Does Britain Have the Capacity?
Davies, Gavyn, The Independent (London, England)
Throughout the economic upswing, there have been repeated media reports of fragility, lack of a "feel- good" factor, impending slowdown, absence of confidence and the like. The unemployment statistics, which have been falling faster than some observers expected, are dismissed as inexplicable data aberrations. The boom in exports receives less attention than the alleged weakness of the housing market, which has retained its status as a national obsession. Any signs of a slowdown in the initial estimates of either the retail sales or gross domestic product statistics are accorded large headlines, while subsequent upward revisions are barely mentioned.
It was the same last week, when government statisticians announced that GDP had risen by "only" 0.7 per cent in the third quarter, following rises of 1.1 per cent in each of the previous two quarters. If this slowdown turns out to be fact, it is very good news indeed, since the growth rate in the previous few quarters had shown every sign of becoming unsustainably rapid. But will it prove to be a fact?
Recent quarterly estimates for GDP have tended to be revised upwards as time passes, and this may happen again in the third quarter. Much of the slowdown was due to a rise of only 0.5 per cent in manufacturing output, down from 1.5 per cent in the second quarter. Service output, meanwhile, rose by 0.8 per cent, compared with 0.7 per cent in the previous three months.
This supposed slowdown in manufacturing output is entirely inconsistent with output expectations in the Confederation of British Industry survey, which have been running at levels equal to the peaks reached in 1988, when manufacturing output was rising by 7 per cent per annum. It would be extremely surprising if the "slowdown" in manufacturing turned out to be either accurate or sustained.
Nor has retail spending slowed down very much, contrary to most reports during the summer. Last week, the statisticians not only announced that retail sales had increased by a robust 0.5 per cent in September, but also revised away much of the "slowdown" in sales that had been apparent in the summer. We now find that the annualised growth rate in retail spending in the last quarter has been 3.6 per cent, insignificantly different from the 4 per cent recorded before the Budget tax increases took effect in the spring.
Nor is the consumer any longer frightened to borrow. In two of the last three months, consumer credit has registered record monthly rises, while M0 growth (cash in the consumer's pocket) is running at a very high year-on-year rate of 7.2 per cent. Admittedly, house prices have been flat, volume in the housing market has been weakening, and car sales have turned down a bit. But we should have realised by now that this is a "small ticket" recovery. If economists are determined to wait until they see a recovery in "big ticket" spending, they may miss the upswing altogether.
Important new evidence on the strength of the upswing will come in the CBI survey due out tomorrow. It would be surprising if this showed any significant slowdown in activity, since the CBI results are normally mirrored quite accurately by the British Chambers of Commerce (BCC) survey, which has already appeared. It showed business confidence remaining unchanged at a very high level, with both domestic and export order books strengthening.
This growth in demand would be all very well if it were accompanied by equivalent growth in the economy's underlying supply capacity, but this does not appear to be happening. Instead, the economy seems to be absorbing some of the spare capacity that developed during the recession. The BCC survey showed an alarming rise in the number of manufacturing firms working at full capacity - up to 37 per cent from 29 per cent in the previous quarter. …