The Office for National Statistics has issued the welcome news that UK GDP rose 0.8% from July to September this year. This is the fastest rate of increase in the past three years and is the third consecutive quarter of growth.
But before we heave a sigh of relief and conclude that the UK is on the mend for the long term, we should look at what this growth is actually based on. We have to remember that GDP is still about 2.5% below its pre-crisis peak. So we’re still producing and consuming less as a nation than we did five years ago.
There is also a big question about how balanced and sustainable this growth is. Long-term growth can only be sustained if it is underpinned by investment and export growth. While today’s figures appear to indicate recovery, there is little evidence that the economy is being rebalanced towards these areas.
When the figures are broken down by sector, they show that there was a 2.3% growth in construction - reflecting a buoyant housing market - compared with a much smaller, 0.5% increase in production, which includes manufacturing, showing that the supply side of the economy remains weak and the GDP figures are largely driven by increases in household demand.
The most obvious conclusion to be drawn from the headline GDP figure, therefore, is that growth is again being driven by household demand for goods and services - consumption, underpinned by an increasingly buoyant housing market and easier access to credit. This sounds some of the same alarm bells that were last heard just before the global financial crisis.
The government’s Help to Buy and Funding for Lending schemes are both aimed at kick-starting the economy by helping first time buyers get on the property ladder and making it easier for businesses to access finance but after the initial benefit, they could lead to difficulties. Help to Buy for example can only be further inflating house prices as demand for housing goes up and increases in housing supply remain limited, especially in the short run.
There is therefore a real risk that this GDP growth will rapidly lead to inflation, especially if worker productivity (the amount produced per worker) does not improve. On the other hand, if productivity does improve this will jeopardise the creation of more jobs. Again, long-term growth underpinned by investment and exports would be the only way to guarantee a sustainable reduction in unemployment as we create jobs by expanding the productive capacity of the economy and selling our output abroad.
The headline GDP figures for the UK as a whole are also somewhat misleading if we look at how growth is spread around the country. Figures produced at Warwick Business School show that there is considerable regional disparity in economic recovery. Just as we as can be seen with house prices, London and the South East are recovering more rapidly than the struggling North East and Yorkshire, for example, with growth in output in the East and West Midlands somewhere in between.
So while our third quarter of growth is good news in some respects, we would be wise to think about the long-term implications of our reliance on consumption, our neglect of the regions as participants in recovery and the high-profile government schemes that offer short-term demand stimulus rather than long-term supply side growth.