A report released by the IFS last week predicts a lost decade for the UK. The report itself focuses on real incomes rather than economic output, but given the economy’s dependence on consumption, the implications of a lost decade for income growth are potentially dire. A squeeze on consumption will squeeze growth.
But low growth is not an inevitable consequence of squeezed consumption. Consumption is not the only activity that supports growth. In fact, if we are to balance the books, the UK needs to move away from consumption-driven growth towards growth driven by investment and exports.
So here's the thing: if we’re going to avoid a lost decade, investment and exports need to grow.
The OBR’s latest forecasts show just how reliant the economy will be on these two factors – particularly investment – in the next few years.
The OBR’s forecasts for investment show quite impressive growth, of 7.7% in 2012 and 8.9% in 2013. Now, growth of this magnitude would not be unprecedented, it is roughly in line with the pattern investment followed coming out of the recession in the 1980s and 1990s…
…But there are two real reasons to think that the investment recovery this time will not look like it did following those two recessions:
1) Credit is still crunched
Indeed, Robert Chote from the OBR today pointed out to the Treasury Select Committee that “credit conditions may be interfering with the reallocation of capital”
2) The Eurozone has created massive uncertainty
Uncertainty acts as a disincentive to invest because it increases the risk surrounding that investment
While our latest Manufacturing Outlook survey shows that manufacturers are still intending to invest in the year ahead, those intentions have fallen back considerably since the first quarter. More of a concern is that our survey shows that cashflow is becoming increasingly constrained, with the balances swinging into negative territory. A balance of 14% of companies now expects their cashflow position to worsen in the next three months.
When cashflow is weak, credit is constrained, and the economic outlook is uncertain, there are bound to be question marks over investment decisions.
The next question, then, is what can we do about this?