The battle for growth

Slower growth in 2011 is not due to the eurozone crisis; slower growth in 2012 will be.

George Osborne was reported recently by the BBC as saying: "It is a very, very difficult and dangerous situation in the eurozone - Britain is impacted by what's happening. There's no doubt that growth in Britain, jobs in Britain, have been hit by what's going on in the Eurozone."

This is probably only true of the last few months, and then only to a limited extent. The slowdown in growth in Britain began in the fourth quarter of last year, since when real GDP has only increased by 0.5 per cent, and employment growth began to falter earlier this year. The crisis in the eurozone has been rumbling on for some time, but it only came to a head sufficiently to affect the UK over the summer months.

This can be seen in the latest trade data. UK export volumes to other EU countries increased by 5 per cent over the last year; exports to the rest of the world were up just 1 per cent over the same period. If the eurozone crisis was to blame for weak growth in Britain, these figures would be the other way round.

Other explanations are needed for the underperformance of the growth in Britain and two stand out. First, higher oil and food prices - and the increase in VAT - have squeezed households' spending power. This is evident in the latest retail sales data. Sales values increased by 5.4 per cent over the last year - a healthy rate of increase - but sales volumes were up just 0.6 per cent. The difference is inflation. Second, the Chancellor's tough fiscal plans have taken demand out of the economy and dented business confidence about future levels of spending. Hiring and investment spending have slowed as a result. Hopes that the private sector would respond to a tough fiscal policy with a burst of entrepreneurial activity have proved totally misplaced.

The worry in all this is that the effect of the eurozone crisis on growth and jobs in Britain is yet to come. Even if the crisis does not worsen - and it would be a brave person who argued that this categorically will not happen - demand in the eurozone is going to weaken in coming months and many forecasters believe it will slide back into recession. This will affect UK exporters: around two-thirds of UK exports go to the rest of Europe. Harder to measure, but possibly more important for growth and jobs in the UK, will be the effect on business confidence. Few company directors will feel comfortable implementing expansion plans at a time when the news headlines are dominated by the risk of Armageddon on the UK's doorstep.

And if the crisis does get worse, the prospect of the banking system freezing up again, followed by another credit crunch, will be a real one.
This is already being reflected in economic forecasts. Earlier this week the CBI revised down its estimates for growth in the UK to 0.9 per cent in 2011 and 1.2 per cent in 2012 and the European Commission predicts growth of just 0.7 per cent in 2011 and 0.6 per cent in 2012. If the Commission is right then the UK is going to come perilously close to a recession in the next few quarters.

This is a challenging backdrop for the Chancellor as he prepares for his Autumn Statement on 29 November. The Government has published a Growth Review, a Plan for Growth and is now reviewing the Plan for Growth. But the economy is barely growing and the outlook is for things to get worse not better. Each of these documents suffered from the same basic weakness. It started from a set of measures agreed between the coalition partners - cuts in corporate tax rates, an increase in the personal tax allowance, aggressive budget deficit reduction - and attempted to build a growth plan around them. This is the wrong approach.

A plan for growth should not be based on a set of miscellaneous policies agreed in coalition negotiations. It should identify what is needed for the economy to grow - additional demand in the short-term and increasing supplies of capital, labour and land in the medium-term, together with better ways of utilising them - and then work out how the government can help deliver them.

We are promised "credit easing" and a focus on housing and infrastructure. These are welcome but more, much more, is needed.

Tony Dolphin is the Senior Economist and Associate Director for Economic Policy at ippr

Tony Dolphin is chief economist at IPPR

Photo: Getty
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Like it or hate it, it doesn't matter: Brexit is happening, and we've got to make a success of it

It's time to stop complaining and start campaigning, says Stella Creasy.

A shortage of Marmite, arguments over exporting jam and angry Belgians. And that’s just this month.  As the Canadian trade deal stalls, and the government decides which cottage industry its will pick next as saviour for the nation, the British people are still no clearer getting an answer to what Brexit actually means. And they are also no clearer as to how they can have a say in how that question is answered.

To date there have been three stages to Brexit. The first was ideological: an ever-rising euroscepticism, rooted in a feeling that the costs the compromises working with others require were not comparable to the benefits. It oozed out, almost unnoticed, from its dormant home deep in the Labour left and the Tory right, stoked by Ukip to devastating effect.

The second stage was the campaign of that referendum itself: a focus on immigration over-riding a wider debate about free trade, and underpinned by the tempting and vague claim that, in an unstable, unfair world, control could be taken back. With any deal dependent on the agreement of twenty eight other countries, it has already proved a hollow victory.

For the last few months, these consequences of these two stages have dominated discussion, generating heat, but not light about what happens next. Neither has anything helped to bring back together those who feel their lives are increasingly at the mercy of a political and economic elite and those who fear Britain is retreating from being a world leader to a back water.

Little wonder the analogy most commonly and easily reached for by commentators has been that of a divorce. They speculate our coming separation from our EU partners is going to be messy, combative and rancorous. Trash talk from some - including those in charge of negotiating -  further feeds this perception. That’s why it is time for all sides to push onto Brexit part three: the practical stage. How and when is it actually going to happen?

A more constructive framework to use than marriage is one of a changing business, rather than a changing relationship. Whatever the solid economic benefits of EU membership, the British people decided the social and democratic costs had become too great. So now we must adapt.

Brexit should be as much about innovating in what we make and create as it is about seeking to renew our trading deals with the world. New products must be sought alongside new markets. This doesn’t have to mean cutting corners or cutting jobs, but it does mean being prepared to learn new skills and invest in helping those in industries that are struggling to make this leap to move on. The UK has an incredible and varied set of services and products to offer the world, but will need to focus on what we do well and uniquely here to thrive. This is easier said than done, but can also offer hope. Specialising and skilling up also means we can resist those who want us to jettison hard-won environmental and social protections as an alternative. 

Most accept such a transition will take time. But what is contested is that it will require openness. However, handing the public a done deal - however well mediated - will do little to address the division within our country. Ensuring the best deal in a way that can garner the public support it needs to work requires strong feedback channels. That is why transparency about the government's plans for Brexit is so important. Of course, a balance needs to be struck with the need to protect negotiating positions, but scrutiny by parliament- and by extension the public- will be vital. With so many differing factors at stake and choices to be made, MPs have to be able and willing to bring their constituents into the discussion not just about what Brexit actually entails, but also what kind of country Britain will be during and after the result - and their role in making it happen. 

Those who want to claim the engagement of parliament and the public undermines the referendum result are still in stages one and two of this debate, looking for someone to blame for past injustices, not building a better future for all. Our Marmite may be safe for the moment, but Brexit can’t remain a love it or hate it phenomenon. It’s time for everyone to get practical.