This week, news filtered through that the economy expanded by 0.8% in the second quarter of 2014. Britain’s economic slump, that has dominated the political scene since the last election, is over. GDP is at its highest level since 2008. The IMF’s forecast estimated that the UK economy will grow at a rate faster than all other G7 countries. Judging by these figures, and the reactions of the Chancellor and Danny Alexander, Britain can relax again. The international financial crisis of 2008, that has ruled our political conversation for the past six years, is over. But how far is this case? Has Britain really recovered to a point where we can satisfyingly say that we are, to quote Alexander, in the “fast lane”?
Firstly, the rebalancing of the economy, hopefully driven by manufacturing and industry, has failed. The service sector has grown by 3% above the 2008 figure, but manufacturing is down 7%, with construction falling even further at 11%. It’s thought that almost 80% of GDP growth in the last three years has been down to a growth in the service industry. This means that the economy is not rebalanced. Traditional industries, that have dominated the British economy since the ‘30s, are continuing their perpetual decline. It’s even possible to argue that although our economy is the fastest growing, it is growing further behind the rest of the world. China, for years heralded as the world's fastest growing economy, has perfected a model of balance between banking, construction, manufacturing and service. This means that our businesses and export expectations are far below other countries with rising GDP and growth figures.
Coupled with this is a weakness in GDP per capita. Yes, GDP is up on 2008’s figures, but our population has grown. Thus, GDP per capita is still 4% lower that it was in 2008, if growth rates predicted for the second quarter of 2014 are met. It’s increasingly likely that GDP per capita will not grow back to 2008 levels for many years. If GDP per capita does not rise then living standards will fall, something that will only serve to add to an already entrenched problem.
Wages are lower than 2008. In fact, the average wage is now 9% lower than six years ago, when inflation is taken into account. Wage growth, needed to strengthen any economy, particularly in the manufacturing and construction industries, is only growing at 0.3%. Moreover, output per worker is also down on 2008. Couple this with an increase in the ratio of household debt and we have a weak market. This ratio, of around 140% of GDP, depends on the assumption that people will again begin to borrow heavily. If people panic, as people do over personal finance, they would stop spending. It is this spending that is driving growth. We would enter another recession. Higher debt could also be detrimental to people’s finances when the Bank of England raises interest rates, probably later this year.
That is the economics of the ‘recovery’, but what is the real picture? There is severe underemployment and a considerable increase in the amount of young people on zero-hour contracts. Whilst these flexible contracts may work for some people, they are no long-term solution to people’s finances and offer no security for young people to safely make the next step on the economic ladder. How can someone buy a house or car or start a family if they are not guaranteed any working hours? In Britain, the world’s sixth richest country, 913,138 people used 432 (Trussell) Food banks in 2013-2014. That’s up from 61,486 in 2010-2011, and it’s thought that 80% of claimants receive food vouchers because of benefit delays. A true recovery, a true economic development serves everyone positively, not just the very top, but the people at the very bottom. We are not seeing this in our London-centric economic model. This ‘recovery’ has been founded on cuts to public spending and therefore job cuts. The lowest earners, young people and benefit claimants of all kinds of have been hit hardest, and that is no recovery. That is papering over our cracked economy with twisted figures. This year, 330,205 children received a food parcel from a Trussell Group food bank. If there truly is a recovery, and Britain truly is in the ‘fast lane’ then food banks should not be a reality. Living standards should be higher, wages increased. This is not a Britain recovered, this is a Britain broken.
By Rhys Cahalane