CPS Head of Economic Research Daniel Mahoney wrote for City A.M., Wednesday 25 November 2015.
"At the Autumn Statement today, George Osborne will have good reason to cheer his economic record. In a number of areas, the UK economy appears to be rebalancing towards a more sustainable course.
GDP growth has remained robust, with output rising at the highest rate in the G7 last year. Unemployment continues to plummet and economic growth appears to be spread across the country – regions such as the West Midlands are growing faster than London, according to data from the Office for National Statistics (ONS). Furthermore, the government is successfully rebalancing the economy away from the public sector, with its share of the economy falling by four percentage points over as many years. The UK’s performance on increasing business investment is also impressive, growing by 5 per cent when comparing the second quarter of 2015 with the second quarter of 2014.
However, there is no room for complacency about the UK’s economic prospects over coming years. A number of risks remain unaddressed – particularly in relation to the UK’s current account deficit, which reached a record high of 5.1 per cent of GDP in 2014. This was primarily a result of a sharp decline in the rate of return on UK investments overseas, which has fallen from 8.1 per cent in 2011 to 5.9 per cent last year. But although this year’s figures suggest that the current account deficit has narrowed, stagnating exports mean that Britain’s yawning trade deficit persists.
In 2012, George Osborne announced a target of the UK exporting £1 trillion of goods and services by 2020, requiring an annual growth rate of 8 per cent. Over the past two years, however, the annual growth in UK exports has reached just 2.7 per cent. The Office for Budget Responsibility (OBR) now projects that UK exports will only reach £630bn by 2020 – a third lower than the government’s target.
Exports in services have shown solid growth this year, but the UK’s goods industries are struggling. It is particularly concerning that ONS data shows output in the UK’s construction and manufacturing industries falling in the third quarter. Indeed, the output of the manufacturing sector remains 6.3 per cent below its pre-crisis peak.
Households, meanwhile, are set to become even more indebted over the coming years. The OBR projects that the household gross debt to income ratio will rise by 26 percentage points over the next six years, taking the ratio above its pre-crisis peak in 2008. The economy does not appear to be rebalancing away from consumer driven-growth towards export-led growth.
Fundamental to this problem is the UK’s low productivity, which remains around 20 percentage points below the average for the rest of the G7. It’s vital that the government uses the Autumn Statement to tackle this, particularly in the sectors that are currently facing difficulties.
This will require liberalising the planning system to promote more house-building, the removal of unilateral burdens on UK manufacturers like the Carbon Price Floor, finally getting shale gas exploration going, and reforming apprenticeships to rapidly improve skills in construction, manufacturing and technology.
The UK’s economy is certainly not out of the woods yet. It’s no time for complacency."