Investment Clock insights

Economic Times March 2016

Ian Kernohan

March 2016

The most recent estimates of UK GDP showed that the economy grew by 0.5% in Q4 2015 - a little faster than in the previous quarter.  Data is still subject to revision, and it is best to make a judgement over a number of quarters rather than just one. However, the expenditure data suggests that the main drivers of growth in Q4 were consumer spending and (surprisingly) government spending.  By contrast, investment and net trade were drags on growth.  The most recent business surveys, often more accurate indicators of growth than early estimates of GDP, suggest that the economy continued to expand in Q1 of this year.

With consumer spending still the main driver of growth, thanks to rising employment and real incomes, the old argument about the economic recovery being ‘unbalanced’ has resurfaced.  If ‘balanced’ growth refers to a situation where all the expenditure components were contributing equally to GDP, then this would be very unusual in any economy.  If it means a skew towards net trade and investment, then that too would be unbalanced.

Taking 2009 as a starting point, the present recovery is still the weakest on record, however it seems more sensible to take 2013 as the more appropriate start of this cycle, since this is when there was a marked improvement in GDP growth (see chart) after a period of very weak growth.  Despite the relatively slow increase in GDP compared with previous cycles, employment is now at record levels, so there has been a significant hit to productivity growth.

The supply side arguments on the resultant ‘productivity puzzle’ debate emphasise the relative lack of innovation in recent decades:  “inventions ain’t what they used to be”.  Other arguments cite the abundance of cheap labour relative to capital, boosting the share of low productivity and low wage jobs.   It may be however, that we are just poor at measuring the impact of new technology on the economy; many new ‘services’ (messaging, online entertainment etc.), which would have been subject to a price in the past, are in effect now free, and so not picked up in GDP or inflation data.  The resultant ‘bad news’, that inflation may actually be below current very low levels, is actually ‘good news’; it means living standards are actually rising faster than measured and the economy can expand more rapidly without the need for a slowdown.  As a consequence, the equilibrium level of unemployment is much lower than previously thought, while the structural budget deficit is not quite so large.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.