Unbalanced and unsustainable – this is the wrong kind of growth
This article explains why the Heseltine “No Stone Unturned in Pursuit of Growth” agenda could fail. I have an article being developed for publication in a new book to come out by my great friend Professor Gerard McElwee of Sheffield Hallam next year. It speaks about the sustainable communities outcomes of Leader in rural economies as the antidote to growth at any price. This article explains:
The economy is growing, but business investment remains at rock bottom, and despite a near 25pc devaluation in Britain’s trade weighted exchange rate since the crisis began, there is very little evidence of significant improvements in net trade either.
Recent data point to an upswing in manufacturing, but we’ve seen these mini-revivals before, and regrettably, the big picture is that consumption is still the main force keeping output alive, not production. The UK is getting the growth in demand, but it is not getting the growth in capacity to sustain it.
Worse, real wages are continuing to fall, even though we are spending more. As a result, the savings rate has once again fallen to perilously low levels.
Sir Mervyn King, former Governor of the Bank of England, has coined the term “the paradox of policy” to explain this phenomenon. The Bank of England is deliberately pursuing a policy that brings about the opposite in the short term of what it wants to achieve in the long run – it has been supporting spending with unprecedented quantities of loose money even though it knows that ultimately Britain must raise national savings substantially.
This approach might be regarded as merely delaying the inevitable, but it’s hard to see the alternatives; doing anything else would only have recreated in Britain the same depression and economic atrophy that afflicts the eurozone periphery. Britain is too indebted to be able to tolerate a rapid return to higher interest rates.
The key point about policy was recently articulated by Sir Mervyn in his valedictory speech: “The real challenge – on a global scale – is to rebalance the world economy so that very low interest rates are not required to exhort deficit countries to spend in order to absorb the surpluses elsewhere.”
As Britain demonstrated after exiting the ERM, it is perfectly possible to have growth, rebalancing and fiscal consolidation all occurring coincidentally, but it requires rising demand in major trading partners. The eurozone crisis has snuffed out all hope of such a benign adjustment for the foreseeable future, leaving Britain again dependent on credit-fuelled domestic demand and whatever success it can achieve in neglected markets further afield.