Growth Is Growth: Uk Economy Needs A Turbo-Charge

Looking at the UK economy it is probably fair to say that we live in an age of narrow margins. Yesterday, GDP figures from the Office for National Statistics revealed quarter-on-quarter growth of 0.4%. This was 0.1% above predictions and enough to take at least some pressure off Philip Hammond’s Budget next month.

Whilst a drop of 0.1% in growth would have been viewed as disastrous by many, an improvement by the same may just give the Bank of England enough confidence to raise interest rates next week for the first time since July 2007. Again, the margins are narrow. If there is a rate rise we’re most likely looking at a 0.25 increase – merely brining rates into line with the previous historic low of 0.5% which stood for over seven years until rates were halved last August.

0.4% growth is clearly sluggish, but it is a pick up on the past two-quarters, but 0.1% offers little on which to make confident predictions on the future growth trajectory of the UK economy. There are also two significant factors that will be giving some, including the Chancellor, the odd sleepless night.

Firstly, productivity remains an Achilles heel for the UK economy. Productivity has more or less flat-lined since the financial crisis and is pushing down real-term wage growth and, in turn, living standards. Yesterday’s growth figure showed that productivity was perhaps not as bad as was thought, but it’s still not good enough.

Commentators have raised valid questions on whether long-standing productivity measures are picking up growth in the digital economy. Transactions made via Airbnb, or a new FinTech disruptor, are arguably harder to monitor than output from a car factory for example. There is a strong case behind this argument and this is something that economists, policy makers and industry leaders will need to work out.

Accountants sometimes say ‘if it can’t be measured, it can’t be managed’ and this mantra applies to the evolving digital economy. We need to effectively measure productivity in the non-tangible outputs of the digital world so we can better understand the real performance of our economy.

The second challenge arising from the 0.4% GDP figure is the way in which the economy has grown. As has been the story for the past year or so it’s consumer spending that is driving growth, not new investment or trade. This is deeply concerning as consumer behaviour is hard to predict and a myriad of factors can increase or decrease consumer spending. Needless to say, consumer spending alone does not lay a solid foundation for sustained growth.

This also raises questions over a rate rise. Savers may rejoice after a decade of rate cuts, but there’s a risk that once a rise plays through to mortgage rates household spending could be squeezed further and the wind taken out of consumer confidence. Linked with a rate rise, levels of unsecured household debt could be a liability for the health of the economy, but how much of a liability is somewhat of an unknown.

We can’t rely on consumer spending to prop up the economy indefinitely. The real challenge is productivity. Increased productivity will start to lift other aspects of the economy, including investment and trade. Digital and tech industries have the ability to turbo charge economies (think California with an economy larger than France).

The Chancellor may not be as flamboyant as his predecessor when it comes to pulling rabbits out of the hat. But if Mr Hammond is looking for the wow factor in his Budget speech he would do well to focus on the levers of productivity, not least skills and both digital and physical infrastructure. This will drive innovation. Leading by example, the Chancellor needs to look beyond R&D tax credits and must dare to be innovative in his efforts to drive innovation.