Why the UK economy is not as healthy as it looks

published 13 December 2006

The bulls were breaking out the bubbly this week after official statistics revealed that the UK economy grew at its fastest pace in two years in the second quarter. GDP rose by 0.8%, equivalent to an annual rate of increase of 3%. But the unexpectedly good news also contains plenty of bad news. The question is the "quality and sustainability of the growth story", as Bill Jamieson points out in The Business. The trouble is that the UK has had "seven years of plenty" based on heavy spending by the consumer and the Government, says the Item Club, an independent forecasting group. These sectors are now "over-borrowed and can no longer take the economy forward".

Given consumers' towering debt loads and rising energy and transport costs, it's certainly hard to be optimistic about consumption. Meanwhile, public borrowing is already running ahead of last year, and has exceeded forecasts for several years. We are experiencing strong growth "largely because of our deteriorating fiscal position", which is unsustainable, says Hamish McRae in The Independent on Sunday. According to HSBC figures, without the public sector, annual growth since 1998 would have been about 0.5%-1% lower than the headline figure; last year it would have been under 1%, rather than 1.9%.

So to keep growth ticking over, exports and business investment will have to take up the baton. Export growth this year should reach 15%, but the figure is closer to 9% when missing trader fraud (when goods are imported or exported without VAT being paid) is factored in, which is hardly impressive in a strong world economy, says ITEM; "our manufacturers continue to lose market share". Business investment has been disappointing too. This leaves us reliant on the world economy at a time when US growth is starting to turn down.