A slow but steady recovery? No, the UK economy is going backwards

Photo credit:   tuc.org.uk

February 14, 2013 // By: James Meadway

Mervyn King is talking up the prospects for the UK economy over the next few years. King is, of course, the same man who as governor of the Bank of England talked those prospects up during the years of the phony boom – seemingly missing the debt bubble that kept it afloat.

He’s been at least more cautious since then, warning of future financial crashes. But he’s very likely to be proved wrong on this latest forecast. He points to the growth of manufacturing and services sectors over the last year as proof the economy’s underlying health. Stagnation of the whole economy over the last year was, he says, driven by a sharp shrinking of the construction industry. The rest of the economy appeared healthier.

But look just a little closer and that rosy glow starts to turn pallid. It’s true that both manufacturing and services output expanded over the last year. The important question for future prospects, however, is how that growth occurred. There are, in the end, two ways to generate growth: you either push more inputs into the system, or you make those inputs work harder. In developing countries, the former is most important. China’s economic growth over the last three decades has depended critically on its ability to draw immense numbers out of agriculture and into more modern industry. This is extensive growth. 

For large, developed economies like the UK, however, it is intensive growth that matters. They must make a their economic inputs, one way or another, work more productively – squeezing more production out of each input supplied. Productivity must increase to drive growth.

The UK, over the last year, has achieved precisely the opposite trick. Latest figures from National Statistics show that productivity both manufacturing and services industries fell over the last year. Services output per hour worked is down 0.2 per cent on a year ago. Manufacturing output per hour is down 5.1 per cent. The situation in services is worse than this suggests: while manufacturing productivity has risen since the crash (falling only over the last year), services productivity has slumped and remains below its 2008 peak.

The economy is going backwards. Firms have compensated for this decline by pushing hard at real wages and salaries, attempting to reduce their costs. This has not been successful. Cuts in real earnings have not been sharp enough to compensate for falling productivity. The result is that the labour cost per unit of output, the unit labour cost, has continued to rise: up 4 per cent for the whole economy for the last year. The implication is that employers will be looking to cut wages and salaries still further; alternatively, that unemployment will rise far above its current levels. And of course, with real incomes falling, households will continue to reign in their spending - reinforcing the slump.

This slide in productivity is unprecedented, at least since the Second World War. It suggests far deeper causes to the slump than King appears to think. It means that ending the recession cannot be achieved through ending austerity alone. There are clear and rising barriers to the blind pursuit of growth. Deeper changes will be required if we are to see a return to anything like prosperity for most: writing off debts, brining finance under public control, a green industrial strategy that reduced dependency on imports, and redistribution.

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