In the balance
George Osborne's 'march of the makers' plan to rebalance the economy still has some way to go.
Five years ago, when George Osborne was almost three months away from becoming Chancellor of the Exchequer, he gave a lecture at City University in London called ‘A New Economic Model’. Central to that model was an economy that would no longer be reliant on consumer spending and rising household debt, but would instead be ‘rebalanced’. ‘We will increase savings, business investment and exports as a share of GDP,’ he pledged. It is a theme that Osborne warmed to once in office. There would, he said, be a ‘march of the makers’, with recovery built on strongly rising manufacturing output and less dependency on Britain’s successful financial services industry.
And why did he want a revival of manufacturing? To help cure the other Achilles’ heel: a trade deficit that has grown alarmingly in the period since Britain ceased to be the workshop of the world. An economy that makes more things, invests and saves more, and achieves exportled growth is healthier than one that doesn’t.
So the Paris-based Organisation for Economic Co-operation and Development, in its 2013 report on the UK economy, applauded a strategy aimed at ‘the necessary rebalancing of the economy away from debt-financed private consumption and public investment towards exports and investment’. The CBI in its 2011 report A vision for rebalancing the economy noted the importance to the economy of compensating for a government cutting spending and ‘constrained’ consumer spending, with stronger business investment and trade.
So how has it gone? Rebalancing can be measured in a number of ways. The easiest is to look at the relative performance of manufacturing, construction and services. Between the second quarter of 2010 – when the coalition took office – and the fourth quarter of 2014, overall GDP rose by 7.8%.1 Was there a ‘march of the makers’, or a building boom? Neither – the recovery has been driven by services, with its output up by 10.8% over the period.2
Manufacturing, meanwhile, was producing only 3.1% more at the end of 2014 compared with the spring of 2010.2 Construction has fared even worse. Its output at the end of 2014 was a wafer-thin 0.9% up on the second quarter of 2010.2 However, financial and business services have seen a 15.2% rise.2 If we look how the three big sectors are doing in comparison with their pre-crisis position, the rebalancing story is no better.
Manufacturing is producing 4.4% less than it did in early 2008, just before the economy dipped into recession, while construction output is down 7.9%.2 Output of the service sector, by contrast, is up by 8%.2 In fact, as the Office for National Statistics reported recently, the overall annual trade deficit in 2014, £34.8 billion, was the biggest since 2010, when it was £37.1 billion.2 The goods deficit, also known as the ‘visible trade deficit’, was a massive £119.9 billion, more than £20 billion up on 2010. It fell in only one year, 2011, before resuming its relentless rise. The broadest measure of Britain’s external position, the current account deficit, reached a record 6% of GDP during 2014.2
We know why. Exporters had the bonus of a big depreciation in the pound during the worst of the crisis. The subsequent strengthening of sterling, partly as a result of the eurozone’s problems, has removed some of that competitive advantage. Export performance has been by no means terrible, but it has been a long way from creating export-led growth. The picture is not all bad, however. Some accuse Britain of having had a debt-driven, consumer-led recovery, but it is hard to make that case. Consumer spending was the same proportion of GDP in 2014, 61%-62% depending on how it is measured, as it was in 2010.3
Household debt has barely increased in cash terms since before the crisis and has fallen in relation to income. A recent McKinsey report noted that Britain is one of the few countries where this has happened. The growth in consumer spending has occurred mainly because strongly rising employment has put more money into the economy, even when average earnings have been depressed. The households saving ratio – the ratio of household income saved to household net disposable income – currently 7%, is down from almost 11% at the time of the last election, but above precrisis levels. 4
Even so, the fact that on some measures the economy has not become even more unbalanced – though it clearly has on others – is of scant comfort and the ‘march of the makers’ has yet properly to get going. That is a task for the next parliament.
2 http://www.ons.gov.uk/ons/rel/construction/output-in-the-construction-industry/april-2015/stb---output-in-the-construction-industry--april-2015.html, http://www.ons.gov.uk/ons/rel/ios/index-of-services/march-2015/stb-ios-march-2015.html,