All indicators suggest economic recovery is on the cards, but Mark Carney is reluctant to move back into ‘growth mode’, suggesting we are reading distorted reality.
By Jack Peat, Editor, The London Economic
Exports are booming, the FTSE has peaked at record levels and all Markit indices suggest growth is back on the cards for Britain, but Mark Carney’s reluctance to move away from ‘recovery mode’ suggests we should be looking at more reliable economic growth signs.
The economy is being propped up by a pseudo reality of rock-bottom interest rates, excessive consumption and insufficient investment. There is a distinct lack of reliable growth indicators which are being overlooked because of macroeconomic ‘props’ which make things look rosy, but will invariably be constrained by supply-side bottlenecks.
In the first few months of 2013 the global markets, including the FTSE, reached record levels on the back of cheap money (quantitative easing) and positive economic sentiment. The Purchasing Managers’ Index – compiled of key benchmark indicators – has returned to growth, suggesting that firms in manufacturing, services, retail are pursuing growth objectives, rather than risk averse strategies that have become synonymous with the economic downturn. But the real growth signs are still not there.
The reality is that sustainable economic growth requires the basic fundamentals to be satisfied. Do people have cash in their wallets? Is there food on the table? Is there room to buy and live? On 13th August investor Carl Icahn increased the value of Apple shares by $17 billion by Tweeting his confidence in the corporation, but that’s not economic growth! Here’s five growth signs you can rely on.
Wages vs Inflation; The cost of living
House of Commons’ figures recently found British workers’ wages have suffered one of the biggest falls across Europe since 2010, with the average hourly rate falling 5.5 per cent. Only in Greece, Portugal and the Netherlands have workers been harder hit by the recession. This has been compounded by inflationary pressure from utility bills and, most recently, transport costs.
Employment; Reaching seven per cent
Bank of England governor Mark Carney said the Bank will not consider raising interest rates until the jobless rate has fallen to seven per cent or below, which is a drop of 0.8 per cent on the current rate. Although that appears achievable, the number of people out of work fell by just 4,000 in June, which is hardly reflective of a strengthening economy.
Real estate; building houses, not inflation
Real estate prices are continuing to soar, particularly in areas such as London and the South East, where international demand has fuelled a dangerous property bubble. But the uncontrollable rate of inflation isn’t a sign of health. Broad rates of construction (i.e- across the country) will be the key indicator for growth in this sector.
GDP; Stuttering growth
GDP growth remains 3.3 per cent below its pre-crisis peak. As recently as April there were fears that after shrinking in the final quarter of 2012, the UK could have slipped into a renewed recession. Growth is likely to remain below one per cent for some time, although Carney’s ‘forward guidance’ could bring more stability.
Exports; Meeting import demands
Ernst & Young UK Goods Global Monitor projects there will be export growth across the UK over the next three years thanks to demand from emerging markets, but closing old ties to our Eurozone partners isn’t happening quickly enough, and exports to emerging markets “aren’t growing quickly enough to meet import demand”. Goods exporters must stop treading water and manoeuvre into the fast lanes to growth in order to support the wider economic recovery.