At last – a sliver of good economic news for the government. The 1% growth in GDP reported for the third quarter not only wiped out the falls in the previous nine months but was also the fastest quarterly growth recorded for five years. But the Chancellor was right not to get carried away. There were, as usual, some one-off factors between July and September which for once were positive influences and even after this jump, national output is some 3.5% below the pre-recession-peak in 2008. Yet the figure was encouraging and has prompted the inevitable questions of whether this was a blip or the start of a sustainable upward trend in GDP and if it is, what will drive growth going forward?
Much of the recent debate on the economy seems to have missed the real point. The issue is less about recession, which ended in Q3 2009, than why the recovery has been so fragile, erratic and faltering. No recovery since 1945 has been a straight line upwards – there are always bumps in the road. This time, however, there have been rather more bumps than usual and given the unprecedented stimulus to activity from the authorities in terms of monetary (interest rates and QE) and fiscal (government spending) easing since 2008, a more robust upturn might have been expected.
The main reason goes back to the nature of the recession. It was debt-induced, and recoveries from financial turmoil take a lot longer than from the usual stop-go cycles that peppered the post-1945 period. The personal sector, which accounts for almost two thirds of the UK’s £1.5 trillion GDP, went on a spending and borrowing spree in the years up to 2008, underpinned by the housing market. The government, which accounts for just under another quarter of spending and was already running a deficit before the recession, then stepped up its spending at a time when its tax receipts were under pressure. Borrowing filled the gap.
These debt-related problems have not yet been unwound. Low interest rates have certainly made them more manageable and there would have been many more casualties had the Bank of England listened to the inflation hawks last year and tightened monetary policy when the Consumer Price Index was rising at 5%. But the debt is still there.
At one stage, household debt stood at £1.5 trillion, or the equivalent of 160% of annual earnings. This meant everyone on average owed about 19 months pay, which made the UK consumer the most indebted in the western world. This has eased back to a little over 140% of incomes but is still above the comfort zone. For its part, government borrowing soared once the personal sector slowed and in one fiscal year, the government borrowed £161 billion. This was just the latest in a series of deficits that pre-dated the recession which added to cumulative debt. Today, national debt stands at £1,065 billion, or 68% of GDP, and this excludes the ‘temporary’ cost of supporting some banks. In 2002, the UK’s national debt to GDP ratio stood at just 29%.
With households and consumers still boxed in by the debt overhang, the traditional drivers of spending in the UK are effectively becalmed. If the 1% increase in GDP in Q3 is the start of a slow upward move back to ‘business as usual’, the economy needs to find a new source of growth, and attention is now being focused on the corporate sector. Unlike the other parts of the economy, it has cash and will need to spend, but it must spark growth rather than respond to it.
Despite the recession, and a number of high-profile casualties, the corporate sector has weathered the worst of the recession pretty well. According to government statistics, the net rate of return of non-financial companies dipped sharply after Q3 2008. But from a low of 10.9% in Q4 2009, it has picked up and has been above 12% for almost two years. From another data series, the gross operating surplus of these companies rose 12.5% between 2009 and 2011, and first six months of this year were better than the first half of 2011.