The UK media (particularly the left-leaning publications) continue to rant about how austerity is strangling the UK economy and that the government should be doing more stimulus such as infrastructure projects, etc.. GDP growth for 2012 will likely be flat and the so-called experts will rave about stagnation and failed government policies.
However, pre-2008 crash, UK GDP was 54% government spending, so using GDP as a measure of how the economy is fairing is misleading. Especially if the government is having to borrow some of that money to spend! What good is 1% growth in GDP if our deficit is 8% of GDP and we’re paying interest on what we borrow?
No, a sustainable recovery can only be created by the private sector – increasing both GDP and tax receipts – and the signs are that this is now happening. The UK government claims 1 million private sector jobs have been created since they took power in 2010. They have also continued to cut corporation tax making the UK one of the most attractive places to do business in the G20.
Headline GDP figures would be a lot better if the UK could fix its housing market. The chart below says it all:
This chart was created by the Bank of England and clearly shows that UK banks still have a lot of healing to do before they can get back to business as usual. Record low interest rates will have stimulated demand for mortgage borrowing, but clearly the banks are unwilling or unable to lend. This won’t be the case forever.
British people have an exceptional amount of wealth stored in their homes (approx. £6trillion) and if they were able to release just a fraction of this equity it would create a lot of liquidity and help every part of the UK’s economy. Unfortunately right now Brits are repaying their mortgages at record rates, rather than releasing equity.
The UK government recognises the above and recently launched a “Funding for Lending” scheme aimed to help banks lend more where there is demand. It appears to be working and the total number of mortgages granted to home buyers was the highest since 2007 in recent months.
So I think British people can look forward to a sustainable recovery … just as soon as the deleveraging stops.