This blog marks the first in the newly monthly format of the Centre for Enterprise blogs, designed to both summarise events from the previous month and also look at the issues highlighted in more detail. This month focuses on the twin dangers of focusing too heavily on short term statistical headlines, and not enough on long term trends.
The rise in the latest inflation figures (both the consumer prices index and the retail process index) is obviously unwelcome to the government and the Bank of England and may, to some extent, dampen the “feel good” factor generated by the Olympics. It is important, however, not to get carried away by one month’s figures, particularly, if, as seems likely, a number of “one-off” factors can largely explain the rise.
Overall, most analysts believe that the general trend in inflation is still downwards, towards 2% and that the Bank of England will consequently continue to focus most of its efforts at stimulating the economy via monetary easing. The focus on growth is now clearly at front and centre, particularly given the contraction in the Eurozone economy.
Ultimately it is this, rather than one month’s inflation figures, which will be the focus of the Bank of England and the UK government’s medium term strategies. The recent TUC report was very interesting in this regard, therefore.
It found that by 2008 the UK economy had become unbalanced in four key ways – by expenditure type (too much on consumption and imports, not enough on investment and exports), by sector (too much reliance on financial services and too little on manufacturing), by region (too much on London and South East, too little on Wales and the North) and by wage share (too much on higher earners, too little on lower earning groups). It also argues that over the past two years there has been little progress on rebalancing by any of these measures and that the Coalition Government is therefore failing to “re-balance” the economy.
If one accepts the assertion that the economy was “unbalanced” then the TUC’s assessment is indeed a fair one. It does, however raise three points.
First, do the factors that create the imbalance constitute a problem? Second, can the government do anything about this? Third, to the extent that they can do anything about this, how long is this likely to take?
The issues highlighted certainly constitute a problem for the UK economy as a whole. Indeed, they are linked both with each other and to the generation of the economic conditions in which we find ourselves now.
In terms of the second point, the government does, at least potentially, have levers that it can use to promote investment and exporting over consumption, as well as greater promotion of sectors other than financial services, growth outside London, and a more equitable distribution of income, through the tax system for example. The coalition, however, has until now been primarily focused on fiscal deficit reduction rather than rebalancing the economy. It is also unlikely that the government will focus on rebalancing of the economy in the near future specifically, given that it is financial services and London and the South East from which growth is most likely to come in the first instance.
On the third point, given that it took many years to generate the economic structure seen in 2008, it will also take many years of sustained effort for a change to occur. Whilst long term economic problems would likely be created if nothing is done, therefore, in the short run a fundamental shift is unlikely, particularly as the economy looks for any growth before it looks for “the right type of growth”.
Government statistics released last month further illustrate indicate the scale of the task facing both Welsh and UK governments, if they wish to “rebalance” the economy, for example, towards manufacturing and away from financial services.
Between 2001 and 2010 the numbers employed in manufacturing in Wales fell by 33%, compared with 30% for the UK as a whole. Conversely, employment in the finance and business sector grew by 24%, faster than the UK (13%) for the period. At the same time, there was also a big increase in those employed in healthcare and social services (19% in Wales, 27% in the UK) over the period.
This is not to say, however, that the process is by any means complete. For example, despite the changes highlighted above, in 2010 health and social care still accounts for 15% in Wales, compared with 12.5% in the UK as a whole. Similarly, manufacturing is 10% of employment in Wales, and 8.2% in the UK, whilst the figures for finance and insurance (a narrower category than financial and business services) are 2.2% in Wales and 3.6% in the UK.
More broadly, however, the figures also indicate that the 10 year trend for manufacturing in the UK is broadly and strongly downwards, whilst in the financial and business services it is strongly in the opposite direction. The long term tide of economic history indicated by these statistics, therefore, means that for both the Welsh and UK economies there is likely to be work to be done in bolstering the manufacturing sector to prevent further decline, before the hoped for strong resurgence can be hope for.