The UK Election: Now the Real Work Begins
Notwithstanding David Cameron’s return to Downing Street, the impact of the UK economy’s return to growth remains to be felt by large swathes of consumers. Much of the growth has been driven by an increase in population, and as a result the figures look less positive when looked at in per capita terms. In particular, low productivity growth has meant that the reduction in unemployment has failed to lead to increases in per capita disposable income.
The new government faces several major economic challenges during this next parliamentary term:
1. Raising productivity
Stagnant productivity growth is perhaps the key economic challenge facing the UK. As the UK emerged from recession it entered into a productivity crisis. Despite GDP growth and falling unemployment, productivity gains have stalled. This must be addressed for growth to continue.
Unemployment Rate and Average Wage per Hour in the UK: 2009-2015
Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics/OECD
Note: Data are in 2014 prices and data for 2015 are forecast
2. Tackling low quality employment
Linked to the productivity challenge, the reduction in unemployment has been driven by an increase in insecure employment. Again, this is borne out in the data on average wage per hour – the UK has seen one of the largest drops in average wages of all major advanced economies.
Change in Average Wage per Hour in Selected Advanced Economies: 2009-2014
Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics
3. Avoiding a “new normal” of slow economic growth
Economic growth is expected to come in at 2.7% in 2015, before tapering off to 2.0% by 2020. Although recent growth has been impressive compared to other major advanced economies, growth of 2.0% per annum, is lower than we saw pre-recession. One factor behind this is population ageing. The population of working age in the UK is set to peak in 2029.
4. Increasing the housing supply
A housing shortage should be one of the UK government’s key policy concerns, bringing with it economic and social challenges. The housing sector’s problems include a bureaucratic planning process and a shortage of available land, which constrict supply and push up prices.
Housing Completions and Total Population: 2009-2014
Source: Euromonitor International from national statistics/Eurostat/UN
5. A weak external sector
The UK has failed to turn around its weak external sector, with the trade deficit continuing to widen to reach 6.7% of GDP in 2014. A broadly balanced economy should be a key target in the coming parliamentary term.
6. Managing the public finances
Despite an austerity-led government, the UK continues to run a significant budget deficit, which stood at 5.4% of GDP in 2014 – compared to 2.4% in the eurozone. Stagnating wages have meant that tax revenues have been slow to recover making it more difficult to balance the books.
What does this mean for business?
Business must consider the downside scenario of the impact of continuing slow wage growth on consumer expenditure; combined with the squeezing out of discretionary spending by the high proportion of expenditure on housing. An increasingly fragmented labour market would also dampen growth in consumer expenditure, creating long-term challenges for government and business.
If the productivity conundrum is solved and the benefits of growth trickle down to a greater proportion of the population, then robust economic growth will have a stronger positive impact on the consumer goods sector. Yet even so, a return to the pre-recession boom times seems unlikely and competition to win over the UK consumer will remain fierce. One example of this is the presence of discounters on UK high street, which will continue to see strong growth.
Real Growth in GDP and Grocery Retailing in the UK: 2009-2019
Source: Euromonitor from trade sources/national statistics
Note: Data refer to real growth of retail sales RSP excluding VAT. Data from 2015 onwards are forecast.
External forces will shape the economy
At this early stage much remains to be seen and it’s important to remember that significant risks will be out of the hands of the government – the oil price has had a huge impact on the performance of the global economy, and the China slowdown also has flow-on effects globally. Finally, the Bank of England’s decisions on interest rates will also impact the growth outlook and the possibility of a Grexit could throw the eurozone into chaos.