If domestic expenditure slows, is the UK economy in better shape to cope than it was in 2008?
Trying to determine the narrative for UK economic performance at the moment is proving tricky. The only consistency is the inconsistency in the signals that are being sent out.
The last quarter of the year, despite initial fears, actually witnessed an increase in the pace of growth as the service sector in particular continued apace. However, looking at the economic growth figures for 2015, compared to 2014, shows that growth slowed to 2.2% from 2.9%. What is clear is that areas such as retail and professional services are providing the majority of GDP growth while manufacturing and construction lag behind. In fact, both the manufacturing and construction industries are still below the size they were before the economic downturn of 2008. The poorer performance of manufacturing in particular means that the UK is experiencing a large deficit in its trade in goods. The implication of this is that growth will continue to come from domestic spending rather than spending on exports from abroad.
So on the face of it there is no alarm but the key point is that domestic expenditure continues to drive economic growth and I am reminded of the early rhetoric of the chancellor when he was lamenting the imbalance in the economy and proposing a “march of the makers”. So what if domestic expenditure slows, is the UK economy in better shape than it was in 2008 to cope? This is difficult to assess but there certainly seems to be more security in the new-build housing sector than in 2008 when housebuilding almost came to a halt. This is where the current suite of Help to Buy policies should allow a more robust response to any downturn than may have been seen in the past. However, this is only one part of the market and it is, in fact, activity in the overall market that will have a bigger impact on expenditure levels in the UK economy as a whole. It is not just the actual purchase of the house but the associated expenditure within the transaction which provides a boost to overall demand. With signs that global economic conditions remain challenging, the chancellor has to hope that the UK’s appetite to spend, particularly on housing, remains.
Michael Dall is lead economist at Barbour ABI