As the weak recovery and threat of triple dip recession continues, it is difficult to find anyone with a good word to say about the UK economy. Britain’s recovery from the deep recession of 2008-09 has not been glorious. GDP is still 4% below its pre-recession peak. Only Italy in the G7 has fared worse.
Since the onset of the crisis in August 2007 average inflation has been nearly 3%, well above the 2% government target and higher than in other rich countries.
Britain’s focus seems to have been on “rebalancing” the economy. Critics cry “We don’t make anything anymore, we need to focus on exports, investment in manufacturing is lagging behind Germany, education needs to be more science-focused and we need kids wanting to be engineers not accountants and lawyers.” Various experts linger on the importance of manufacturing to growth in output and employment.
This export-led manufacturing recovery is now looking a poor bet. The eurozone is still a mess with Italy, Spain and France all struggling badly. The US can’t agree a budget plan and the fast-growing emerging economies seem to have slowed. Even during periods of sterling weakness the budget deficit has grown rather than shrunk.
So is manufacturing really going to get the UK economy out of recession? I suspect the real impetus will come closer to home and from our strengths rather than focusing on our weakness.
According to UNESCO, the UK is the world’s largest exporter of cultural goods. Yes, number one in something for exports! Yet, this is achieved with funding of the arts of only 17p per person per week. No billions in bailouts for this vital area of our economy.
The arts provide over 2m jobs and are mentioned by 80% of tourists as the reason for their visit. In the National Theatre’s 2009-10 Annual Report Nicholas Hytner, the National Theatre’s artistic director, says “it is our creative economy that is genuinely still a world beater, and at its centre is the network of publicly subsidised institutions that are its engine room”. To put some meat on this comment, public sector investment of £1.6bn (now falling due to the cuts) generated a return of £7.7bn last year
Another example, our football. The premier league is playing an important role in bringing tourists to Britain. Visit Britain found nearly 1m football tourists came to the UK, spending, on average £765 per person, well above the spend for the non-football visitor. The Premier league is the most watched league in the world with matches broadcast to 700m fans in over 200 countries.
At a time when more youngsters than ever have a degree and want to benefit from that education rather than do the same jobs for the same pay as their non-university predecessors, maybe, we should be looking at the creative industries to fuel growth. The UK film industry supports over 117,000 jobs, employing more than both the fund management and pharmaceutical manufacturing sectors. 70% of the workforce are graduates and, at an average salary of £32,500, earn more than the national average. As for exports, the UK film industry exports are over £2bn per annum. Exporters of other goods and services also benefit from this and the image of the UK is improved with obvious gains for tourism.
The creative economy is now recognised as the second largest driver of the UK economy worth £61bn per annum and growing, second only to the service sector. This doesn’t only focus on the creative hub of London but is of great benefit to the regions. For example, the designer Wayne Hemingway MBE developed the “Starter for 10” Scheme with Gateshead Council transforming a redundant building into a thriving cluster of creative businesses.
If this is all a bit “not real work” for you, there are also tentative signs that the economy is stirring. Jobs are surprisingly plentiful. Payrolls have increased by more than 1.2m since early 2010. The number in work currently stands at a record 29.7m. Job creation has continued long after the Olympics boost.
In fact, jobs figures seem too good to be true. UK unemployment is still high but at 7.8% and falling compares very favourably to our European partners, with an eye watering 26% in Spain. Sceptics point out the increase in part-time work and self-employment but growth in casual work tends to be an early sign of a recovery. Jobs growth is still impressive even when self employment is excluded.
With this, consumers appear to be waking up. Wages have been sluggish, employment perceived as being flat and people have been scared of losing their jobs, public sector workers in particular, taxes are up and inflation high. Youth unemployment is still very high and many youngsters face an uncertain future but, bluntly, they are not where the potential consumer-led recovery will start.
Now jobs growth means more people are earning. Inflation is at 2.7%, nearly half its peak of 2011. The fiscal squeeze is proving less painful to those in work for householders than they expected. Real disposable income is rising by a respectable 1.7% per annum. Yes, energy bills are rising but with interest rates at ½ % for 4 years now this has meant a sustained period of lower repayments for most of the 7.5 million mortgaged homeowners.
In time, a burst of consumer led growth should spur capital spending by cash rich businesses, that have to date stockpiled cash rather than splashing it on new buildings and machinery that might end up idle. Firms may soon loosen the purse strings particularly now there is a reduced threat of a collapse in the eurozone.
The first shoots are starting to appear, the housing market is starting to move again. Headlines recently claimed house prices “hit five-year high” with the average house price just £2,115 shy of the record set in February 2008. London only, you say, actually the North West and Wales recorded monthly leaps of 5%. It appears clear that the slump in house sales has been due more to an unavailability of credit and a drop in mortgage approvals than an actual lack of willingness for people to dive in and buy.
New car registrations in 2012 rose to a four-year high. Retail sales in particular grew 12.9% on the previous year. Overall, more than 2m new cars were sold in the year.
With triple dip recession still a distinct possibility, bad news abroad coming with depressing regularity and a sticking plaster approach to each crisis suffered by the eurozone, fiscal tightening and the potential loss of our triple AAA credit rating all acting as strong headwinds to recovery, it will be a long time before optimism kicks in and the economy starts to pick up.
However, when it does, will it be due to “rebalancing”? When we reach the other side of the recession will the UK have seen the light and be a world leader in manufacturing, making products in such volume that the UK is seen as a leading exporter of manufactured goods? I very much doubt it. It is more likely that we will still be seen as a leader in niche, highly skilled manufacturing, developing and adopting technology but not in sufficient volume to drag the UK out of its mire.
Don’t get me wrong, we at SW have a number of great manufacturing clients, creating highly desirable products, offering valuable apprenticeships and generating real wealth. But, I always remember the words of a client of mine when discussing the merits of diversifying, “You play to your strengths, if you were backing England v USA at sports, you would put your money on us winning the cricket match not the baseball game.”
No, this will be a consumer-led recovery where people spend on coffee shops, restaurants and going out, attractive to tourists brought in by our creative, film and fashion industries, wanting to buy our British brands and wanting to visit the home of where the Olympics was staged and the head of the monarchy jumps out of a plane to celebrate!
Exports? Yes, they will be key but (whisper it quietly) that will be led by those big, bad bankers, assuming the politicians haven’t killed that golden egg in the interests of winning cheap votes, as the UK retains its place as a major global financial player.
Recovery? Eventually, if we focus on the quirky, idiosyncratic UK, support our world beating industries and spend less time fretting over those that can only slow crawl their way to growth.
Darren Smith, Partner, SW Accountants
Image credits: Andrew Kershaw and Anne-Marie Smith