Is the eurozone killing the UK recovery?
George Osborne says the UK’s recovery is being “killed off” by the eurozone crisis.
This is unconvincing.
One might presume from the Chancellor’s argument that our exports have taken a hammering thanks to weak demand in our biggest market.
But actually, as this chart of GDP by expenditure courtesy of the bank ING shows, exports have been one of the few reasonably performing parts of our economy in recent years:
Exports have now recovered their pre-crisis levels in real terms. So while the eurzone farrago is unlikely to be beneficial for our exporters – to put it very midly – it’s not actually held them back so far.
Of course, the Coalition might argue that our exporters would have made even more of a contribution if the Europeans had sorted things out. But on the Office for Budget Responsibility’s forecasts, trade has actually come in better than expected. In June 2010 the OBR predicted net trade would contribute 0.9 percentage points of GDP growth in 2011:
In fact, net trade contributed 1.2 percentage points of growth last year, as this from the OBR’s Budget report this year shows:
Without that positive contribution from trade, our economy would have contracted over 2011 as a whole.
What has really crushed growth, as one can see by comparing the two OBR tables, is the significantly worse than expected performance of private consumption and business investment.
Other things stand out from the first levels chart from ING. Government expenditure is up 3.8% on pre-recession levels. And investment spending, having utterly, collapsed is yet to register any sort of recovery.
First, the fact that Government has played such a crucial role in sustaining national expenditure should cause us to tiptoe slowly away from those on the right who say that the solution to our econonomic difficulties is to slash state spending dramatically faster.
Second, reversing that investment collapse is clearly the priority if we are to see any sort of recovery. So what’s been holding it back? It’s possible to argue that the blame lies with the eurozone for undermining business confidence. But, as Labour have pointed out, this rather lacks force given that the German economy, at the very heart of the eurozone, has recovered its pre-crisis output levels, as this shows:
There are other pain transmission channels. ING points out that our banks have £659bn in eurozone exposure to the eurozone, equivalent to 43% of out GDP. That might have constrained their lending to the UK economy, undermining growth. But, again, German banks are also massively exposed to the eurozone, yet that has not held the German economy back.
And the problem is less one of constrained bank lending as UK firms sitting on their cash surpluses. The CBI calculates that the corporate sector has around £750bn on their balance sheets. If they wanted to spend, they could.
So why won’t they? Weak consumer spending is clearly one explanation. Real wages have been hammered by a combination of higher than expected inflation and weak pay growth. When the public aren’t spending, firms hold off from investment because they fear there will be no demand for their products.
The debate about the extent to which the Coalition’s VAT rise last year has exacerbated this weakness will continue. So will the argument about whether the Government’s investment cuts programme has been needlessly hasty and whether more state spending now would crowd in more private investment.
But one thing looks pretty clear: if the eurozone is killing off the UK recovery, it is stabbing the life out of a corpse.Tagged in: banks, CBI, eurozone, george osborne, investment, net trade, Office for Budget Responsibility
Latest from Independent journalists on Twitter