John Humphrys asks: how happy should we be that the economy is recovering when at the same time living standards are still falling?
Signs that the economy is finally recovering are now unmistakable. After the longest recession in living memory the motors of economic growth are at last getting into gear. But at the same time living standards go on being cut. So how cheered should we be by the latest economic news? And what does the mixed data mean for politics?
Until the last couple of weeks or so we had become as much used to dismal economic statistics as we had to the idea that summers where the sun actually comes out were a thing of the past. Now we are having to adjust to the notion that life can be better on both fronts. The good economic figures have been coming out almost daily and include parts of the economy many had virtually written off.
The troubled construction sector grew more than anyone expected in the second quarter of the year and manufacturing output rose by 1.9% between May and June. Factory output as a whole rose by 0.7% in the second quarter and sales of cars climbed for the seventeenth month in a row. The British car industry, which used to be a byword for British industrial decline, is knocking the rest of the world into a cocked hat.
More generally, a much respected if rather esoteric measure of economic health, the purchasing managers’ index, rose in July faster than at any time in the last two and a half years. The index is a measure of how people at the sharp end of economic activity think things are actually going. The recent rise in Britain’s PMI is faster than anywhere else in the world. Similarly the services sector, which makes up more than 75% of our economy, is growing at a faster rate than anywhere else. Even our trade deficit fell in June. The consensus now is that economic pundits are going to have review upwards their forecasts of economic growth in the coming months and years.
All this is grist to the mill of the government’s case that we are ‘moving from rescue to recovery’. But the good statistics don’t mean that everyone is benefiting from the rosier economic picture. Far from it. Figures produced by the House of Commons Library for the Labour Party show that since 2010, average hourly wages, adjusted for inflation, have fallen by 5.5%. That’s the fourth worst drop in so-called ‘nominal’ wages in the whole of the Europe Union. Only Greece, Portugal and the Netherlands have a worse record. For the EU as a whole, the comparable figure is a fall of only 0.7% and in Germany average hourly wages have actually gone up by 2.7% over the period.
In separate research, the Institute for Fiscal Studies reports that a third of British workers who stayed in the same job between 2010 and 2011 saw a freeze or an actual cut in their wages over the period. Between 2009 and 2011 the average hourly pay rate for workers in the public sector fell from £16.60 to £15.80 and in the private sector from £15.10 to £13.60. ‘The falls in nominal wages … during the recession are unprecedented,’ the IFS says.
Such cuts in cash pay might not matter if prices were falling at the same time. But that’s the opposite of what’s been happening. Inflation has been well above the government’s 2% target for most of the period and in some vital areas, such as food, petrol and energy, the inflation rate has been very much higher. This means that ‘real’ wages – the value of the pay packet once inflation has been taken into account – have been falling markedly.
So the position we find ourselves in is that of an economy that is gradually returning to more conventional rates of economic growth but in which living standards go on being squeezed. Certainly the outlook for inflation is not especially cheering, even though no one expects it to rise to anything like the giddy heights we suffered in the 1970s and 1980s. The new Governor of the Bank of England, Mark Carney, has made clear that sustaining economic recovery is his main priority and he has given what is known in the jargon as ‘forward guidance’ that he’ll keep interest rates low until unemployment falls to 7%, meaning that there is going to be no serious effort to cut inflation further in the foreseeable future. So even though recovery may make people feel more secure in their jobs, they are not likely to start feeling better off very soon.
There’s also a longer-term worry. The economic upturn is largely being fuelled by an increase in domestic consumption which makes up the bulk of demand in the economy. But given the fall in wages, this is having to be financed by people reducing their savings or returning to the borrowing habits they got used to during the boom. Continuing low interest rates can only encourage this trend. Furthermore, the new buoyancy in the housing market, in part stimulated by government measures, is likely to spur those who already own houses and see their value rising again to spend on the back of their perceived increased wealth. Some commentators fear that these trends could return us to the bad old days of unsustainable debt-fuelled consumption. Certainly few people see in the new economic statistics much evidence of the ‘rebalancing’ of the economy away from such spending.
All of this is happening, of course, in what is now rapidly becoming a pre-election period. With the next general election now less than two years away the political implications of economic statistics will seem almost as important as the statistics themselves. It is already becoming clear how the parties are going to interpret those statistics.
The government, and especially George Osborne who is not only the chancellor but the Tories’ chief electoral strategist, will be keen to use the improved economic figures to boast that their economic strategy was right all along and that Labour’s Ed Balls was simply to wrong to claim that the government’s austerity measures would choke off recovery. Labour is most unlikely to admit this and may indeed still believe it was right, notwithstanding the improved figures. Its focus is shifting instead to living standards. If ordinary people, or what shadow ministers like to call ‘the squeezed middle’, are not going to be able to share in the recovery, then what sort of recovery is it, they will ask.
The outlines of the next election campaign are clear. The Tories will claim credit for the economic upturn and warn us not to let Labour ruin it. Labour will say that after five years of coalition government most of us are still worse off than when the government came to power.
Which case do you find more persuasive? And how cheered are you, if at all, by the latest batch of economic statistics?
