George Osborne’s hopes of using a strengthening economy as the springboard for election victory next May have been dealt a double blow with news of weaker growth during 2013 and 2014 and the biggest current account deficit in the UK’s history.
With Britain’s recovery from its worst-ever recession set to dominate a tightly fought political contest next spring, Labour seized on official figures showing it was unlikely national output would expand this year by the 3% envisaged by the chancellor in the autumn statement earlier this month.
Osborne has claimed in recent weeks that a combination of stronger growth, falling unemployment and a smaller budget deficit have shown that the government’s plan is working and that sticking to the current course is essential.
But the Office for National Statistics said the economy’s performance throughout much of 2013 and 2014 had been less impressive than initially thought. It left growth unchanged at 0.7% in the third quarter of 2014 but revised down its estimates for the five previous quarters – reducing the annual growth rate in the year to the third quarter from 3% to 2.6%.
With fresh figures showing America’s economy expanding at an annual rate of 5% in the third quarter, it will now be touch and go whether Britain is the fastest growing of the leading G7 industrial nations in 2014.
Data from the ONS added spice to the political battle over economic competence when it said gross domestic product per head – one measure of living standards – was rising but the 0.6% increase in the third quarter still left the measure 1.8% below its pre-recession peak.
An alternative measure of national wellbeing – net national disposable income – remained flat in the third quarter and was 5.6% below its pre-recession peak. The measure makes allowances for depreciation and for income generated in the UK that goes to overseas residents. Meanwhile, the UK’s current account – which measures trade in goods and services together with investment income and payments to multinational bodies – was in the red by £27bn in the July to September quarter. At 6% of gross domestic product, the current account deficit is now higher than it was during the so-called Lawson boom at the end of the 1980s, its previous peak.
Shabana Mahmood MP, Labour’s shadow Treasury minister, said: “These are concerning figures. Growth has been revised down for five of the last six quarters, exports continue to disappoint and business investment fell in the last quarter.
“The chancellor has totally failed to rebalance the economy as he promised. And working people are still not feeling the recovery, with wages sluggish and average earnings in real terms down £1,600 a year since 2010.”
Upward revisions to America’s growth exceeded Wall Street’s expectations, with the Dow Jones average pushing through 18,000 for the first time.
The US economy has been growing robustly since a weather-related fall in output in the first three months of 2014 and analysts believe it will expand by about 2.5% for 2014 as a whole.
On the foreign exchanges, the pound fell to its lowest level in a year against the dollar and by the close of business in London was trading at just above $1.55. Currency traders believe stronger growth will lead to the US Federal Reserve becoming the first major central bank to raise interest rates, and were taken aback both by the UK growth figures and the current account deficit.
David Kern, chief economist at the British Chambers of Commerce, said: “While the quarterly results remain strong, the stark revision in annual growth confirms that the pace of recovery is slowing. The most concerning aspect of these figures is that the current deficit has risen to an unsustainably high level – due to the fall in net investment. Although the economy continues to grow, the recovery is not yet secure and further efforts are needed to boost business investment and to help businesses export to foreign markets.”
An ONS breakdown of the economy’s performance in the third quarter showed that growth was heavily dependent on consumer spending, which rose by 0.9% on the quarter. Spending increased despite a 0.1% drop in households’ real incomes, with consumers running down their savings in order to make purchases.
City analysts said political uncertainty might start to weigh on the pound in the coming months. Anna Stupnytska, global economist at Fidelity Worldwide Investment, said: “UK growth has lost steam in recent months, with the housing sector weakness now looking well-entrenched. In 2015, the headwind of political uncertainty is likely to weigh on confidence, at least for the first half of the year.
“However, the lower oil price should also start benefiting UK consumers, and although the associated boost to growth is unlikely to be as significant as in the US, it will still lend a welcome support. At the same time, the lid is likely to stay on inflation, lifting pressure off the Bank of England to tighten for the time being.”
Stephen Lewis, chief economist at ADM Investor Services International, said: “Sterling should remain stable as long as foreigners find the UK an attractive home for their capital but the risks of a sharp fall in the pound would be considerable, given the extent of the current account deficit, if ever foreigners were to lose their appetite for UK investment.
“Such an adverse turn of events might come about if UK economic or political fundamentals were to weaken. But it would not necessarily take developments specific to the UK to trigger trouble. Conditions of general risk-aversion, were they to arise, could also cut the flow of investment funds to the UK, as they did in 2008.”
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