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A recovery built on sand

A recovery built on sand


Figures for GDP out today show the UK economy has grown steadily over the last year or so, up 1.9% on this time last year. Naturally, David Cameron and George Osborne have talked this up to the skies as evidence that their “long term plan” is “working”. On top of latest unemployment numbers, showing more people returning to work, they think they have reasons to celebrate. A victory in next year’s election may just be on the cards.

Unfortunately, this is a “recovery” built on sand. There are three main problems here.

1. This economic growth is doing very little for most of us.

Average real earnings have fallen, year after year, for the last five years: the longest period of sustained decline in living standards since Queen Victoria was on the throne. Until the growth turns into sustained increases in real earnings, GDP is little more than a number.

2. This recovery is down to a rebound in consumer spending.

But if real wages are falling, consumers can only spend more if they eat into their savings – or borrow more. The evidence for both is clear. Household savings are falling at their fastest rate for forty years, and the most recent Bank of England figures show increasing volumes of unsecured lending to households.

3. Productivity is still falling.

In normal times, productivity drives economic growth. Increases in productivity mean firms can pay more, over time, to their workers. What’s happened since the crash is unprecedented: productivity fell (as is usual in a recession), but has not actually recovered. Until it picks up, there is unlikely to be a sustained improvement in earnings for most.

The graph below summarises this. It shows the levels of output, employment, hours worked and output per hour relative to their early 2008 level. We can see that employment and hours worked are now back above their levels in the crash. But output (GDP) remains below. The reason is that output per hour worked – productivity – is well below its 2008 peak.

In other words, we are working longer hours, for less money, less productively than before. The new jobs being created are, very largely, low paid and insecure. To compensate for all this, we are saving less, and borrowing more. Some recovery.

This is not sustainable. Real earnings cannot continue to fall and debt increase indefinitely. Something has to give. Either investment by businesses picks up this year and turns into sustained productivity increases. Or increasing numbers of us will be trapped in the spiral of falling incomes and rising debts.