LAST week, Chancellor George Osborne presented his analysis of why the UK has “turned a corner” citing “tentative signs of a balanced, broad based and sustainable recovery” as proof that his stimulus measures have worked, writes Nick Williams.

With the UK’s manufacturing and construction industries showing the strongest growth in activity for two and a half years, it would appear that Mr Osborne has indeed found a magic formula to turn the UK economy around.

However the future may not be quite as bright as he predicts. According to a leading economic think-tank, the Institute of Economic Affairs (IEA) which has cautioned this week that in reality the UK’s sustainable growth rate is actually much lower than that calculated by the government to forecast public finances. 

They warn that in the long-term, the sustainable growth rate in the UK may be only 1 per cent compared with the 2.5 per cent that HM Treasury thought standard from the 1980s to the 2000s. 

In their research they assert that we are more likely heading for an era of sluggish growth, pointing out that five years on from the start of the financial crisis in 2008, GDP is still 3 per cent below its peak which is “unprecedented in 170 years of shocks that have hit the UK economy since industrialisation."

According to the IEA there are six factors which contribute to this: increased regulation in energy and financial services; the depletion of North Sea oil; low-productivity of immigrant workers; increased indebtedness of government, corporates and households and demographic pressures from an ageing population. 

Low interest rates and government bond yields are a further indicator that the medium-term sustainable growth rate is very low.

The climb out of the recession has been weaker and taken longer than all previous recoveries. Arguably, this has been because the financial collapse that triggered the slowdown was without precedent, caused by a credit bubble that was itself bigger than any before as governments, corporates and individuals gorged themselves on cheap and freely available lending.

While to a large extent individuals and companies have tightened their belts, cut spending and reduced borrowings, the Government’s finances are still fragile and this, as the IEA predicts, may dampen the recovery.
The markets, however, have taken the view that the UK recovery will be stronger, drawing confidence from a housing market that is making healthy strides and from business surveys which are looking increasingly positive. 

Either way, while the upturn so far may be slow, there is no doubt that it is gathering pace. After such a protracted downturn, if a longer period of low interest rates is the price we have to pay for a slow and steady revival, that is unlikely to worry George Osborne. On the other hand, should the markets be right, and the economic upturn gains in strength, then so much the better.

Nick Williams is an Assistant Director at Brewin Dolphin and offers advice on a wide range of financial services to private clients, trusts, charities and pension funds. 

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