On Friday, the Office for National Statistics published its latest estimate of GDP for the 2nd Quarter of 2013. The previous quarter-on-quarter ‘growth’ estimate (in volume terms) was raised from 0.6% to 0.7% (and 1.5% year-on-year). This has sparked a veritable bubble in reports of a great British economic recovery.
However, GDP is just 2.2% higher today than in Q2 of 2010 (when the Coalition Government came to office), which means that GDP per head of population (UK population is increasing at about 0.8% per year) is completely flat, following the big drop in 2008/9.
Just before the 2010 election, the then Shadow Chancellor, George Osborne, gave the Mais lecture in which he set out his economic approach. He said:
“We have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports.”
Amongst the “eight benchmarks” against which to judge a future Conservative government over the next Parliament, he included:
"We will increase saving, business investment and exports as a share of GDP"
On the GDP figures, the FT and Daily Telegraph quoted an anonymous Treasury spokesman as saying:
“This data confirms that the British economy is moving from rescue to recovery, supported by balanced growth across the economy.”
But a closer look shows that so far, UK’s growth is far from “balanced”. Compared to 2010, when the government came to office, exports have indeed risen (though a wide trade gap remains), but capital investment has fallen back severely, overall industrial production has fallen, manufacturing has stagnated and construction collapsed, while some service areas have surged ahead.
The most worrying aspect of all is capital investment. Far from taking off again, it has continued to slide. The ONS statistics for real-terms investment (GFCF) show that total capital investment in the first 6 months of 2013 was the lowest half-year since the first half of 1998 – 15 long years ago. Worse still, in the first half of 2013, business investment - George Osborne's benchmark - fell to its lowest level since the ONS dataset began in 1997.
It is one-third lower than the highest half year in 2007, and 22% below the average for the whole period!
Here are the charts showing total investment (1998 to 2013), and business investment (1997 to 2013), using ONS data
NB the chart for business investment is taken from the NSA (non seasonally adjusted) dataset from ONS, since this demonstrates more clearly the picture over the 1st half of this year, absolutely and compared to recent years, than the seasonally adjusted data. If one takes the seasonally adjusted dataset, the performance in the 1st half of 2013 still remains among the worst on record – 1997 as adjusted comes out lower, as does the 2nd half of 2009 (the deepest part of the slump). Also lower is H2 of 2005, though this appears to be a statistical quirk as the 1st half figure is by far the biggest in the whole record, and 2005 was the second highest year as a whole.
The figures for investment in dwellings are scarcely any better, and the government has - for ideological not economic reasons - also cut back on government capital investment despite the collapse in private investment.
An "economic recovery" based on the worst figures for investment on record is not sustainable. What we are facing is a good old-fashioned pre-election bubble based on rising house prices and consumer debt. George Osborne, it seems, is following the lead set by his predecessor Anthony Barber (in Edward Heath's government) who stoked a crazy bubble-recovery 40 years ago, rather than following his own commitment to create "a new model of economic growth."
This article was amended by the author on 27th August to clarify the use of SA and NSA data - see in particular the passage in italics above