Oh, Mister Osborne

Never known to withhold praise when due, I have exercised restraint over my doubts about the recovery of the UK economy and would even go so far as to give George Osborne a pat on the back as growth hits three per cent.

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However, analysts and forecasters continue to revolve around the same disturbing theme, summed up most recently by the National Institute of Economic and Social Research (NIESR).

 

According to the think-tank, the economy has recovered to its pre-crisis size but GDP per capita is still more than 4.5 per cent below its pre-recession level, with the figure representing "a deviation unprecedented in recent economic history". In fact, NIESR describes UK productivity performance as "abysmal"!

Poor productivity has been puzzling most economic forecasters over the last couple of years but they tend to agree that it means large uncertainties remain.

So, when can we expect living standards to rise? NEISR doesn't expect the UK to hit its pre-crisis productivity levels until 2017 and without growth in productivity, the pay packets of the majority of the population are not going to increase, in real terms.

It's possible that industries across the country are more aware of the problem than the Chancellor, as business confidence in the UK has fallen for the first time in two years, according to figures from accountancy body, ICAEW, and Grant Thornton.

 

The ICAEW's Director of Business, Stephen Ibbotson, suggests the decline "demonstrates that businesses are becoming more realistic about the future".

Having surveyed 1,000 members working in senior roles in business, it transpires that looking forward, respondents are expecting turnover and profit growth to level off and business investment to slow. Grant Thornton's CEO, Scott Barnes, comments: "The biggest problem long term is the fact that domestic sales, rather than exports, remain the key driver of growth".

So, we are reliant on domestic sales, which makes holding on to economic growth difficult if wages aren't likely to rise but interest rates are. And further alarm bells sound regarding the PPI bonanza - undoubtedly a boost to GDP growth. Incredibly, our leading banks have recently collectively set aside a further £1.7 billion for mis-sold PPI but eventually cash from this source will dry up. (Although maybe not just yet - I have recently noticed adverts urging consumers to claim for having been mis-sold investment bonds!).

 

But there will be an end point, and what then? Worst case scenario - stagflation - high inflation and slowing economic growth. And how do you get out of that? Nobody knows, but stagflation does at least illustrate the fact that an economy is like any ecosystem and does not necessarily respond well to the vote-winning strategies of politicians.

 

We all know that the Chancellor has surpassed himself - GDP up and the budget deficit down. But the UK's winning performance on GDP means a strong sterling exchange rate as investors crowd in, making us less competitive in export markets.

 

Oh! Mr Osborne, what a conundrum and what to do? Lacking an Oxford degree, I hesitate to suggest this, but how about a greater focus on the living wage and making sure wages rise in line with inflation. So that the quid pro quo of years of belt tightening translates into "quids" in the pockets of your favourite sector of the electorate, the hard-working family? Hmmm .....?