Growth in the UK economy is producing its fair share of discontents., They are often the same people who claimed there would be no growth under policies designed to cut the deficit. There is no pleasing some people.
The new moan is that the growth is too dependent on consumers, without enough investment and exports. Let’s examine this a little. It’s a kind of moral mantra – we must have the right kind of growth.
The point in exporting is to sell goods and services we are good at for good prices, so we can buy goods and services that foreigners can produce better and cheaper with the money. An export is not especially moral or worthy. It is someone else’s consumption, rather than consumption for ourselves. The only point of it is to earn us foreign currency which we can then spend on consumption of goods and services from foreigners.
If we are unable to sell enough to pay for goods from foreigners, then we have to sell them our assets or borrow from them. We have been quite willing and able to do that for many years, so we have run a balance of trade deficit. The rules of the EU are especially difficult for us, reinforcing a permanently large deficit with the rest of the EU. They made it easier to trade in the things France and Germany were good at, and less easy to trade in the things we are good at.
Saving and Investment means buying things that can help us consume more in the future. An individual saves so he can buy a dearer item later, or so he can have more income in old age than he would otherwise enjoy. A company invests those savings in an extra factory or a new product, which means we can consume more once they have made that investment. Investment is only worth doing if you are using all your current investment capacity, or if new investment can produce to a higher quality and lower cost. The whole point of saving and investment is to consume more later. An investment will not be made in additional capacity unless people do plan to consume more and are therefore likely to buy the additional output.
The big collapse of 2008-9 led to a shortage of demand . This led to people losing their jobs, to factories not having full order books, and investors being put off committing more capital to risky projects. It does take more consumption to put this right, which is now beginning to happen. Now is not the time to go all puritanical about the wrong kind of growth. As demand works through, then we should expect investment to pick up. Higher house prices and more mortgage finance is leading to a pick up in housebuilding. People buying more cars is leading to more investment in car capacity. The purpose of providing more homes and cars is so people can consume them, use them, enjoy them. That is not against the laws of economics. Those who dislike it have a very austere outlook.