It is this time of the year again when the ONS rewrites the UK’s recent – and not so recent – economic history. Last week’s ONS GDP revisions grabbed the headlines for casting the UK’s economic recovery in a more favourable light.
In a nutshell, the new figures showed that the recession was slightly deeper than previously estimated, and the 2011-2013 recovery period stronger, leaving GDP in q2 2015 at 5.9% above its pre-recession peak instead of 5.2%. This is the good news.
But here at EEF, we remember a time when rebalancing the economy – away from household consumption and services and towards exports, investment and manufacturing – was seen as the blueprint for the future direction of the UK economy by economists and politicians alike.
So what do the revisions tell us about the composition of growth in the UK economy?
Rebalancing remains elusive
The GDP revisions show a stronger economic recovery but in no way less unbalanced. In fact, the economy looks more skewed towards services and household consumption than it did prior to the revisions.
Manufacturing has been revised down for the past three years (2012-2014) and slipped into technical recession during the first half of 2015. The weakness in net trade has been a consistent feature of the UK economy over the past years and while this picture has improved slightly it has not changed dramatically with the revisions. In 2014, net trade was still a drag on GDP and progress towards the Government’s £1 trillion target still fell about half a trillion short.
On the other hand, more surprising – and perhaps more worrying than the well-known poor performance of trade - is the weakening profile for investment in the economy. This will be the focus of today’s blog.
The missing ingredient
In what seems to have flown largely under the radar, total fixed investment (Gross Fixed Capital Formation) in the UK economy saw some hefty downward revisions over the last couple of years. Business investment – which excludes investment in buildings not classified as dwellings – took the bulk of those revisions, seeing its contribution to growth for 2014 slashed in half to 0.4pp.
Over 2013 and 2014, business investment grew at almost half the rate estimated before the revisions. That leaves business investment at around 4% above its pre-crisis peak compared to 11% previously estimated with about £10bn less invested in the UK economy.
This has an important bearing on the nature of the UK’s economic recovery. It means that rapid economic growth in the last couple of years has been unsuccessful in fuelling the investment-led recovery needed to boost productivity over the long-term. In fact, total fixed investment has been revised down for each year since the crisis save for 2012, with household consumption – which carries a larger weight on GDP – compensating for the shortfall in 2013 and 2014.
More of the same in H1 2015
Moving into 2015, the growth profile for the first two quarters of the year fail to point to a significant turnaround. Total fixed investment contributed about 0.3 pp and 0.2pp to GDP growth in q1 and q2 2015 respectively – close to its post-crisis quarterly average.
Given that the UK has been historically under-investing compared to its G7 peers and the centrality of boosting long-term investment in the Government’s productivity plan, this is not the performance that will move the needle towards a more investment-intensive high-productivity economy.
Factoring in the current global economic climate – with significant headwinds from the slowdown in emerging markets weighing on investor confidence topped with oil & gas related difficulties in the domestic front – we expect investment to remain close to its long-term trend. That is, investment contributing moderately to growth, which points to another year where the UK economy has not moved towards a more balanced position.