I begin my essay for the Modernisers’ Manifesto, published by Bright Blue today, by quoting Sherlock Holmes. “Never trust yourself to general impressions,” the detective tells Watson in Conan Doyle’s A Case of Identity, “but concentrate yourself upon details.” It’s a scrap of advice that translates well to the economy. After all, while we may have had five consecutive quarters of growth, there are still plenty of devils lurking in those details – and if we don’t concentrate ourselves upon them, we risk the sort of complacency that could help them to stick around. So here, briefly, are eight of those devils. One for each tenth of a percentage point of growth achieved in the last quarter, or something:
1. The deficit – down but not out
After the tax hikes and spending cuts, the political calamities and personal misfortunes, what are we left with? A deficit of around £100 billion, that’s what. And it will be another four years, or so, before it’s fully eradicated…
…if it is ever fully eradicated, that is. One of the most important lessons of this Parliament is that plans go awry. What was 2016-17 is now 2018-19. That difference creates fresh uncertainties, with more time for external shocks to buffet the public finances off course.
2. The debt – going up
And here’s another sobering graph, this time of the national debt:
In fact, it’s probably more sobering than the deficit one because this line isn’t on a simple downwards trajectory. You’ll notice that the debt is expected to peak, as a percentage of GDP, in 2015-16. Of course, it comes down after then, but look at the numbers on the left-hand axis: it’s still at 75 per cent, 70 per cent, of the size of our economy. The Institute for Fiscal Studies reckons that it will take until at least the late 2020s (p.20, here) for the debt to return to its pre-crisis level of around 40 per cent.
3. Growing pains
Yesterday’s growth figures showed the economy continuing on its happy march back to… where it was in 2008. The recession took a 7-percentage-point-sized bite out of the nation’s GDP, which has now regrown to the point where only 0.6 of those percentage points remain. Analysts think it’s “very likely” that we’ll recover all that lost output in the current quarter. This is a good thing.
But it’s worth putting this recovery into the sort of context provided by the National Institute of Economic and Social Research. Their graph (click for a larger version) compares the last recession to its forbears. It’s not a flattering comparison:
And the unflattering comparisons don’t end there. The US economy is already over 6 percentage points bigger than its pre-crisis peak. For Germany, it’s about 3 percentage points.
4. The cost of living
While we’re on the subject of growth and pre-crisis peaks, here’s another detail to digest: GDP per capita is still about 5 percentage points lower than it was before the crash. This is, in simple numeric form, what I was getting at in my blog-post about pay a fortnight ago. Wages may finally be catching up with prices, but people aren’t necessarily going to feel much better off. What they certainly will feel is the sting of paying £1.30 for a litre of petrol, up from £1.17 in 2010. And although it’s heartening that food price inflation was at its lowest level for eight years in March, this ought to be set against the fact that it was 12.6 per cent higher than the general level of inflation over the previous six years.
5. An absence of balance
I dwell on the country’s economic imbalances in my Bright Blue essay. They’re something that I’ve written about plenty of times before. It helps, in a way, that there are thousands of figures to illustrate the point. Did you know that London has accounted for over 70 per cent of all private sector jobs growth since 2010? Or that, by yesterday’s figures, the services sector is 2 per cent ahead of its pre-crisis peak, whereas production is still 11.5 per cent down. But this is something that goes far beyond metrics. As politicians boast about overall growth figures, they neglect those parts of the country – such as in Wales – that have been in a slump for decades. This is a tragic waste of potential, both human and economic.
6. The productivity puzzle
Sorry to keep boring you with pre-crisis peaks and post-crisis plummets, but that’s largely the point of this post: not everything has been fixed yet. You know how the country’s output has almost returned to the level it was at before the recession? Well, the output per hour worked – aka, productivity – really hasn’t. According to the Office for National Statistics, it’s still 3 percentage points below its level in 2008.
Why is this? The truth is, no-one knows for certain. That’s why they call it the “productivity puzzle”. It could be that our workforce has suddenly and permanently become less productive. Or it could be – as Mel Stride MP suggested in an article for this site, last week – that the economy is yet to reach a new and happier status quo. Whatever. In the meantime, we’re suffering in comparison to other developed economies, as this useful ONS infographic demonstrates.
7. Bricks and bubbles
You know how it is: house prices rising by almost 10 per cent a year; a UK average of £250,000; a garage in London selling for £550,000. But how bad could it get? The Office for Budget Responsibility included this graph in its latest Economic and Fiscal Outlook…
…which has house price inflation peaking at 9 per cent later this year. Even after that, from 2017 on, they expect it to remain around 4 per cent a year. This may be wonderful for those looking to sell, but less so for those looking to buy – y’know, those people that Help to Buy is meant to, erm, Help.
8. Kicking away the crutches
And, don’t forget, the growth that we’ve witnessed so far has been prodded on by an extraordinary set of conditions: rock-bottom interest rates and £375 billion of easy money. Of course, the Bank of England is waiting until the recovery is firmly, totally entrenched before it hikes base rates – so there’s no need to fear a crash created on Threadneedle Street. But it’s still worth noting that higher interest rates are on their way. This might be good news for savers, but it’s not for the country’s borrowers, of which there are plenty. People’s pocketbooks may come under further stress.
Anyway, that’s your eight. I should say, none of this is meant as unalloyed criticism of George Osborne: some of these problems are too large to overcome in one Parliament, and in most cases he’s made an admirable start. But it is, like I said, meant to protect against complacency. So, in that spirit, please do suggest other items for the list. An unreformed banking sector? The persistence of household debt? The possibility of Ed Balls as Chancellor? The comments section is yours.