For the UK economy, a national trait is at play

Football fans from Continental Europe and the residents of Magaluf have grounds to dispute the reputation of the British as a self-deprecating bunch.

In UK economics the attitude is alive and kicking. We look in awe at the Federal Reserve’s close call not to raise interest rates and generally accept without question that raising interest rates is a feat more likely to be accomplished on the other side of the pond, because innate American strengths have fostered a much healthier recovery.

Political discourse in London is conducted against a backdrop that assumes the British economy has gone to the dogs. To George Osborne’s accusation that the political left are “deficit deniers”, Jeremy Corbyn, the newly installed leader of the Labour party, counters that the right are “poverty deniers”.

Anyone who listens to this stuff for long can be forgiven for thinking that Britain is still the sick man of Europe: too poor to accommodate refugees, too crowded to build housing, too unequal for growth, too feeble to export successfully, and too shackled by unions for business to thrive. But Britain’s economy is stronger than the headlines suggest.

Consider the headline measure of economic growth. The initial estimate of quarterly gross domestic product, which generates the most news, suggests the UK is indeed inferior. If you looked only at these first drafts of the GDP data for every quarter since the recovery began in 2009, you would conclude that the US economy was now 15 per cent larger than in the dark days of the crisis, and that the UK had grown about half as fast.

But long after US commentators have punched the air, attributing American superiority to a more enlightened policy towards the government deficit, the numbers keep being revised. Statisticians in Washington have a habit of being a bit brash at first, while their British counterparts, cocooned in a bunker in Newport in South Wales, are overly cautious.

The latest estimates, soon to be incorporated in official data, say that the UK economy has grown 13.4 per cent since 2009, against 13.7 per cent in the US. Britain’s recovery, in other words, is just as good as America’s — and it was achieved with a rapidly shrinking offshore oil sector, a greater burden from damaged banks and closer proximity to the Eurozone crisis. Not too bad, as the British like to say.

The strength of the recovery is not the only economic statistic that shows Britain in a favourable light. The employment rate for those aged 16 to 64 is at a record high, which is far from the US experience. With regular pay growing at an annual rate of 2.9 per cent and zero inflation, real wage growth — a measure of living standards — is at its highest level for 12 years.

Such is the strength of employment that the government is gambling it can increase the national minimum wage for those over 25 to 60 per cent of the median. The US minimum is less than 40 per cent.

There are also signs that alongside the rise in pay, there is finally a break in the run of terrible productivity performance of the UK economy that began in 2008. Official figures later this month are likely to confirm that output per hour worked rose by more than 1 per cent in the second quarter.

And while Washington frets that middle-class American families are not experiencing the fruits of growth due to rising inequality, little could be further from the truth in Britain. Wage, income and wealth inequality are as stable since the crisis as they were before. The benefits of recovery have been shared.

If Britain’s recovery is strong and broad, we still like to complain that it must be built on the sand of household consumption and debt. In his new book, Lord Turner, former chairman of the Financial Services Authority, argues that excessive household debt led to an unsustainable consumer boom in the last decade and that without more consumer borrowing, it will be impossible to sustain British growth.

While there is room to debate the role of debt in the run-up to the crisis, we should note that households have been shy of borrowing ever since. Outstanding debt has fallen from 165 per cent of household income in 2009 to 145 per cent today, and assets total nearly 1,000 per cent of income. British household balance-sheets are strong. Arguably, they could withstand a lot more debt.

So, unless you cherry-pick your statistics assiduously, there is very little in the recovery to suggest serious economic mismanagement either in the government budget or in interest rates.

For sure there are economic problems that still need to be tackled.

Despite the recent improvements in productivity, the disappointments over the past seven years that have left output persistently below what we had imagined was possible still need to be better understood and addressed; a sudden drop in net income from foreign assets has sent Britain’s current account plunging into the red; there is no sign that politicians are serious yet about the need to use land better to build more housing and infrastructure; and although the gap between rich and poor is stable, the young have been trounced by the old.

Nor is Britain’s economy back to normal. It still requires emergency interest rates of 0.5 per cent. Government borrowing is forecast to be 3.7 per cent of national income this year and the public sector is showing the signs of budgetary strains.

There are also economic threats on the horizon ranging from a global downturn to the possibilities of a populist Labour government led by Corbyn, Greece leaving the euro, Britain departing from the EU and Scotland kissing goodbye to the union.

Similar threats have been with us over the past six years of recovery, and yet we have muddled along. The economy has been gradually curing itself at the same time as Britain is coming to terms with the fact that the boom’s go go days are not coming back.

Self-deprecation is better than hubris. But it is time to recognise the UK economy is far from the basket case that many imagine.

— Financial Times