Source: Investors chronicle
Economists are increasingly worried that the UK’s economic expansion is becoming dangerously unbalanced. Surveys of purchasing managers this week showed that growth in manufacturing activity slowed to a 14-month low while construction and services are still growing strongly. The upturn, says Markit’s Chris Williamson “is ever more dependent on the domestically-oriented services and construction sectors”.
Martin Beck at the EY Item Club says this means that the economy is becoming too dependent upon consumption and housing while exports and investment lag behind. Other figures this week from the Bank of England corroborate these concerns. They show that while consumer borrowing accelerated slightly in July, bank lending to non-financial companies, despite a small rise in July, is still falling year on year. Official figures next week are likely to highlight the problem. They are expected to show that manufacturing output was lower in July than in the spring, and that the trade deficit in goods has widened this year and has exceeded £9bn for the third successive month. Worryingly, the deficit isn’t simply because of falling exports to the euro area; exports to non-EU countries have also fallen in the past 12 months, pointing to a general problem of poor export competitiveness.
Some economists hope that an eventual reduction in tensions between Ukraine and Russia will raise business confidence in the euro area and so boost UK exports, investment and manufacturing. However, history shows that large external deficits – and the UK’s trade deficit is now over 6 per cent of GDP – often lead to slower growth. In the past 40 years, there has been a statistically significant correlation (of 0.3) between current account deficits over three-year periods and real GDP growth in the following three years. Big deficits in the late 1980s and mid 2000s, for example, led to recessions. Borrowing from overseas often proves unsustainable.
What’s more, says Mr Williamson, the fact that UK growth is so dependent upon construction and consumer demand means there is a “risk that higher interest rates will derail the upturn”. This would happen if highly-indebted consumers are forced to cut their spending as higher rates squeeze their disposable incomes. Many economists increasingly suspect that the Bank of England won’t want to take this risk soon. They are betting that the first rise in rates might not come until next February.