GDP growth strong but masks UK plc’s deeper structural problems | Larry Elliott

Britain had the fastest growing economy in the G7 in the first half of the year. The unemployment rate Wage inflation is slowing. Jim Callaghan never spoke of his return to the country during the winter of discontent: the crisis? What crisis?

Key economic indicators released last week did not exactly support the government’s contention that the country had been handed the worst position since 1945. While the quarterly growth is 0.6%, the annual inflation rate is 2.2. % and unemployment is 4.2%.

Jeremy Hunt, the caretaker shadow chancellor, is making sure the government’s argument goes unanswered – which makes political sense for the Conservatives. When George Osborne made similar claims in 2010, Labor was too busy in a leadership contest to refute them, resulting in them being accepted as fact, which they certainly weren’t.

This was not a case of boom-boom Britain. Far from it, actually. Ruth Gregory, UK analyst at Capital Economics, says:

Overall, we doubt the talk that the UK is now experiencing a 'Goldilocks’ situation. But it is clear that there has been a shift in the narrative from weak growth and high inflation to strong growth and weak inflation.

This sums up the position nicely. Things are getting better in the first half of 2024 (from a low base) and there’s no harm in Labor admitting that.

Voters kicked out the Tories not because of the state of the economy but because of their 14-year record. While Rachel Reeves will raise taxes in October’s budget, she will cut some of the concessions, just as Gordon Brown has stuck to the tough spending plans she inherited from Kenneth Clarke in 1997.

But Reeves needs to sort out the right argument. His case is that the Tories have failed to tackle Britain’s chronic productivity, investment and trade deficits and Labor can.

There is plenty of evidence to support that case. Digging a little deeper into last week’s figures, it’s clear that the Tories have handed over an economy where the structural problems are deeper and in some cases more severe than in 2010.

Let’s start with a selection of growth figures where the 0.6% increase in activity in the second quarter was entirely due to a strong performance in the services sector. Both manufacturing and construction were contracted out. Although services account for about 80% of the economy, growth has been uneven.

Britain has a poor record on business investment and – despite Hunt’s generous tax breaks – there is little evidence that firms are responding to a more adverse economic backdrop with higher capital spending. Business investment fell 0.1% in the quarter and 1.1% from a year ago.

What’s more, gross domestic product (GDP) is a poor measure of how a country is doing. Even those who take it seriously as a measure will say that what matters is not GDP but GDP per head, where the UK’s recent record is clearly unimpressive. GDP per capita rose 0.3% in the second quarter of 2024, but was 2% lower than before the start of the pandemic. The fact that people in Britain are poorer than they were in 2020 has been masked by population growth.

The latest labor market figures show that the number of employees on the payroll has risen by more than 250,000 in the past year but the UK’s Production efficiency He continues to be poor. Output per hour worked was 0.1% lower in the second quarter than a year earlier and was 2% higher than before the start of the pandemic. It doesn’t take a genius to draw the correlation between weak investment, weak productivity and weak growth in per capita income.

Breakdown of labor market statistics Region wise Provides evidence of a north-south divide. The employment rate across the UK is 74.5%. However, this proportion is higher than the average in the South of England at 78%, whereas in Wales it is almost 10 points lower to 68.9%. Scotland (73.4%), Northern Ireland (71.6%), North East (69%), West Midlands (72.7%) and North West (73.1%) have lower employment rates than the national average.

Areas of the UK traditionally dependent on manufacturing have lower employment rates than areas that are more service oriented. So it’s no surprise that the latest Trade statistics In the second quarter of 2024, the UK ran a huge deficit of £52.4bn in goods, partially offset by a surplus of £39.1bn in services.

Once again, connecting the dots is enough. As a result of the UK not running a trade surplus in goods since the early 1980s, the share of manufacturing in the economy has been falling steadily for decades. On the contrary, England Second As the only exporter of services to the United States, the firms responsible for those exports—banks, management consultants, architects—are located in the Southeast.

Simply put, the economy goes through a cyclical upswing, based on the fact that wages are rising faster than prices, amid hopes that interest rates will fall further.

That doesn’t mean all of the economy’s problems have been miraculously solved, because it obviously isn’t. There are still structural challenges. Yet Labor is doing itself no favors by exaggerating how bad things are at the moment. Just tell it like it is.