This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
Spring is in the air for the UK economy. That is the message the Government wants to get over and, in the past few days, there has been quite a bit of evidence supporting that optimistic view.
We have had first quarter GDP figures showing growth of 0.6 per cent, equivalent to 2.4 per cent annual rate. Real incomes are growing again, up 2 per cent in January to March. The Governor of the Bank of England, Andrew Bailey, has told Sky News that the path of interest rates is downwards. The stock market has been booming, with the FTSE100 index of large London-quoted companies up more than 9 per cent this year and hitting a new all-time high in trading on Wednesday morning.
And while we won’t get the next set of inflation figures until 22 May, the markets expect the consumer price index to be close to, or maybe even below, the 2 per cent target. If it is, there is a decent chance of that first cut in interest rates coming through at the next monetary policy committee meeting in June.
It certainly seems to be a remarkable shift from the gloomy prospect for the economy earlier in the year. The latest GDP estimates mean that the UK, instead of staging the second-slowest recovery among the G7 countries since the pandemic struck, suggest it was actually the third-fastest, with only the US and Canada ahead of it.
Change of mood
But whenever there is a change of mood like this you have to ask whether it is real. After all, the statistics are almost always revised and, in any case, if people don’t feel any difference, maybe not much has changed.
Start with those GDP numbers. Yes, they signal the end of recession, but it is quite possible that the recession itself will be revised away when more data comes in. So there clearly was decent growth in the first quarter, but it is easy to have a great leap forward if you start from far back enough. Maybe we were not so far back at the end of December, and so the growth this quarter will be revised down a bit.
What about real incomes? The job market seems still to be quite strong, but overall pay has been pushed up by the rise in the national living wage, and what seems to have happened is that the rise in the pay of people at the bottom of the pay scale has also helped push up those who are higher.
Cheaper imports
In one sense that’s great. After the battering nearly every working person has experienced it is a relief that they should be able to claw back some of the lost ground. But unless it is matched by higher productivity, higher pay feeds through to inflation.
The thing that would help boost living standards most of all would be for inflation not only to come down but to stay down. Here, the short-term outlook is excellent, but the longer-term one – largely because of higher pay – is more clouded.
The good CPI figures we will get later this month will be helped by cheaper imports, falling energy prices and so on. The worry is inflation will be fine throughout the summer, but then start to climb back up later in the year. That is what seems to be happening in the US. Inflation there fell faster than in Europe or the UK, but now seems to be stuck. It was 3.5 per cent in March and 3.4 per cent in April. But in January it was 3.1 per cent.
No longer a basket case
As for the stock market, there has been a clear shift of mood. The UK is not yet a favoured place to invest by world standards, but it is no longer regarded as a basket case.
London-quoted shares seem cheap when compared with those in New York, and the recognition of that has made foreign investors to start buying. It is impossible to explain why these shifts of investment fashion happen, how real they are, and how far they may run. If anyone could, they would be billionaires.
In any case, while the London market has risen decently, the New York one has gone up even more. The S&P500 index is up 11 per cent this year. So see this as catch-up, not a vote of support for this Government, or indeed for the UK economy as a whole. Indeed, since more than fourth-fifths of the earnings of those companies in the FTSE100 index come from abroad, either from exports or from overseas subsidiaries, the increase in share prices is really about brighter prospects for global growth.
As always, there are a host of questions ahead. Will the fall in inflation be sustained? Can the housing market cope if interest rates come down slower than currently expected? What can be done to boost the long-term growth rate? What will happen to taxes and public services, given pressure on Government finances and the huge National Debt?
But it would be churlish not to acknowledge that the outlook now looks materially brighter than it did even a few weeks ago. And after a glum winter that’s a bit of a relief.
Need to know
So are unemployment benefits being used as a “lifestyle choice”, as Jeremy Hunt and Mel Stride would have us believe?
The Chancellor and Pensions Minister have written a joint op-ed in The Times, arguing that the country is better off than people believe, that many who could be working are not doing so and that, with 900,000 vacancies, there are plenty of opportunities for them to get a job. Fair or not?
It’s difficult. We know, and indeed the ministers acknowledged, that there has been a surge in mental illness following the pandemic. This is a global phenomenon, and the World Health Organisation estimates that there has been a 25 per cent increase in anxiety and depression worldwide, with young people and women worst hit.
This is real and it is deeply troubling, and one of the huge challenges everywhere will be how to tackle it. At least part of the increase in long-term sickness, now 2.8 million people in the UK, a rise of 800,000 since Covid-19 struck, will be directly related to the pandemic.
There are other problems too. There are certainly serious shortages of labour in the economy. You can see that in those unfilled vacancy figures, and one-third of businesses report difficulties in hiring.
But there are several unconnected forces at work.
UK in a Changing Europe, a think-tank, reports that we have a lot of baby boomers reaching, or getting close to, retirement age. It seems many decided to retire a bit earlier than they might otherwise have done. Another may be health issues, aside from the longer-term effects of Covid-19, with obesity high by European (although not US) standards. There are also specific issues post-Brexit, for example in the hospitality industry, where many Europeans came to work in bars and restaurants, and it has been hard to replace them with local staff.
I suspect also that the geographical imbalances of the UK make matters worse. Demand for labour is mainly in London and the south east, and it is hard for people to move there because of the cost of accommodation. There is a skills issue. Among the most in-demand jobs are programmers and software developers, cyber security analysts and so on, and many older workers who have been displaced have quite different skills. Think of the way our high street banks have shut their branches. That means thousands of bank staff will no longer be working there. Lloyds alone cut 1,600 jobs earlier this year.
The other issue is self-employment. That is the big component that has declined, and here it is not clear quite why this should be so. It may be partly because of changes in tax treatment, with companies pressured to bring onto the payroll people who previously were classified as self-employed. But it can’t just be that. Maybe many self-employed people found that if they cut their costs they could get along without working.
Actually, despite everything, the UK is middle of the pack in terms of labour force participation rates, higher than the US, France and Italy although lower than Canada, Germany and Japan. So this is not an overall disaster. But we do seem to have found the recovery post-Covid particularly troubling and, as yet, I don’t think as a country we really have the answers.
I am afraid, too, that the Government doesn’t have the answers either.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.