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Smith's economics - Growth falls short

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Magazine Article, Source : The Manufacturer
Published : September 2002

Pride comes before a fall but so far Gordon Brown and Tony Blair, with their insistence on ‘no return to boom and bust’, have escaped the worst verdict of the fates, says David Smith. Bust has been avoided, despite the consumer boom that preceded it

Now, a different problem is emerging, that of slow growth. Already the chancellor’s forecast for this year, of a 2 to 2.5 per cent expansion, looks unattainable. The omens for next year, and the Treasury’s prediction of an acceleration in 2003’s growth rate to between 3 and 3.5 per cent, are not at all good.

Manufacturers know only too well about slow growth, having experienced it, or something rather worse, in recent years. They are also aware of the disparity between industry’s fortunes and those of consumers. In the second quarter of the year household spending rose by 1.2 per cent, twice the 0.6 per cent increase for the economy as a whole. In the mid-1990s, household spending accounted for 61 per cent of Britain’s gross domestic product. Now its share is 69 per cent.

Anybody looking at those figures might conclude that there is something unsustainable about such increases, and they would be right. Although the consumer spending backdrop - high employment levels, low interest rates and low inflation - remains favourable, demand appears to be gradually weakening, both in the high street and the housing market. People are not as confident as they were that the good times can last. High debt levels may finally be starting to bite.

If the growth imp-etus from the cons-umer is fading, exp-orts are not going to take up the slack. America is still grow-ing but more slowly, while Europe is chipping in with ano-ther disappointing performance. By nor-mal standards, the recovery from last year’s sharp global slowdown is weak, particularly given the very low interest rates central banks have maintained.

What we have, plainly, is very strong growth in government spending, Brown’s master plan to make up for what the government describes as years of under-investment. Nobody, looking at the state of Britain’s infrastructure, can deny that some of that investment is needed. The big risk, which has been repeated at regular intervals through our chequered economic history, is that the taps have been turned on at the very time when the economy is least equipped to afford it.

The chancellor’s ambition is to provide quality public services from the fruits of a high-productivity, strongly-growing economy. Productivity growth, however, has been weak since 1997. And now the basic ingredients for setting the economy on a stronger path of sustained growth are fading.

The most prominent among those ingredients is investment, yet the latest figures show a quarterly fall of 4.5 per cent in capital spending in manufacturing, for a record annual fall of 18 per cent. Manufacturing investment, astonishingly, is falling faster than during past recessions. This is very worrying. The whole point about the expansion in public investment (and spending on public services) was that it would go hand in hand with a rise in private sector investment, not replace it.

Why is investment so weak? Partly because confidence has been knocked, and partly as a reac-tion to the over-investment in technology and tele-communications in the 1995-2000 period. Capacity utilisation, particularly in manufacturing, is low.

There is also a sense in which business is knuckling down to quite a long period of subdued growth, of the kind that characterised the first half of the 1990s. The danger is that this becomes a self-fulfilling prophecy.

It need not be so. Given the right conditions and the right signals, business is good at anticipating upturns and bringing forward investment plans. For the time being though, all the big spending is being done on behalf of government. If growth continues to disappoint, that can’t last. Brown and Blair badly need business to share their optimistic vision.

David Smith is economics editor for The Sunday Times