Slow and bumpy road to recovery
12 March 2013
The latest issue of our UK Economic Outlook report has one central message - the recovery will be slow and bumpy. But it is not all bad news: we think there is potential for stronger growth in the longer term if UK businesses can tap into the investment potential of fast growing emerging markets.
In the short term, growth will remain hard to come by: it was barely above zero in 2012 and looks set to be only around 1% this year, even if major accidents can be avoided in the eurozone. Growth could pick up to around its long term 2% trend in 2014 and beyond, but the ‘new normal’ will be for constrained growth for some years to come as the UK and other major advanced economies work through the painful process of adjusting to the legacy of the global financial crisis.
UK consumers will continue to be hampered by prices rising faster than earnings in 2013-14, although this real wage squeeze should ease relative to the situation in the last five years as the chart below shows.
Real earnings squeeze expected to moderate in 2013-14
Source: ONS, Consensus forecasts for nominal earnings growth (Feb 13), PwC main scenario for CPI inflation.
Retailers will continue to face a tough time due also to the continuing switch to online sales. We also don’t expect any strong rebound in average UK house prices even if London continues to buck the trend. But unemployment should continue to drift down and large businesses do have the cash to invest if and when demand does start to pick up.
Slower growth in nominal GDP means that public borrowing again looks set to overshooting targets this year, perhaps by around £8 billion in our main scenario, so the Chancellor’s options for the Budget are clearly constrained. Indeed he may need to find additional fiscal tightening in the next Parliament over and above what has already been announced. More tightening in the short term should be avoided, however, given that the fragility of the economy and the focus on boosting growth.
There is no quick and easy way to generate growth, but we think that the Chancellor should focus what limited firepower he has on increased capital spending on housing and transport infrastructure, supported by appropriately targeted business tax incentives. This should boost growth and employment in the hard hit construction sector, while also supporting long-term supply side objectives.
High among these longer term objectives should be making Britain a location of choice for inward investors from the fast growing emerging economies. This will require the UK to improve the quality of its infrastructure, make the most of the research capabilities of its world class universities, and maintain a competitive tax regime. In fact, that’s not a bad shopping list for the Chancellor to focus upon in the Budget. But we should not expect miracle solutions – it will be a long and bumpy road to recovery.