HOW COME WE’RE SUDDENLY DOING SO WELL (and yet so badly)?
Scot-Buzz editor Bill Jamieson says if you flick through the business headlines in recent weeks, it’s hard to believe this is the same country that was mired in gloom for more than four years.
Our prospects have improved sharply. From employment to business start-ups, services to house sales, manufacturing to business confidence, pundits now reckon the economy grew by 0.8 per cent in the third quarter and is now heading for three per cent growth next year – and it may be even higher.
In the past two days we had two further indications of improvement…
The Bank of Scotland’s PMI survey shows Scotland’s private sector economy continued to expand rapidly in September, with survey record-equalling rates of growth in both output and new business. The pace of job creation was also unchanged since August, remaining solid and well above the long-run average.
And latest ONS figures show the UK construction sector output grew four per cent in September compared with a year ago. In a clear sign the recovery is gathering strength, the construction sector has now shown annual output growth for three consecutive months - something which had not happened since May 2011
Not a single major economic forecaster predicted a recovery of such breadth and magnitude – not one. Is it really as good as it looks? And if so, how come our prospects have improved so suddenly?
Well, it’s good. But not that good...
There IS a recovery underway. But we need to see more of an upturn in entrepreneurial activity and in the small business sector. And the recovery has not seen the critical rebalancing towards investment and exports that we need to see.
Without this we could be heading for a reversal of the recent good fortune.
We have a rising deficit on manufactures and a rising deficit on fuels as North Sea oil and gas reserves are run down. And we are still too reliant on financial services: the combined surplus on financial services and insurance was a £46 billion (three per cent of GDP) in 2012.
After the pre-crisis credit boom, we need to import less and export more and, as part of this, shift away from services and towards manufacturing. This is well known but since 2007, activity has become more unbalanced.
Without re-balancing, we could be heading towards another consumer boom and bust; Bank of England policy may perversely be driving us towards one.
Its governor Mark Carney has set the course with his policy of forward guidance, indicating no rise in ultra-low interest rates until unemployment drops below seven per cent.
This was meant to reassure markets. But this guidance has now come into doubt.
And there is growing concern that the government’s ‘Help to Buy’ mortgage guarantee scheme is adding a further boost to a housing market that is already recovering. Since the Help to Buy schemes were launched in the Budget the number of first time buyers in April-July surged 38 per cent YoY and probably will continue to rise rapidly as the second stage of HTB takes effect this month. The number of FTBs was 220,000 in the 12 months ended March, and would not be a surprise if the number doubles over the next year or two.
Says Simon Wells, chief UK economist at HSBC, “Low interest rates and rising house prices are the opposite of the UK’s longer-term needs. Forward guidance arrived just as the economy seemed to turn a corner. It may help by increasing confidence but the MPC is offering no guarantees about interest rates.
“The practical benefit is undermined by huge uncertainty surrounding the unemployment outlook. Unless borrowers understand this, they could be in for a nasty shock.
“And with policies to boost the housing market alongside the BoE’s intention to keep interest rates low for several more years, the UK risks a return to bad habits. Deferring an inevitable adjustment down the road may make it more painful when it finally occurs”.
Michael Saunders, UK economist at Citigroup, sounds a similar warning: “The rebound is led by demand rather than supply-side improvements, and is not rebalancing the economy towards investment and exports. As the output gap closes, it will become increasingly important over time for the authorities to emphasise measures that will rebalance the economy and revive potential growth.”
He cites four reasons why the economy has recovered so suddenly: the stimulus from loose monetary conditions, magnified by Funding for Lending and the Help to Buy scheme; diminishing headwinds from the EMU crisis and household deleveraging; substantial pent-up demand in housing and car sales and the fading of temporary factors that held back he recovery last year.
