very simple. If we can expand output rapidly to meet demand then this growth phase will be much more durable than if we start running into bottlenecks in the next year or two. The answer to that is we simply don't know – and we need to be humble about the limits of our knowledge.

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
peopleThe report and photo dedicated to the actress’s decolletage has, unsurprisingly, provoked anger
Property
Home body: Badger stays safe indoors
property
PROMOTED VIDEO
News
The programme sees four specialists creating what they believe are three perfect couples, based on scientific matchmaking. The couples will not meet until they walk down the aisle together
tvUK wedding show jilted
Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
You've been framed: Henri Matisse's colourful cut-outs at Tate Modern
artWhat makes a smash-hit art show
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Sport
Mikel Arteta pictured during Borussia Dortmund vs Arsenal
champions league
Voices
Yes supporters gather outside the Usher Hall, which is hosting a Night for Scotland in Edinburgh
voicesBen Judah: Is there a third option for England and Scotland that keeps everyone happy?
Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Arts and Entertainment
Robin Thicke and Pharell Williams in the video of the song, which has been accused of justifying rape
music...and he had 'almost no part' in writing it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Payroll & Accounts Assistant

£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Senior BA - Insurance **URGENT**

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week