So the UK economy grew 0.8 per cent in the second quarter of 2014, leaving output on this preliminary estimate at just about the previous peak set in Q1 2008, over six years ago. For an economy that produces almost £400bn a quarter in gross domestic product, exceeding the previous peak by £752m is really small beer, as our first chart below the break shows.
This has been the slowest recovery from recession since the 1920s, although be warned, the ONS has form on revising up its estimates. Joe Grice, its chief economist is already hinting at such a move, commenting today that the ONS “may yet modify our view of how slow the UK’s recovery has been”.
This post will examine how the economy has changed over the past six years in charts even though output is now again at the same level.
Although output has recovered, the same cannot be said for many sectors. Manufacturing remains almost 8 per cent below its peak and construction over 10 per cent below. The worst performing sector, by far, is output from the North Sea (officially mining and quarrying, though there is not much left apart from gas and oil). It is down 33 per cent.
…but not all services
If you think all service sectors have done well, think again. Finance is down 14 per cent and transport services are still down 16 per cent. In contrast, ouptut in some service sectors has risen sharply. Remember, sectors such as health rise because output is measured by the volume of patients seen etc, not the money spent.
…don’t believe people who say it is all consumption
We have only Q1 2014 figures to go on so far, but the expenditure breakdown of GDP shows household consumption almost identical in the first quarter to Q1 2008. Investment is still very weak, now over £10bn a quarter lower than six years ago and it is offset by higher government spending on services (again, not cash but quantities) and a better trade position. Yes, exports have done a bit better than imports over the past six years. Not nearly as much better than people hoped given a huge recession, but many people assume the opposite.
…what about contributions to cash GDP?
This is a good question. When money is spent, is that mostly household spending or other components? The following chart again shows the huge drop in investment spending. It is why there is still obvious scope for an investment boom. Here you can see consumption taking a greater proportion of nominal GDP than in the past, but this is really just an offset to the fall in investment. Cuts to government spending on goods and services after 2010 are much more visible in this chart measuring cash spending changes than volumes in the previous chart
…was it a consumer led recovery?
Yes, in many ways. But it also came much earlier than most people think – around the time of the London Olympics. The reason this recovery didn’t show up in the overall GDP figures until later was that for about a year, there were always offsetting elements that prevented the improvement in household consumption showing up in the GDP figures. Remember though that consumption is now still no higher than it was in real terms in 2008.
… but I’m not feeling better off
No, you’re pretty average then. Because population has increased by 2.8m people since 2008, GDP per head is still over 4 per cent below its peak. Households might be spending because there are more of them, not because individually they are spending the same amount in real terms. Britain still has a long way to go before incomes climb back to the peak.
… What about employment
That is the big surprise of the recession and recovery. There is now higher employment in every category – full-time, part-time, self-employment etc – than there was in 2008. It does not mean everyone has a job, but the remarkable employment performance has shared the pain of the recession much more evenly than in the past. The downside is the terrible performance of productivity – which is ultimately needed for rises in prosperity. It has declined since 2008.
…I might have a job, but Im miserable in it
Probably, because real wages have fallen for most people. Wages have continuously risen slower than prices, partly because the average quality of jobs has declined and partly because employees have not been able to negotiate pay increases to defend their previous living standards.
… which means I can’t afford a rise in interest rates
Mortgage borrowers under stress are far from the average family, but it is true that household debts have not fallen much compared with GDP. Households have not felt the need to pay down debts as much as might have been hoped. That is one reason why the Bank of England insists any interest rate rises will be “gradual and limited”.
… but at least my home has risen in value.
Well, in most areas, house prices are rather similar to the levels in 2008 and significantly lower if inflation is taken into account. Note the outliers of London and Northern Ireland. And always spare a thought for people outside the housing market for whom much larger falls in house prices would have been great.
… the London thing in housing is really remarkable
Much more so than in any other indicator, London’s house prices are extraordinary and particularly difficult for those not in the market or wanting to trade up. If ever there was an indicator screaming that more building is required in the capital, this is it.
… what about other assets?
Not much comes close to London housing, but a broad share in the FTSE All share index would have also generated a healthy return over the past six years. It is up 20 per cent on January 2008.