GDP growth is built on pillars of sand

In response to today’s announcement that GDP grew 0.8 per cent between June and September building on the previous quarter’s 0.7 per cent increase, David Cameron said the economy had “turned the corner” and George Osborne that the country was “on the path to prosperity”.

But behind the headlines the latest ONS figures are less encouraging, with Government policies exacerbating the failure to come to grips with the UK’s profound economic challenges.

Admittedly, any good news is welcome given the economy’s dismal performance since 2008. Nearly all facets of output, income and expenditure have grown both over the quarter and year-on-year.

Recovery is being led by services, which grew by 1.8 per cent over the year and account for three quarters of the increase in GDP. Now back to pre-recession levels in real terms, this includes strong growth in all service sectors

Growth also extends across all the production sectors but is thinner. Collectively these grew by 0.5 per cent since June but shrunk by 0.3 per cent over the year. Manufacturing is up by 0.9 per cent over the quarter but just 0.1 per cent over the year. And construction grew 1.9 per cent since June and 5 per cent since last year (after hitting the bottom in 2012).  These sectors, however, all remain 10-15 per cent below pre-recession levels.

All this is coming after what Ed Balls called “damaging years of flat-lining” and government policies unambiguously making matters worse (as official statistics make clear). Having shrunk by 7.2 per cent in the interim, GDP is still 2.5 per cent lower than it was in 2008. While confidence is returning, recovery is so far unspectacular. As yet it is merely a still to be sustained resumption of earlier rates of growth but with little to show for the intervening impairment and sacrifice.

The truth is that the recovery is unevenly shared. With growth heavily concentrated in London and the South East, many regions have yet to recover at all. And despite sales and operating income reflecting weak demand, company profits have surged off the back of reduced labour costs, cheap money and generous tax cuts for large companies. Top earners and the wealthy have seen their incomes and worth grow strongly.

Meanwhile the overwhelming majority are caught between falling incomes and rising costs.  Real incomes and median pay have fallen 10 per cent on average since 2008. With pay for those at the top continuing to grow rapidly, the decline in incomes for the majority is yet greater still, with the lower the income, the greater the  fall.

Superficially positive employment figures mask declining proportionate employment, growing hidden unemployment (currently 4 million plus), a jump in under-employment and declining quality of work in terms of pay, skills and conditions.

But above all it’s the wrong type of growth, reinforcing rather than tackling the economy’s problems. Expansion is being driven by flooding the banks and economy with cheap money, inflating the property market and consumption fuelled by personal borrowing (which is increasing again). The little growth in ‘productive’ activity there is comes increasingly from greater short-term exploitation of markets, workers or assets and/or reliance on rentier activities (the explosion in pay-day lending and gambling obvious examples).

Meanwhile the UK’s productivity, economic capabilities, rates of business development and innovation slip ever further behind, accelerating the erosion of one time strengths and competitiveness. Much of the UK’s former manufacturing and mercantile activities have already been lost; and we are now losing mid-and higher level technical and service activities.

Despite a 20+ per cent depreciation of Sterling and a world economy 15 per cent bigger than it was in 2008, exports have grown by barely 3.5 per cent in five years. While now showing some marginal improvement, this is far short of reversing the on-going deterioration in the trade balance.

The economy’s most critical weakness is under-investment. Britain had already spent decades investing significantly less than other developed economies. This then fell off a cliff after 2008 and has remained abysmal since. While investment increased by 4 per cent over the year, the UK’s per capita investment remains among the very lowest in the world (on a par with Guatemala and Mali). Similarly, while new capital formation has recovered to where it was a year ago, it remains 25 per cent down on already inadequate pre-recession levels.