Britain's GDP up, but problems remain
Britain鈥檚 GDP expanded by 0.2 percent in the first quarter of 2010, according to the Office of National Statistics. The manufacturing sector grew by 0.7 percent. Naturally any growth is to be welcomed, and the hope has to be that this is a sign of confidence returning and the wheels of commerce starting to spin.
However, I don鈥檛 think we should get ahead of ourselves. Nor should we believe 鈥� as the government will no doubt be insisting in the run up to the election 鈥� that everything is hunky-dory and that tough decisions can be put off. Growing or not, there are still some serious problems in the UK economy.
First, there鈥檚 debt. According to McKinsey the UK has the second highest level of combined public and private debt in the industrialized world, with its 469 percent debt to GDP ratio only just below Japan鈥檚. Government debt, as we all know, is getting worse, as public spending spirals out of control and the state continues to expand. Household finances aren鈥檛 much better: the savings ratio has fallen below 5 percent again, which is really no surprise when real interest rates (base rates minus inflation) stand at around -3 percent. This is not the basis for a real, sustainable recovery.
Then there is inflation: recent figures show CPI at 3.4 percent, RPI at 4.4 percent, and RPIX at 4.8 percent. How much longer can the Bank of England keep interest rates so low without inflation getting out of hand? Of course, if the Bank raises rates, that would have knock-on effects 鈥� not least on mortgage lending and, by extension, house prices, which are still unrealistically high by historical standards. And a further drop in house prices (while ultimately necessary) would clearly cause problems for the banks. RBS in particular is still in pretty dire straits, and has no less than 拢282bn of 鈥榯oxic assets鈥� in the government鈥檚 Asset Protection Scheme. Neither the financial sector or the taxpayer is out of the woods yet.
Unemployment is also a worry. Yes, recent figures showed that dole queues had shortened, but as MoneyWeek鈥檚 David Stevenson pointed out at the time: 鈥淭he number of Brits who are either without a job, or who've given up looking for one, has soared to 28% of the UK workforce. That's a staggering 10.6m people. The total of those who are classified as "economically inactive" has now hit a record high of 8.2m.鈥� In other words, claimant counts are only part of the story. And with public sector job losses virtually inevitable, the worst may be yet to come.
So 鈥� on the one hand we鈥檝e got debt, inflation, unemployment and persistent concerns about the housing market and the financial sector, and on the other we鈥檝e got some fairly anaemic GDP growth. That will be Gordon Brown鈥檚 legacy, and the cross his successor will have to bear.
P.S. You鈥檒l notice a number of links to MoneyWeek鈥檚 website in this blog. For sound economic and financial commentary, I can鈥檛 recommend them enough.
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