Today, two facts about the UK economy appear to contradict each other. That’s this week’s news: firstly about unemployment, and secondly about interest rates.
Unemployment has now finally reached pre-recession levels, with the unemployment rate back at 5.1 per cent. Last time it was this low was way back in 2006, two Prime Ministers and nearly a whole decade ago. But this week, Mark Carney, the Governor of the Bank of England, confirmed that interest rates – seven years after the global financial crisis – still won’t rise, and will remain abnormally low.
In fact, as Fraser Nelson pointed out, the Governor confirmed this policy in contradiction to the direction given in George Osborne’s “cocktail of risks” speech just 14 days ago.
This change in direction is significant. Mark Carney effectively reviewed the Bank’s position on how well the economy is going. We have changed from “decent prospects ahead” to “wait and see”.
Back in 2013, Carney said interest rates would rise when unemployment fell below seven per cent. But this week, in my view, it’s clear that it’s more complicated and caution is required. The labour market statistics don’t necessarily all point one way. Employment in the crash fell hardest in regions outside London – Yorkshire, North East, and the West Midlands – and is there is some indication that growth in recent months has stalled.
So there are two questions worth asking. What is going on with the UK economy? And what’s happening around the globe?
On the UK, while the Tories blow their own trumpets, this winter has seen some seriously disappointing public finance figures for our country. Osborne’s austerity has been revealed as harsh words, harsh cuts for some, but in the end, a sorry failure. The tests Osborne set himself when he took over were all missed by the time the general election came in May, and while the public finances have got worse, the Chancellor has been busy throwing money at voters with his inheritance and corporate tax cuts. At times, it can be hard to discern any real strategy.
Meanwhile, China’s troubles look serious, and the friction as this huge nation adjusts to more normal financial market functions will surely affect us all. The six per cent growth that China is experiencing might sound good at first, until you consider what a slowdown that is from the 14.2 per cent they had in 2007, and also the huge potential that exists if China can lift the fortunes of the millions of its citizens still living in poverty.
UK direct exports to China, which is our sixth largest export market, have nosedived. And what’s more, this doesn’t account for the indirect impacts of Chinese tremors that I wrote about here. The US have decided to raise their rates, and the consequences of this are uncertain. Markets are nervy, leadership is scarce, and insecurity everywhere from the tourist resorts of the Middle East to European capitals does little for economic confidence.
So this is how, from the upbeat Autumn Statement, we now have gloom in January.
In general, though, answers to these two questions – on the UK and the world – are intertwined. The UK is highly exposed to the global economy, in a way that other countries are not. Our financial services and manufacturing industries are truly global. British businesses are involved in the world. So I think the correct question for is whether we can build more strength from within the UK. Can we improve our position so that global turbulence can’t shake us so hard, and give us a better chance of leading in Europe and across the globe?
Now because wage growth in the UK has been so sluggish since the crash, the incentive to invest in technology in order to save on labour costs is also lower, relative to others in our position but with greater wage growth. This could build in a problem for our future if other countries see great technological investment and leave the UK behind. This is one structural weakness that must be addressed.
And, as Rachel Reeves has pointed out, our country is dangerously imbalanced.
Take Osborne’s flagship scheme, the Northern Powerhouse. If it really represented a serious effort to rebalance our country, that might be something that would help the chronic division that under-uses the skills and talents of those outside London and the South East. But consider this analysis from LSE’s Neil Lee. It shows that the Northern Powerhouse is more brand than strategy.
Still, neither of these problems are something a Labour government couldn’t fix. Just like Labour took on the challenge of rebuilding the shattered West Coast Main Line, we would be much more serious on the transport requirements of today. Just as we built unionlearn centres in our production sites, we would be able to put skills development back in the hands of business. And as we invented and funded the Open University, we could find new ways to back an open university system that meant that no one – whether they start their working life as a graduate or an apprentice – need ever give up on learning. We would need a very serious plan for productivity, but these are the kind of ideas that we could begin with.
But to return to the here and now. Labour must recognise and expose Osborne’s true faults. The upcoming budget is a crucial moment for us. We cannot allow George Osborne his pantomime villain cloak, and we must show him up as an incompetent play-actor.
He has neither built in strength to our public finances, built the next generation of infrastructure improvements that will progress our country, nor responded to a changing global picture to which we, the UK, are uniquely exposed.
But he has now the popularity rating of Nigel Lawson after he engineered a boom just prior to the 1987 general election. Like Lawson he sold a story about booming Britain that is dependent on an overheated south, which fails to make the most of all our country has to offer.
Still, the fact of Osborne’s polling numbers should tell us in the Labour movement that we have to do better than we have since May. And, that when it comes in March, the next budget is a huge opportunity to do just that.