Predicting the UK’s growth trajectory has become a notoriously tricky game. When the coalition came to power, the OBR was expecting to see the economy start recovering during 2010, and growth of 2.8% in 2012. Instead, GDP barely grew at all in that year. Easier to predict however, is how the different parties would hang their own narrative around whatever figures emerged today. The Conservatives have said it vindicates the coalition’s economic plan, while Labour have stressed the poor performance of the UK economy in the longer term context. And the Lib Dems have been focusing on the hard road ahead. But this rhetoric leaves it hard to assess whether the figures are good news or not. So what’s actually going on?
Today brings some good news
The economy grew by 0.6% in the last quarter. After the bumpy ride of 2012, this is the first time we have had two quarters of successive growth since 2011. And recent figures show that although it is still above 2008 levels, unemployment is continuing to fall. So the Government is right that the headline numbers are starting to look positive.
But it’s been a slow recovery
More than four years on, GDP is still 3.3% below the peak at the start of 2008. All three previous downturns in the 1970s, 1980s and 1990s saw much faster recoveries than this. This downturn is different. Opinion is divided on how much permanent damage there has been to the economy and therefore how long it is likely to take to return to pre-crisis levels of GDP, and what we can expect from GDP growth in the medium term. So sceptics are right to be worried.
We haven’t seen a swing to manufacturing
Back in 2010, the Government wanted to see a rebalancing of the economy away from financial services and towards other sectors such as manufacturing. In the 2011 Budget, George Osborne talked of a Britain “carried aloft by the march of the makers”. The switch to manufacturing hasn’t happened so far. Of the 0.6% growth this quarter, the majority – 0.48 percentage points – came from growth in services, which includes sectors such as financial services and retail. Services has now almost recovered to its pre-recession peak, whilst production is still 13.9% below its 2007-08 level. This sector accounts for almost 78% of GDP.
And we haven’t seen export-led growth either
Back in 2010, the Government also wanted to stimulate exports as a path to growth. The ONS release of the GDP figures is a first estimate and doesn’t break down the numbers down by expenditure – we’ll have to wait for that. But data released in June on GDP up to the first quarter of this year shows exports falling and domestic household spending rising in 2012 Q4 and 2013 Q1.
So overall, the news is mixed. The Government will be pleased with the headline growth figures. But we’re still a long way away from the vision set out when it came into office three years ago, when it aimed to “lay the foundations for the new economy”. Whatever the GDP figures are by the election in 2015, the question of how to create the conditions for long-term sustainable growth is unlikely to have gone away.