The UK economy is pretty much stagnating: next week’s figures are likely to show that real gross domestic product was barely higher in October than it was in February. A big reason for this is that it is firing on only two cylinders, and might continue to do so.
The breakdown of real spending growth in the year to the third quarter tells us this. In this time, real GDP grew by 0.6 per cent year on year. Consumer and government spending, however, accounted for more than all of this – 0.6 and 0.4 percentage points, respectively. Exports and capital spending actually subtracted slightly from growth.
Could this change? There are reasons for optimism, for believing that the export and investment cylinders will begin to fire next year.
Official figures from the eurozone next week could show that industrial production is finally beginning to stabilise after falling since 2017. And growth in the M1 measure of the money stock in the region has recently accelerated, which has traditionally been a lead indicator of stronger economic growth. A recovery in the eurozone should boost our exports.
Sadly, though, this might not do much to boost overall growth. Because supply chains are now globalised, higher exports require increased imports of materials and parts. That offsets some (although not all) of the benefits of higher overseas demand.
Another hope is that it is possible that next year will see an end at last to uncertainty about Brexit. If so, projects that companies had put on ice because of this uncertainty will get the go-ahead, causing a spurt in capital spending.
I’m not sure, though, how large or long-lived this spurt will be. There are countless other reasons why investment has stagnated in recent years, such as: the difficulty intangibles-intensive companies have in raising finance; a fear that future technical change will render today’s investments obsolete; still-significant spare capacity; and the scarring effect on animal spirits of the great recession. Even if Brexit uncertainty is resolved, these obstacles to investment will remain.
This doesn’t, however, mean we should be pessimistic about the economy next year. Whoever wins the election is likely to increase public spending next year – and futures markets don’t expect this stimulus to be offset by higher interest rates. (Crowding out is so 1980s.) This might help to support employment and wages and hence consumer spending – although the flat housing market and need to rebuild depleted savings might partly mitigate this stimulus.
All this, however, leaves us where we started – with growth being powered largely by the consumer and the government. Even if the economy does pick up, this should not distract us from the fact that it suffers a lot of long-lasting problems.
