The assumption among policymakers is that, given enough time, Britain’s flat-lining economy will somehow sputter back to life. The truth however, is that as the slump continues, several key areas of the economy continue to worsen, and sooner or later these are going to matter.
In this excellent article Dr Tim Morgan, Global Head of Research at Tullett Prebon, examines some of the fundamental problems that lurk beneath the headlines about a triple-dip recession and the coalitions latest attempt to kick start the wealth effect.
Dr Morgan starts by exposing Britain’s rapidly deteriorating current account, “which last year plunged to a deficit of £58bn, from £20bn in 2011. Current account deficits of this magnitude matter, because they show that the UK is not paying its way in the world. Far from expecting an improvement from 2012’s pretty shocking 3.7% of GDP, the IMF expects the deficit to worsen to 4.4% (say £70bn) this year, and to remain at well over 4.0% in 2014. In a nutshell, this means that our overseas earnings (and our investment income) are not covering the cost of imports, which in turn means that foreign creditors are lending us the wherewithal to buy our essential food and energy. Pretty obviously, that’s not a sustainable place to be”.
Dr Morgan also addresses the fact that households continue to be squeezed by wages that have failed to keep pace with inflation. In fact, over the past 12 months average weekly wages have not grown at all.
“Bad though this is when set against official inflation of 2.8%, it is even worse when compared with our latest estimate of the rate at which the cost of essentials is increasing (3.4%). Spare a thought, too, for workers in the private sector, whose nominal earnings have actually declined (by 0.5%) over the last year. Worst hit of all are employees in the notoriously badly-paid retail and hospitality sectors, whose February 2013 average weekly wage (of £303) was down by 2.1% year-on-year”.
It is clear that policymakers are not willing to take the steps that are necessary to reinvigorate the British economy. As Dr Morgan notes, we are now clutching at straws, “Perhaps we can reinvigorate the property market by helping first-time buyers to purchase over-priced houses? Maybe we can inflate our way back to prosperity if the new governor will let us lighten-up on our targets? Fortunately for ministers, their official political opponents are about the only people more economically-clueless than themselves”.
In conclusion he asks, “I know this is going to sound hopelessly idealistic, but might it be a better idea to ditch the gimmicks and focus on the facts? Perhaps the government could tell the public quite how unsustainable our predicament really is, and base a recovery plan on realistic assessment and structural reform?”
Wealth is created by saving and investment, and policymakers need to recognise that the wealth creation mechanism in Britain is severely impaired. What’s needed is a radical package of measures that unleash the productive private sector and make it much easier for people to save, invest, and create competitive businesses.
Read the full article here.
Dr Tim Morgan | Global Head of Research at Tullett Prebon.