Jeremy Peat: ‘The public sector desperately needs more funds’Heat Profit
Maybe it should not be seen as unexpected – given the ever-larger looming spectre of Brexit – but UK economic data appear to be all over the place in recent weeks. It is increasingly difficult to interpret what has been going on in recent months, let along to predict progress in the months ahead. But perhaps I can pick out a few interesting features.
The most important element of the tale is that overall GDP growth remains weak, relative to past UK experience and performance in other major economies, developed and developing. Growth in 2017 is estimated at 1.7%, as compared to trend growth of close to 2.5%. Growth in the EU was estimated at about 0.6% per quarter (say 2.5% year on year) at the back end of 2017, but appears to be accelerating away, according to the best forward indicators, to the giddy heights of 0.9% per quarter. Unlike the UK, business confidence is sky high in Europe.
The same forward indicators suggest that US GDP growth is at its highest level for nearly 3 years, as is corporate optimism – unsurprisingly given the strong position on new orders. The key question in the US is when interest rates will be increased again, given strong inflationary pressures, and by how much the Federal Reserve will be minded to raise rates over 2018 as a whole.
For a change the UK’s major problem does not appear to be either weak business Investment or dawdling productivity growth. The former is doing OK, increasing by just over 2% last year, while in the last two quarters of 2017 productivity growth shot upwards to 0.9% and 0.8% in Q3 and Q4 respectively. I fear these may be short term trends and also that the data for Scotland (when available) will be less encouraging on both Investment and productivity. Nevertheless, it makes a pleasant change to have some positive news to report, at least for the UK as a whole.
The relatively low UK GDP growth is related to consumption rather than Investment. Spending by UK households rose by only 1.8% last year, weaker than any year since 2012. This is one reason for the continuing series of bad news stories emerging from the retail sector. Weak growth in demand, alongside the accelerating growth in on-line shopping, implies problems for all but the most fleet-of-foot in the High Street.
Low consumption growth reflects a combination of higher retail price inflation than we have seen for many moons and seriously subdued growth in earnings. Real disposable incomes are flat or even falling and that trend may continue for a while yet. The outlook for retail sales remains disappointing. The expectation of one or more hike in UK interest rates in 2018 does not help.
Fortunately for the domestic economy as a whole unemployment remains remarkably low and employment – and indeed job vacancies– remarkably high. But might the recent data on productivity suggest that the trend here could change? One theory is that productivity remained weak while those many employers sighting uncertainties all over the place preferred to meet any increase in demand via higher employment (cheap and often ‘disposable’) rather than Investment. The latter required too much of a medium or even long-term view. If business Investment is now accelerating and productivity shifting upwards does this mean a parallel downward shift in the demand for labour? Watch this space.
Another fascinating but confusing development has been the markedly lower than expected Government budget deficit. This is all rather ironic given that it has happened once the puritanical George Osborne had passed over command of the finances to a less stiff-collared Philip Hammond. More importantly it is difficult to judge why this shift has occurred and whether it will be sustained. We may have a better idea very soon after the Office for Budget Responsibility provides its economic and financial forecast for the Chancellor’s Spring Statement.
All of these difficulties and uncertainties are, of course, compounded many times by the total lack of clarity on the Brexit front. Also the relatively limited UK deceleration in the past 18 months has been due to the impact on consumption of weaker sterling and higher inflation. As and when Brexit does happen it looks inevitable that there will be major negative economic repercussions. We have not seen the real effects as yet.
In a logical world the Chancellor would put together the mounting problems in the NHS, police, prisons, local authorities and other parts of the public sector with the existing consumer weakness and the adverse Brexit impact to come, and take immediate advantage of the improved position on the public finances to splash the cash – or at least that bit of it that comes as an unexpected bonus. Some loosening of fiscal policy could sit comfortably alongside a tightening of monetary policy.
The public sector desperately needs more funds. The domestic economy needs a boost. We have funds over and above expectations. Can the Chancellor see that two plus two might in this case make four? It must be reiterated that the adverse impact of anything like a hard Brexit, and that is what must be expected, would be dire. Any degree of ‘splashing the cash’ would not avoid that impact; but it might provide a welcome degree of mitigation.
Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute.