How the UK economy grew

 

              Growth in the first quarter of 2011 was led by government spending, transport,  and financial and business services. These contributed 0.2%, 0.2% and 0.3% respectively to the GDP growth figure.  This was offset by a loss of 0.3% from construction, with 0.1% growth coming from others.  Whilst manufacturing continued some advance, mining and quarrying fell.

                So what does this tell us about the state of the UK economy?  The government can point to the fact that the economy grew 0.5% in the last quarter, and 1.8% over the last year. The opposition point to the absence of growth in  the last six months.

                Many who accept the spin will find it surprising that government made a contribution to the growth in the totals owing to increased spending. For the year as a whole government was up 1.4% after allowing for inflation, or 5.1% in cash terms for total current spending.

                  Over the last year all parts of the economy with the exception of mining and quarrying contributed to the growth.

                  The sharp falls in construction output are not surprising. Outside London there is plenty of empty retail and commercial space. Banks are reluctant to made large advances for new property developments, and are busily trying to work their way out of some of the high cost positions in property they supported in the credit bubble.  Housing volumes are well down, as a result of much less mortgage availability and the requirement for higher deposits. People find current house prices are still high relative to incomes, when banks are more cautious about how big a loan they will advance.

                   Manufacturing has had a good year with reasonable growth in each quarter. However, because manufacturing is a relatively small part of our economy after the big decline of recent years, it has not made a huge contribution to overall growth. It has added 0.1% to each of the last three quarters, and 0.2% in both the first and second quarters of 2010 during the recovery phase from the large recession it experienced in 2009.

                  In order to hit the more taxing forecasts for growth made by the OBR for 2012 onwards the service sector and private consumption are going to have to pick up speed as well as manufacturing continuing its revival. Growth over the last year is a little down on the OBR forecast, which means to hit the 5 year plan the government’s growth strategy needs to speed up growth a  bit more. The government needs to press on with its reform of the banks to ensure reasonable levels of credit for good projects, and needs to set a betetr tax and regulatory framework to make busienss investment more worthwhile.

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16 Comments

  1. norman
    Posted April 28, 2011 at 6:57 am | Permalink

    Read my text: no more taxes.

    However tempting it may be in the next couple of budgets to slip in more Brown-esque hidden tax raises, as has been done by Osborne so far showing it’s not just Dave who’s learned his craft from his predecessor (but one), it should be resisted. We’re not only taxed enough already, we’re overtaxed already but there’s no chance of taxes coming down as a big state is too necessary for us all – apparently.

  2. Javelin
    Posted April 28, 2011 at 7:57 am | Permalink

    I think you’ll find much if not all of the growth in the past year is still a result of Government spending. I have alot of price data available on my desk and freedom to test economic models. Up until very recently I had the data and resources of the worlds largest bank to hand. I take the view that the private sector has not grown one jot – and that 0.8% growth has come from increased Government spending. Sadly Ed Balls is right saying increased Government spending creates growth, but he is a complete nutcase in believing that any increase in Government spending is good for the economy. This facade will end when Greece defaults. Investors will start asking serious questions about the UK fiscal consolidation and in my view, in the short term, will punish the Government for not cutting faster.

    • lifelogic
      Posted April 28, 2011 at 10:03 am | Permalink

      I agree government borrowing and paying people to dig pointless holes will not help the economy just bury the productive sector and Cameron and the Tory party too.

      Rebalance the economy and fire half the state sector now release them to do something useful they will be far happier that way.

  3. Alte Fritz
    Posted April 28, 2011 at 8:06 am | Permalink

    As your other post demonstrates, we need to move away from the infantile to the real issues in politics. Business needs real help in real time.

    By contrast, my local council, on its website,plasters the home page with an announcement that £60m cuts are needed this week. Further into a labyrinth of which Minos would have been proud, you find that we are to be treated to a compost awareness week and a real nappy week, complete with roadshows.

    Small business here, as elsewhere, will pay crippling business rates and have to cope with zealous bureaucracy before they put in any effort to running successful businesses which stimulate the whole economy. To what end? Compost awareness and cloth nappies.

    • Electro-Kevin
      Posted April 28, 2011 at 9:30 am | Permalink

      Ah. I’m glad you clarified that.

      I thought parents had gone over to using virtual nappies as opposed to real ones for a minute.

      This would have brought new meaning to the sight of a mum dealing with a messy baby with an iphone in hand saying “I’ve got ‘n’ app for that !”

  4. lifelogic
    Posted April 28, 2011 at 8:08 am | Permalink

    So surprising that the recovery is “sluggish” in fact none at all for the last six months. How can this be when the government is doing so much to:

    restrict the bank’s lending books
    push up taxes and inflation
    push up government waste and interference
    push up over regulation at all levels and indicate no let up in the EU regulation insanity and costs,
    push many of the wealthy and investments overseas
    push up the price of energy with its alleged “green energy” policies
    force people to employ people until they are 92+
    set a general big government, socialist, pro EU tone with the prospect of Labour within four years time
    regulate employment in a direct conspiracy against free contracts
    fail to sort out education or the health service
    offer the likely prospect of Labour in power very soon

    What is the matter, I wonder, with UK business people. Surely Cameron just saying he and the Government is pro business should be enough without him actually doing having to do anything pro business?

    Construction is down hugely mainly to to the banks snatching money they lent earlier back again and charging huge fees and margins when they do, very rarely, lend. The Government owned RBS/NATWEST being one of the main culprits here despite their claims to the contrary. If they just sorted the RBS/Natwest they actually own it would be a great help.

    It was however good to hear Cameron state the blindingly obvious yesterday that “insurance premiums should reflect risk” in response to the insane European court ruling – let us hope that for once he makes something actually happen in this direction. I somehow doubt it on past performance.

  5. alan jutson
    Posted April 28, 2011 at 8:33 am | Permalink

    Sustainable growth will only come when people have enough confidence to spend their had earned money.

    Like every recession before it, for the vast majority of people lack of money is not a problem, most people have savings of some sort, and a regular job/income. The real problem is the lack of desire to spend money, when you are uncertain if you can replace it.

    When times are either hard or uncertain, people, if they can, save. Its human nature for most.

    In the last couple of years, never has there been a better opportunity to do a deal or get a bargain on a whole range of goods or services, but it simply has not happened on any sort of scale which the Country needs.

    Money needs to circulate for the economy to work, the more it circulates the better for all concerned (even the taxman). The simple fact is, people are not confident in the future, for either the Country or themselves.

    So far people have been fed an almost non stop diet of cuts, cuts, cuts, and as such many are in fear of their jobs. The biggest irony of all, government spending is increasing, so whilst the message is killing the patient, not enough action/medicine is being taken to help cure the problem.

    The government and the economy is a victim of its own spinning, and the recovery will thus take longer to come to fruition than perhaps it would have done if rather more truthful statements had been made..

  6. CHEESED OFF
    Posted April 28, 2011 at 9:37 am | Permalink

    As my old chums The Essex Boys said here more than once when they contributed, the economy grows at the required pace when (and probably only when) the construction sector grows strongly.
    It seems to me the proverbial ‘no brainer’ that all factors that provide that growth should be put into place and prioritised. Most urgent of these is the provision of sensible 90% mortgages at a level of base rate plus 2% with no big up-front fees or redemption penalties. First time buyers are the immediate target group as they fuel the buying chain but neither should the oft-vilified Buy-to-Let sector be excluded from the program.

    There is no good reason why the market need be allowed to over-heat nor why we should not attain over 5% growth from the construction sector given recent declines and the lower base figure. The effect of that kind of growth would put total growth into the right ball-park and incentivise the aspiring and economically productive members of the work force.

    • Simon
      Posted April 29, 2011 at 11:52 am | Permalink

      Isn’t it a sad indictment of our country that construction of residential property is a main driver of the economy ?

      Looks like another ponzi scheme to me . What is the residential construction industry going to do when the population stabilises and there is enough housing ?

      Refurbs , energy efficiency upgrades , install dual stream reticulation so there are potable and non-potable water supplies ?

  7. Brian Tomkinson
    Posted April 28, 2011 at 9:49 am | Permalink

    How accurate and meaningful are any of these figures? For example, Government spending rose by 5.1% in cash terms for the year but only 1.4% after allowing for inflation. Presumably that uses the CPI figure. Is that appropriate? Do we know what the true inflation figure was for that government spending, when public sector wages and salary increases were meant to be frozen or low? These quarterly figures are always revised later which is presumably more accurate but after all the political bluster has taken place.

  8. oldtimer
    Posted April 28, 2011 at 10:20 am | Permalink

    The UK economy will continue to plod along with the current policy of high taxation compounded by the unrelenting Green agenda of this supposedly Conservative party that is now in coalition with the equally Green LibDems. The Green agenda is, with high taxation, the second ball and chain that is slowing the economy and inhibiting any prospect of growth.

    In this regard you may be interested to read the views of Tim Worstall, …..

    He starts from the position that he accepts the global warming hypothesis and that something should be done about it. But he asks why the political class is so obtuse as to subsidise technologies that do not need subsidies (ie solar) or, even worse, do not and cannot work despite the subsidies lavished upon them (ie windmills). He notes a refusal to consider alternatives (ie shale gas and thorium powered nuclear energy). He concludes that this outcome is intentional and reflects the Green agenda to restructure society in a way of which they approve. This does indeed appear to be the policy of the coalition as set out in their Carbon Plan. The Conservative party is in danger of being tagged not the nasty party but the stupid party.

  9. sm
    Posted April 28, 2011 at 10:36 am | Permalink

    Growth? well it must be green growth based on Spring weather.

    Back of an envelope:
    If the Government spending grew 5% (inc inflation) and it accounts for +50% of the economy. That’s 2.5% annual GDP growth in (inc inflation). Therefore the private sector is probably close to zero or negative at present, 0.5% per quarter per the GDP figures (inc inflation).

    After adjusting for inflation it looks like stagflation.

    So flat to zero real spending, monetize the debt mountain, and balance the books via an inflationary long term tax squeeze. Meanwhile subsidies continue uninterupted to the financial sector in terms of rigged markets and central bank interventions.

    The point about prioritising our expenditures must be the message and im afraid increasing government spend is not helping when it is used to misdirect scarce capital into banking blackholes where bonuses abound based on commodity speculation, leverage and transaction commissions. Evidence abounds in posts on this site about other waste, EU bailouts (for banks) and other conflicts.

    We need reduced taxes on employment. Council tax reduced and or capped at % of income. We need to discourage needless consumption of imported goods.

    We also need a system which encourages sustainability in individual and country finances- without peverse incentives we find endemic in the UK.

    Universal benefits and uncontrolled immigration cannot co-exist for long periods- its a race to the bottom as capital exploits labour and the state picks up the social costs.

    Cartelised and subsidized banking with powerful interconnections with politicians cannot be good, the vestiges of democracy are being shed.

    Quangos such as the BBC are no longer useful and are a tax on a particular media outlet and are basically a method of indirect media control by unelected PC quangocrats which do not report or protect free speech. ( Witness all the we couldnt question xyz because of PC sensitivities)

    All we can wait for now is US rates to rise, bonds to fall, ditto in world. The banks may suddenly become aware of further losses and require more taxpayer capital and subsidy. Witness gold,commodities etc.

    Hence it will go on until all the wealth is controlled by a Global Super Elite (Being bankers,speculators, other tax advisors etc Euro MPs, MP’s, CEO and other highly renumerated and pensioned public servants with pots in the multi millions).

    This happened on Labour’s watch (never forget) and there are no easy options for Conservatives, but one must govern for the UK (all) not an elite, particularly to control a deflation from an enormous credit bubble on which unsustainable government debt based spending was superimposed.

  10. Peter
    Posted April 28, 2011 at 12:02 pm | Permalink

    How can “growth” be led by the government spending money it has stolen from the productive? If the UK economy is so reliant on public sector waste to prevent it going into recession then in reality we are already in recession.

    • lifelogic
      Posted April 28, 2011 at 8:50 pm | Permalink

      Absolutely leave it with the productive where it will actually produce something and do not let the government tip it down some fashionable nonsense drain or buying votes.

  11. Javelin
    Posted April 28, 2011 at 1:15 pm | Permalink

    Been crunching some numbers this morning. I’ve had a look at what I guess the new world view will be once Greece defaults. I’ve been reading various commentators to see which set of scales will finally tip it for Greece and then looked at how this will effect the various economies. I’ve come up with two answers. The first is to look at non-productive GDP vs tax revenues. If tax revenues are falling faster than non-productive GDP then the country will come under pressure from bond investors. This includes the UK and the US – the UK pinch point will be the enormous public sector pensions – they will be the liabilities that international investors will shirk. The second answer is the X-factor that once Greece defaults we will not know which banks hold Greek bonds and therefore what losses will be made. This will dry up liquidity again as we do not know which banks are credit worthy – guven the EU avoided stress testing the banks non-trading books for sovereign defaults I presume some banks will fail and therefore counterparties will avoid lending. I would guess this summer we will be seeing the second and final sovereign leg of the credit crunch. It’s interesting to speculate that the new world view will be that Governments spend within their means immediately – or they will bring the banks down that hold their bonds – the West may be coming down to earth with an almighty crunch.

  12. Mike Stallard
    Posted April 28, 2011 at 5:06 pm | Permalink

    The first time, under the tutelage of the Great Scottish Genius, when the huge banks were fuelled by enormous, unwise debts which could never be turned into capital investments, the State was there to bail them out. Even so, as you say, there was a cover up and liquidity ceased. (Where, incidentally, have the toxic debts actually gone to?)
    Now when whole countries default and UK and America are busted and heavily in debt, who will bail the banks out? Germany? China?
    The almighty crunch might actually be Germany 1922, Turkey or Zimbabwe as the euro and the pound and even the dollar might completely disintegrate.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

    Promoted by David Edmonds on behalf of John Redwood both of 30 Rose Street Wokingham RG40 1XU

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