More Wrong Kind of Growth


The UK economy experienced another year of modest economic performance in 2017. Despite the technological drive for change across a range of industries, political, public sector, business investment and consumer factors held back the pace of economic development.

The consensus is that there will be ‘more of the same’ in 2018, with the ‘wrong kind of growth’ persisting unless productivity accelerates. Inflation is expected to stay above target but ease back from its exchange rate highs. The risk of recession is higher than the risk of a boom but an improving world economic outlook suggests some upside to offset BREXIT uncertainties.

Even if the forecasters are correct, there should be considerable interest in major structural changes that will be negotiated or get underway this year, especially those related to future trade patterns and industrial strategy.

Against this background, local businesses are confident, operating at high capacity and continuing to face constraints from infrastructure and skills. The need for investment in competitive productivity has never been stronger.

The UK Economy


UK Annual Quarterly Monthly
Real GDP (%ch, yoy) +1.8 (’17) +1.5 (Q4) n.a.
CPI inflation (%ch, yoy) 2.7 (’17) 3.0 (Q4) 3.0 (Dec)
LFS unemployment (%) 4.9 (’16) 4.3 (Q3) 4.3 (Aug-Oct)
Trade deficit* (£bn) -40.7 (’16) -5.8 (Q3) -2.8 (Nov)
Base rate (%) 0.29 (’17) 0.41 (Q4 17) 0.5 (Jan 18)

Source: ONS   *goods and services

The UK economy (table above) ended 2017 with modest growth, high inflation and low unemployment. The trade deficit was probably shrinking a bit and interest rates were starting to edge higher, along the yield curve. There were signs of good activity in some manufacturing and export sectors but the overall mood in many industries was more sombre, with uncertainty about the future weighing on business decision making. At the same time, consumers were restrained by falling real incomes whilst net government and net trade’s contributions were unhelpful, at best.

For 2018, the questions are whether unemployment has troughed, inflation has peaked and growth can be maintained. Most forecasters suggest a slight move away from the ‘wrong kind of growth’ towards more productivity-led activity but the extent of the improvement is expected to be modest. In particular, the consensus of current forecasts is for 1.4% growth and 2.4% inflation, both slower than in 2017.


There were three key messages from the OBR in November:

  • The cyclical economy is weaker than previously thought: growth projections fell (not forecast to reach 2%p.a. over next 5 years).
  • The structural economy is weaker than previously thought: growth potential dropped to c1.4% per annum (because productivity worse).
  • The fiscal economy is weaker than previously thought: public finances in deficit until 2019/20. (Debt burden stays close to 80% of GDP.)

Essentially, the OBR is predicting more of the same over the forecast period. This can be summed up as “the wrong kind of growth” – growth not fuelled by enough investment, productivity and real earnings.   The economy is operating near to potential and there is little spare capacity. In the near term, BREXIT uncertainty dampens domestic and foreign direct investment, whilst reducing net immigration, compared with what otherwise might have occurred.

There are two broad risks to this OBR central outlook:

  • Fears about BREXIT disruption may be over-stated. New technological innovation, skills and investment may add value more quickly than anticipated. Also, a buoyant world economy could provide more of a local boost, as long as the pound remains competitive and UK trading patterns can be adjusted smoothly. Output and productivity growth may get back to 2% p.a. or more sooner than we think.
  • The forecasts are now so low, however, that the chance of a shock to confidence causing a further slowdown, even recession, cannot be ruled out. Investment and consumption may stagnate because of constrained living standards/high debt burdens, new trade barriers/corporate realignment of capacity and operations, and higher interest rates.

The future is always uncertain but the current UK outlook is particularly so.


Interest rates remain very low and are only expected to increase slowly over the next few years. Base rates probably need to get back to about 3.5% at some point (roughly equivalent to underlying nominal GDP growth), if pre – Great Recession ‘normality’ is to be restored.

As long as this is done in small, slow steps, such an adjustment need not hurt overall economic growth. There may be some pain for over-extended households and corporate debtors who have not planned properly for higher rates, but a gradual process of change to more ‘normal’ interest levels will improve resource allocation in time – a necessary condition for getting the economy working well and sustainably.

The fiscal side of stabilisation policy remains constrained by historical and projected levels and ratios of debt. Political imperatives may allow some easing of the immediate fiscal stance, but the room for manoeuvre is limited in a low productivity, low growth economy that is losing clarity about access to important international markets.

Structural reform of the public finances is warranted but may be difficult in the current febrile environment of BREXIT and minority government.

The Dorset Economy


The evidence is that the local economy lost a little momentum in the second half of 2017, reflecting the uncertainty about how BREXIT will evolve. It is unclear as to whether this is a real effect or a convenient scapegoat and some local firms are still quite sanguine. Whatever the truth, the impact is the same – more modest growth in 2018.

For example, the collapse of Carillion (15/1/18) suggests construction and public services may lose output in the near term whilst worrying statements from Airbus (FT 16/1/18) about the prospects for aerospace cast something of a cloud over local supply chains. Similarly, there have been a number of reports, notably from the CBI (FT 26/1/18), that contingency plans for “no deal” are being implemented by externally orientated businesses and this will involve a loss of UK jobs.

The latest Federation of Small Businesses Survey (FT 5/1/18) found a high number (1 in 7) of respondents planning to downsize, close or sell the business in 2018. The overall confidence index was negative for only the second time in five years – the other time was just after the BREXIT referendum day 2016. Falling profits were highlighted, as costs increased and demand, especially consumer demand, weakened.

Similarly, the most recent Chamber of Commerce Survey casts a subdued shadow over the business atmosphere. It shows waning confidence in manufacturing and services at a national level. In Dorset, the mood was steadier about current activity and prospects. Locally, in the latest quarter, sales and orders remained positive and employment and exports grew. In the year ahead, more Dorset respondents expect turnover and profitability to rise than to decline. The prospects were steady compared with the previous quarter – an outlook a bit more confident than seen in the country as a whole.

The various Purchasing Managers’ surveys continue to send mixed signals but there was a softening of activity through 2017 in the SW region, including Dorset. The December report showed business confidence about the near future resilient yet the output and employment measures, whilst still positive, were lower. Compared with a year ago, last month’s output reading was down 11% (from 58.7 to 52.2).

Meanwhile, in the year to September 2017, Dorset enjoyed virtually full employment, with most local places’ ratios below national and many below SW regional averages (see next table – SW averages 78% and 3.5% respectively).

Local Labour Indicators (Oct 2016 – Sep 2017)

Emp % Unemp % Emp % Unemp %
Bournemouth 76.4 3.8 Dorset 78.5 2.7
Poole 75.3 3.2 Somerset 74.8 4.0
Christchurch 80.7 2.3 Devon 78.3 3.0
East Dorset 80.6 2.4 Wiltshire 81.0 3.1
North Dorset 83.7 2.5 Southampton 73.3 4.9
Purbeck 85.2 2.3 Portsmouth 74.0 4.3
West Dorset 79.4 2.7 Hampshire 81.1 3.0
Weymouth & Portland 62.8 4.0 Isle of Wight 71.8 4.3

Source: ONS: employment 16-64 age groups, APS. unemployment 16+ economically active

The local labour market is tight and living costs high, making it hard to find and attract new and replacement skills as long as companies are unwilling or unable to pay higher wages. Skills acquisition and retention is a key area in need of improvement if Dorset is to move towards more sustainable, productivity-led growth.

There is also an issue about a shrinking of the ‘middle’ market, with new entrants (16-25 years old) finding it hard to enter and progress along a desired career path (see Prince’s Trust Survey released 24/1/18 – said to reveal “a staggering deterioration of young people’s confidence in themselves and in their future”).


In December, the ONS released latest numbers on the GVA breakdown for 2016 for Dorset.  Total GVA was £16.1bn in 2016 (current prices), placing the county 32nd out of the 38 LEP areas – roughly as expected given its relative size. In terms of GVA per head, taking population into account, Dorset achieved £20,900. This broad measure of productive performance showed Dorset to be below regional and national averages, ranking 24th out of the 38 LEPs.

Dorset’s index of GVA per head was 79.3 (UK average = 100) – down on the previous year. For the first time, Dorset was more than 20 percentage points (pps) below the national average, continuing a long-term downward trend.

This slippage in comparable standing is disappointing. Although it reflects a widening gap across the country (Greater London versus the rest), it also indicates a poor relative local productivity record: Dorset GVA per head dropped from just 8.7pps below the UK average in 2000 to 20.7pps below average in 2016.

This fall in the relative GVA per head index is similar to the experience of other south coast areas. Amongst the 12 “southern” LEPs listed in the next table, Dorset ranked 10th on GVA per head. Only four of twelve have seen a positive change over the last two decades.

GVA per head by LEP area, UK = 100 2016 & pps change since 1998

index change   index change
Cornwall & IoS 64.8 -0.5 Solent 91.7 -8.9
Heart of the SW 75.2 -4.7 Oxfordshire 126.6 +6.9
Dorset 79.3 -9.4 Coast to Capital 95.6 -10.5
Gloucestershire 99.1 +3.0 Bucks Thames Valley 114.3 -12.7
Swindon & Wilts 96.9 -12.2 Enterprise M3 122.3 +2.1
West of England 111.5 +4.5 Thames Valley Berks 158.4 -6.1

Source ONS.

Recent growth in Dorset GVA has been in services, with most growth in business and financial services and least in manufacturing and resources. Production has gone from 23.5% of the economy in 1998 to 18.5% in 2016. This 5% loss has shifted largely to private services (not including real estate).  Within Dorset, about two-thirds of the GVA was generated in the east Dorset conurbation – Bournemouth, Poole, Christchurch and East Dorset (next table shows details).

GVA & GVA per head within Dorset: All industries

£mn £/head GVA % share
Bournemouth 4,145 20,971 25.7
Poole 3,964 26,167 24.6
Christchurch 1,019 20,596 6.3
East Dorset 1,693 18,999 10.5
North Dorset 1,233 17,354 7.6
Purbeck 879 18,962 5.5
West Dorset 2,322 22,905 14.4
Weymouth & Portland 875 13,386 5.4

Source: ONS

The Government’s recently announced Industrial Strategy (below) aims to correct some of the imbalances and inadequacies displayed by the latest GVA statistics.

The annual GVA regional performance publication will always be one of the areas where future analysts will observe whether the Industrial Strategy is having the desired effect.

The Development Outlook


More open trade deals between customs unions/countries are intended to increase economic welfare for all partners to the agreement by reducing barriers to exchange in the markets and sectors covered by the agreement, i.e. by increasing economic efficiency, productivity and wealth.

Economic analysis shows decisively, in theory and in practice, that movement towards open (freer and fairer) trade is a net ‘good’ for all concerned. It is one of the things on which virtually all economists agree: more open trade increases competition, raises productivity and boosts living standards for trading partners as resources are re-allocated to reflect absolute and comparative advantage. Although there may be internal distribution issues, all macro parties are better off.

Historically, most trade deal activity has been based on trade in products rather than services but, increasingly, more agreements are likely to be made about the latter. It is important, however, to remember that trade deals are political as well as economic animals. Sadly, the spirit of mercantilism – the view that trade is a zero-sum game with winners (surplus generators) and losers (deficit generators) – is far from dead. In a world of “America First” and “Deutsche vorherrshaft”), Ricardian views of trade – that efficient and mutual specialisation means it is not a zero-sum game) – need to be defended.

This is what is worrying about BREXIT. For example, one of the UK’s comparative advantages is in financial services. Shifting capacity from London to Paris, because of reduced EU access freedoms/passports for the former, merely diminishes both countries’ ability to create total wealth most effectively: a potentially negative reallocation of resources.

The problem is that BREXIT does the opposite to ‘normal’ trade negotiations. For any likely eventual UK-EU terms, it leads to a constraint on trade rather than a liberalisation. Even if, in the long run, ‘freer’ trade deals are agreed with other trading blocs, it will be many years for the near-term losses to be compensated for. There are costs of losing ‘single access’ for both sides.

Also, under BREXIT, failure to set a trade deal with the EU does not mean, as it usually does, a return to the status quo. It results in a less open move to WTO rules. Countries that have a ‘better than WTO’ trade deal with the EU – e.g. Norway, Switzerland, Canada, South Korea – and those further along in the trade negotiations – over 50 in total – would have better access to EU markets than the United Kingdom after a ‘hard’ BREXIT.

Both the EU and the UK lose trade opportunities from a failure to agree favourable terms. Currently, the EU takes c40% of UK exports. The UK takes c10% of EU exports. At the margin, it is not easy for either to substitute these patterns with new markets quickly.

Finally, there are the psychological effects on supply chains – club members tend to deal more with themselves than outsiders – even at an economic cost. There are already reports that UK companies are finding it hard to get onto the list of potential suppliers in the EU after March 2019 and attracting EU ‘talent’ is getting tougher.

There are always winners and losers when trading structures change but BREXIT, by meaning less open trade, means the average UK citizen will be poorer than would otherwise have been the case – unless there is speedy substitution elsewhere. Future politics will be judged on whether this price is material or not and on whether it turns out to be a price worth paying. It is hoped we do not have a populist, more closed economy by the early 2020s.


Turning to the Industrial Strategy released in November One of the government’s key ‘antidotes’ to BREXIT trade affects, the key point is that it presents a worthy intention to tackle the UK’s long-established and widening productivity ‘gap’ (with its closest competitors) by rebuilding the underlying capacity and export competitiveness of UK sectors, places and workers. The issue is whether it yet amounts to more than throwing everything into the kitchen sink and seeing if anything floats!

The Industrial Strategy is a long-term plan to boost productivity and earnings, based on five foundations – re-packaging the drivers of productivity as follows:

  • Ideas (innovation): raise R&D as a percentage of GDP, turn more inventions into markets, and preserve and extend collaboration between economic actors.
  • People (skills): advance technical education, STEM and retraining – raising quality, filling gaps, and spreading spatial capacity and opportunity.
  • Infrastructure (investment): expand transport, housing and digital infrastructure and use public procurement to build resource efficiency.
  • Business Environment (entrepreneurship and competitiveness):
    generate government-industry sector deals, make UK the place to start and grow businesses, and develop a fiscal system that supports scale-ups and exports.
  • Places (local capacity and competitiveness): produce local industrial and transforming cities strategies that narrow regional productivity differentials and other disparities through local leadership and co-operation between places.

The Strategy announces sector deals for the life sciences, construction, artificial intelligence, and automotive industries and proposes ones for creative industries, industrial digitalisation, and nuclear. It also intends to form a team that will support future (emerging and disruptive) sectors.

The Strategy presents four Grand Challenges for the industries of the future – aspiring to a fourth industrial revolution of technological fusion. The four are: artificial Intelligence & big data, future mobility, clean growth, and ageing society. If engaged, Dorset can feature positively in each of these areas.

The Strategy also promises a review of LEP roles. The Industrial Strategy requires Dorset to produce its own Local Industrial Strategy under the LEP’s guidance, although when, what and how this will be done is not yet clear.

The Strategy talks about the composition of the UK economy, with its world class heights but much mediocrity, as being a major cause of relatively low productivity. Any new policies to address this need to emphasize how sustained growth is generated: globally competitive productivity growth on the supply side and greater trading engagement on the demand side.

The Industrial Strategy discusses many of the ‘right’ issues and proposes to act on many of the ‘right’ levers. The timescales, resourcing and processes are unresolved, but it is a reasonable framework for future development, based, as it is, on improving national and local productivity performance.

As with all UK government’ approaches to sub-national development, however, the uncertainties are about long term political commitment and consistency, especially in an era of changing international economic relationships, and about private sector and local buy-in across industry and place.

For Dorset and its neighbours, the important thing is to improve existing economic linkages – markets, supply chains and wider connectivity – and to develop new ones. We need more connective agglomeration, higher aspirations and a positive attitude towards personal, business and community development.

Key Data for Dorset


On 20th December, ONS released the latest regional and sub-regional gross value added (GVA) figures, including historical revisions. For the first time, it produced ‘balanced’ data between the incomes and production methods.

GVA is the standard measure of total ‘output’ generated in a particular place (below the national level) over a particular period. The new numbers are for 2016 and provide a structural benchmark for most local economic analyses. (Given the sluggish performance of the UK and local economy this year, the relative scores are unlikely to have shifted markedly in 2017.)

Total GVA and GVA per Head

Dorset’s total GVA was £16,130mn in 2016 (current prices), placing Dorset 32nd out of the 38 LEP areas. Given the area’s relatively small size (economically), this ranking is roughly to be expected. These standings do not change much from year-to-year because all UK areas tend to grow or fall together. However, there can be lags between the different parts of the country when significant changes in trends are taking place (such as periods of recession). Also, in the long run, there can be bigger changes in position as industries wax and wane and local specialisms grow or fade.

In terms of GVA per head (see first table below), a better measure of relative performance because it takes total population into account, Dorset still did not fair that well. Ignoring some commuting effects, this is a broad measure of productive performance. It shows Dorset to be below regional and national averages (see table).

GVA per head (new balanced approach)

£’000 2015 2016 UK = 100 2015 2016
Dorset 20.5 20.9 Dorset 80.1 79.3
SW 22.4 23.1 SW 87.3 87.7
SE 28.1 28.7 SE 109.8 108.9
England 26.4 27.1 England 102.9 102.9
UK 25.9 26.6 UK 100 100

Source: ONS

Dorset’s index measure of 79.3 (compared with the UK average = 100) was down on the previous year. Indeed, for the first time, Dorset was more than 20 percentage points (pps) below the national average, continuing a downward trend that has existed since, at least, 1997. Dorset ranked 24th out of the 38 LEP areas on this measure.

In historical terms, this ‘middling’ ranking is roughly where one might expect Dorset to be, given that nowhere is standing still and given the sector and infrastructure characteristics of the county. Nevertheless, it is disappointing that recent slippage in comparable standing continues. Dorset GVA per head dropped from just 8.7pps below the UK average in 2000 to 20.7pps below average in 2016. This suggests a significant erosion of relative living standards for Dorset residents over the last 15 years. (N.B. it is not an absolute decline. The numbers are not inflation adjusted and all areas can still be growing. It is the relative change over time that is unfavourable.)

In mitigation, some of this relative decline is caused by the more general widening of the gap between Greater London and most of the rest of the country. London has pulled the UK average up compared with the more economically peripheral areas. Nonetheless, the basic story remains one of a poor local productivity performance in Dorset (and elsewhere): a “lost” decade or so of potential growth in living standards.

Broad Industrial Breakdown

The next table shows the broad industrial breakdown of local value added.

Share of Dorset GVA by industry (SIC classification, % of total)

  1998 2016   1998 2016
ABDE 4.7 2.7 GHI 18.0 17.7
C 12.7 9.3 J 2.7 2.7
F 6.1 6.5 K 6.0 7.3
All production 23.5 18.5 L 22.2 20.2
      MN 5.9 9.0
OPQ 18.2 20.5 RST 3.5 4.1
Public services 18.2 20.5 All private services (except L) 36.1 40.8

Source: ONS

Definitions: ABDE = agriculture, forestry & fishing, mining and quarrying, utilities-fuels, water & waste. C = manufacturing. F = construction. GHI = distribution services (retail, wholesale, transport, accommodation). J = information & communications. K = financial and insurance activities. L = real estate. MN = business services (professional, scientific, technical, administration & support).   OPQ = public services (administration, defence, education, health & social). RST = leisure & culture, household and other personal services).

In industrial terms, all recent growth in Dorset GVA (1997 onwards) has been in services, with most growth (in nominal terms) in business and financial services and least growth in manufacturing and the land-based/fuels producers. The table above shows the broad movement over time in major sector shares. Production has gone from 23.5% in 1998 to 18.5% of the economy in 2016: a drop of 5% in less than two decades. This 5% share has shifted largely to private services (excluding real estate – L climbing from c36% to c41%.

Local LEPs

Amongst the 12 “southern” LEPs (as highlighted in the next table below – first column), Dorset ranked 10th on GVA per head, with only the two furthest west SW areas below it. Overall, across southern England, there were clear ‘east-west’ (peninsula) and ‘north-south’ (coastal) divides in productive performance, overlaying the more usually recognised ‘urban-rural’ one. The divergence across southern England remains significant: fully 93.6pps across the patch from Berkshire to Cornwall. Sadly, Dorset has slipped towards the relegation zone.

GVA per head by LEP area, UK = 100 2016 & pps change since 1998

  index change   index change
Cornwall & IoS 64.8 -0.5 Solent 91.7 -8.9
Heart of the SW 75.2 -4.7 Oxfordshire 126.6 +6.9
Dorset 79.3 -9.4 Coast to Capital 95.6 -10.5
Gloucestershire 99.1 +3.0 Bucks Thames Valley 114.3 -12.7
Swindon & Wilts 96.9 -12.2 Enterprise M3 122.3 +2.1
West of England 111.5 +4.5 Thames Valley Berks 158.4 -6.1

Source ONS.

It is interesting that eight of the LEP areas in the table above have experienced a relative decline in performance since 1998 (second column). Over this period, Dorset’s 9.4% drop in its GVA per head index is similar to the experience of the other south coast areas – Devon (HoSW -4.7%), Hampshire (Solent -8.9%) Sussex (Coast to Capital -10.5%). Cornwall (-0.5%) has just about held its own, (perhaps, because of the substantial development funding that has poured in under EU regional policies) whilst Kent (part of the South East LEP -8.1% – not listed) was also down.

Clearly, there is an issue about relatively weak economic achievement along the English south coast, probably explained by changes in industrial structures – sector and technological specialisation and employment and skills distribution.

Perhaps, the “South Coast Corridor” deserves support from development agents and funding as much as the “Midlands Engine” and the “Northern Powerhouse”.

Within Dorset

Within Dorset, about half of the GVA was generated in Bournemouth and Poole (combined £8.2bn in 2016) and half in the rest of the county (£8.0bn). If we include Christchurch and East Dorset with Bournemouth and Poole), the split would be £10.8bn for the main Dorset conurbation and (£5.3bn) for the rest (roughly 2/3rds to 1/3rd). The following table shows the GVA and GVA per head breakdown within Dorset in detail

Because Dorset has a distinct urban and rural diversity, commuting patterns are important inside the county and between it and its neighbours (mostly to the east). Some GVA produced in the Dorset towns is made by non-residents, but GVA per head is calculated on residents alone. Some Dorset residents’ output is recorded in the Greater South East and some output in the conurbation is generated by labour commuting in from outside. This is why the GVA per hour series for Dorset that relate value output to worker effort – scheduled for release in January – are a better measure of underlying labour productivity.

GVA & GVA per head within Dorset: All industries

  £mn £/head GVA % share
Bournemouth 4,145 20,971 25.7
Poole 3,964 26,167 24.6
Christchurch 1,019 20,596 6.3
East Dorset 1,693 18,999 10.5
North Dorset 1,233 17,354 7.6
Purbeck 879 18,962 5.5
West Dorset 2,322 22,905 14.4
Weymouth & Portland 875 13,386 5.4

Source: ONS

By broad industry (SIC Codes as before), the distribution of GVA is shown in the next table. Unsurprisingly, it confirms the importance of the conurbation for many industries, with the per resident head measure ranging from over £26,000 in Poole to about half that in Weymouth and Portland.

For example, in 2016, B&P contributed 44% of the land based/utility industries, 37% of manufacturing, 41% of construction, 49% of distribution, 58% of information and communications, 86% of financial services, 46% of real estate, 47% of professional services, 53% of public services, and 44% of leisure and other services.

Similarly, it is interesting to note some of the differences in sector importance for different parts of the county. For example, the biggest industries in each area were, respectively, distribution in Weymouth and Portland, public services in West Dorset, Purbeck, North Dorset, Poole and Bournemouth, and real estate in East Dorset and Christchurch.

The table can be used to show were different sectors are important locally. For example, manufacturing is clearly important in Poole but it is also particularly important, albeit at a lesser scale, to activity in East Dorset and West Dorset. Distribution (retailing and transport etc) is important everywhere but some sectors are more concentrated in urban domains, including financial and business services.

GVA Industry Breakdown within Dorset (2016, £mn)

  Bournemouth Poole Christchurch East Dorset
ABDE 44 146 10 57
C 113 453 116 244
F 211 224 80 145
GHI 757 650 211 266
J 128 127 50 40
K 656 359 26 52
L 820 694 250 427
MN 361 313 105 150
OPQ 903 859 132 254
RST 151 140 39 59
  North Dorset Purbeck West Dorset Weymouth & Portland
ABDE 46 52 63 15
C 162 116 255 44
F 119 57 159 53
GHI 212 142 404 219
J 28 16 42 10
K 17 10 37 14
L 242 197 444 193
MN 92 78 271 75
OPQ 248 151 563 194
RST 68 60 84 58



The new data reviewed in this briefing shows the broad ‘league’ tables of economic performance, with Dorset middling, at best. Structural, capacity, skills and market weaknesses remain to be addressed. All the UK needs to raise productivity relative to our overseas competitors. But, within the UK, Dorset needs to raise productivity even more to stop it slipping further behind in the table.

The Government’s recently announced Industrial Strategy aims to correct some of the imbalances and inadequacies displayed by the latest GVA statistics (see our LEB22 for a discussion of the Strategy).

Indeed, this ONS regional performance publication will be one of the areas where future analysers of development research will observe whether the Strategy is having the desired impact. The GVA and GVA per head figures will remain a key, annual data source for analysis of regional economic development across the United Kingdom.

Broken: Budget, Brexit & OBR

The key economic message from (yesterday’s) UK 2017 Budget is that there was something of a loosening of macro fiscal policy with a number of measures aimed at encouraging investment and growth.  Analysis of the details is covered by many commentator elsewhere.  The main point of our interest here is the changed OBR view of the overall economy’s future.  It suggests fiscal policy is not going to do much for absolute or relative UK productivity and competitiveness in the next few years.

The most important OBR message is that growth stays below 2% per annum (averaging about 1.4%) because productivity only increases from just below to just above 1% per annum for the foreseeable future.  In consequence, unemployment rates start to rise (though still below 5%) and the inflation rate peaks shortly and falls back to target (2% per annum).  Real earnings start to rise modestly, but only from 2019.  The rise in business investment is anchored at about 2.4% per annum and household consumption increases at a similar rate to the economy as a whole (averaging 1.4%).  Net trade contributes nothing.  As a result, the government deficit ratio drops slowly from over 2% to about 1% over five years and the public sector net debt peaks at 86.5% of GDP in 2018/19 but is still as high as 79% by 2022/23.

The message is stark.  If the central forecast is for growth below 2% a year, the downside risks could be ominous.  If Brexit imposes new barriers to trade, as currently seems likely, the risk of recession becomes far from negligible.  The need to fix the ‘broken’ model of UK development is profound.  Whether it comes from a domestic resurgence fueled by policy on skills, innovation and investment, from an indigenous spark of entrepreneurship and competitiveness (cheap £), and/or from new trade deals with various parts of the growing world, the productivity deficiency has to be closed.  An Industrial Strategy white paper is expected shortly.  The economics and development community will need to interrogate this closely and deeply when it comes.  The fear is that it’s all too late to avoid a harsh economic period in the years ahead.  The broken economy needs mending.

Wrong Kind of Growth

UK inflation hit 3% in September (CPI) and it doesn’t look like reversing downwards soon.  Growth (real GDP) is running at no better than 2%.  Whenever inflation rate > growth rate, it makes one nervous.

Moreover, we have the “wrong kind of growth”: driven by employment growth that is not productivity-led.  Real wages are falling, interest rates and exchange rates are still too low.  The trouble is that cheap labour and cheap money tends to fuel mediocre growth, at best.  Incentives to invest in new capital, innovation and skills are depressed, made worse by current trading uncertainty (BREXIT plus Trump).  Creative destruction is stalled, supporting unproductive ‘zombie’ companies.  Weak sterling offers competitive advantages but can also lower the incentive to do so.

The consensus is that growth will remain subdued through 2018 and  beyond.  Suppressed trade/investment and stretched household/public finances reflect the fundamental productivity gap.  To delay the next recession, we need more investment in the digital revolution in services and, thus, the adjustments needed to skills and innovation that will drive entrepreneurship and competitiveness.  And, that means better inter and intra regional connectivity and higher business aspiration.

The upcoming UK budget/industrial strategy (and the BREXIT negotiations) should focus on these areas of regional development.

Summer of Uncertainty

After an indecisive General Election, and with the BREXIT negotiations now underway, the political runes remain hard to read. Meanwhile, the global economic context is unstable and the economic outlook uncertain.

The financial markets and UK and foreign-owned businesses have reacted warily to the process of regulatory and trading change that is now underway. In contrast, many households are over-borrowing whereas many businesses have robust cash reserves. This and other economic imbalances are profound, especially with respect to productivity, trade and the public finances- regardless of how BREXIT proceeds.

Against this background, the latest data show a mixture of below trend growth and above target inflation, with high employment, low unemployment and, still, low interest rates. Consumer and business surveys remain largely positive but there is a marked contrast between negative real wage growth (hurting average households) and, despite poor productivity figures, improving profitability (net rates of return for average businesses).

Meanwhile, the key business issues are ones of skills deficiencies and tight labour markets contrasting with some caution over investment and competitiveness. Generally, the economy is growing but losing some momentum.

Latest evidence

  Annual (2016) Quarterly Monthly
Real GDP (%ch, yoy) +1.8 +1.7 (Q2 17) n.a.
CPI inflation (%ch, yoy) +0.7 +2.7 (Q2 17) +2.6 (Jun)
LFS unemployment (%) 4.9 4.6 (Q1 17) 4.5 (Mar-May)
Trade deficit* (£bn) -£37bn -£8.8bn (Q1 17) -£3.1bn (May)
Base rate (end %) 0.25 0.25 (Q2 17) 0.25 (July)

Source: ONS   *goods and services

Economic growth may be petering out, with household spending constrained by prospects for real incomes (earnings not compensating for higher inflation, despite high employment). Investment remains modest and net trade in massive deficit (overall, price effects outweighing substitution effects despite some headline successes). Longstanding UK economic weaknesses persist.

It is always regrettable when the inflation rate exceeds the growth rate (see table above). UK growth went from fastest to slowest amongst the G7 over the year to Q1 2017. For April-June, there was a tiny bounce but, it appears to be one of the ‘dead cat’ variety. In the first half of the year, UK real GDP growth was running at half the rate it did in the second half of 2016. Given the uncertainty surrounding BREXIT, most forecasters expect this underlying loss of pace to persist.

On the policy front, the ‘hung’ Parliament suggests some erosion of fiscal austerity might occur. It could also mean a stalling (before it has really begun) of the “Modern Industrial Strategy” – the white paper is now promised before end year. It is to be hoped that uncertainty about the BREXIT negotiations and the government’s lack of a strong electoral mandate do not stand in the way of positive action on public investment at home.

Meanwhile, with inflation above target and expected to remain so, albeit lower in June than May, the Bank of England remains extremely loose. Contrast its unchanged interest rate and QE stance with the actual and pronounced movement to a ‘less loose’ position by the US Federal Reserve, as the US recovery builds. It will be interesting to see if the European Central Bank, already talking about having removed the risk of deflation, abandons its negative interest rates and its QE measures later this year – now that the EU economy is grinding out some forward momentum (at least its better bits).

Financial Stability

The Bank of England’s latest Financial Stability Report (June 2017) describes the current domestic financial position as having risks at a “standard level”, which seems to mean ‘broadly normal, no immediate threats”). Nevertheless, the Financial Policy Committee (FPC) is highlighting four main “pockets of risk” that “warrant vigilance”.

  • Consumer credit is growing too fast (+10.3% in the year to April 2017), especially in unsecured loans for motor vehicles, credit cards and other personal loans. Because the maturity on these types of credit are relatively short, loan viability can deteriorate rapidly if the macro environment becomes adverse. The FPC is concerned about the commercial banks relaxing loan criteria and cutting margins. It is asking whether risk is being correctly priced by the banking sector. Some commentators worry that consumer finances look precarious, as they did in the pre-crisis days of 2007.
  • Mortgage debts are high (average debt/income ratio above 100%) and potentially vulnerable to higher interest rates. Although the latter are unlikely to rise sharply in the foreseeable future, debt levels are high enough relative to incomes to suggest even small changes could prove problematic. Periods of economic adjustment can be worsened by an unbalanced mortgage market because mortgage payments tend to be maintained by households as interest rates rise or incomes are lost, requiring other spending to be cut. This can transmit adverse mortgage effects quickly to the wider macro economy. Indeed, banks with bad loans in housing tend to react by reducing lending to the rest of the economy/unrelated sectors, reinforcing any macro downturn. The FPC is asking banks to stress test their home loan books for mortgage rates 3% above current standard variable rates, indicating where we might be heading on rates over the longer term.
  • Financial market assets may be overvalued. UK bond yields are very low (-c2% for 10-year gilts) and volatility is minimal. Commercial property values are high and some would argue that corporate share values are overstretched. Sudden corrections in these markets could have significant impacts on broad financial stability and detrimentally affect macro growth.
  • Although world growth has accelerated recently, the FPC identifies some global risks, particularly the high debt levels supporting growth in China and the high exposure of UK banks to any correction there. It is also concerned about the continuing high-level of non-performing loans in Italy and ‘peripheral’ Europe. The ‘holes’ in the books of the Italian banks could yet undermine the euro.

Beyond these four risks, the FPC also mentions concern for the banks if disorder from the BREXIT negotiations emerges and vulnerability to cyber-crime is exposed.

Overall, the banks have strengthened their capital positions markedly since the 2008/9 crisis but their profitability remains weak. Stress tests reveal that resilience is good but, given the risks highlighted above, continued vigilance is required. The FPC is right to be watching closely and recommending early action to prevent excesses in UK banking.

Macro Stability

Meanwhile, the Monetary Policy Committee (MPC) of the Bank of England is beginning to talk about raising interest rates and starting the process of ‘normalisation’ – by reducing the overhang of liquidity from quantitative easing (QE). In May, the MPC vote was 5-3 in favour of keeping the base rate at 0.25%. The ‘mood’ music is that the Bank wants to prepare the markets and other economic actors for a slow tightening of monetary policy from here.

Although inflation is now above target, the MPC does not expect this to last because, as yet, there is no momentum towards higher inflation from the labour market. The drop in the ‘headline’ inflation rate from May to June (back to 2.6%) was taken as evidence for this view. Accordingly, there will be no major increase in interest rates soon. Thereby, the ‘awkward’ incentives provided by prolonged low interest rates, which continue to hinder the savings/investment process, and to support unsustainable domestic debts and so-called ‘zombie’ firms, look likely to persist.

Since the General Election, there has been some debate about the future of the governments’ ‘austere’ approach to fiscal policy. Some loosening may be seen in the Autumn Budget but the internal Conservative Party conflict between ‘wets and dries’ and ‘brexiteers and remainers’, and about the future leadership makes any prediction on this front futile. Fiscal policy is just another uncertainty for business and households to deal with.

Macro stability also hangs on the ‘success’ of the UK’s trade negotiations with Europe and other major trading blocs. New impediments to free trade, real (tariffs, quotas, regulation or other trade barriers) and psychological (affecting aspiration and trade engagement by UK and foreign companies), would be a major blow to productive potential, trend and achieved growth, and future living standards. As recent discussion of the demands of the strong agricultural and health lobbies in America indicate, the UK willingness to do non-EU trade deals is confronted by the reality of BREXIT transition and the potential need for difficult compromises and unforeseen consequences.

The Economic & Development Outlook

At the time of the pre-election Budget (March 2017), the Office of Budget Responsibility (OBR) set out modest and largely flat economic prospects for the UK economy.  Since then, other forecasters, including the OECD and the IMF (down from 2% to 1.7% for 2017 real GDP growth and 1.4% for 2018), have been moderating their views and helping to create a more subdued consensus. For example, the latest (June) HM Treasury monthly survey of independent forecasters shows growth at 1.6% and inflation at 3% in 2017 and 1.4% and 2.5% respectively in 2018. The equivalent unemployment rates are 4.9% and 5.1%. The current account deficit and public-sector net borrowing improve a little but remain excessive.

Overall, the UK and local economies are forecast to slow down further over the year ahead, with a small increase in unemployment and still weak productivity. There is a strong real and policy need to break this pattern (see our Local Economy briefing 19 – Productivity Revisited – released with this report). The promised “Modern Industrial Strategy”, including significant real investment in productivity-growing capacities, is sorely needed.


During this summer of uncertainty, UK macro stability is being tested by a global and domestic environment that is undergoing profound structural and psychological change.

The Economic Grand National

Thoroughbred or Plough Horse[1]

With the UK’s economic performance better than feared in the last half year, fuelled by robust consumer spending, but with a number of clouds on the horizon, it is a good time to look ahead and see how the economy stands.

The economy is rather like the Grand National horse race. It’s an endurance test with a number of barriers to overcome where the steeds generally move forward carefully. Sometimes the gallop cannot be sustained for long without problems building up: an overheated horse (economy) may well get pulled up.  Over a racing career (the economic cycle), the horse needs to be fed (by investment) and it needs occasional periods of recuperation (rebalancing) but, once the race is on, it only stops if there is a reason to make the horse falter.  Usually, this occurs because hurdles are put in the way that are too high for the racehorse to jump or the jockey is too heavy for the horse to carry over the distance.

There are four ways the hurdles and jockeys of economic policy can slow the horse down or, indeed, make it fall.

Monetary Policy: Monetary policy, guided by the Bank of England, is about setting interest rates to influence the demand, and setting reserves to influence the supply, of money.  Monetary policy can slow the economic horse by setting interest rates too high, too quickly and by restricting access to funds or speed it up by being “loose” on the reins.  Effectively, monetary conditions influence the height of the fence to be jumped and the style of the jockey.

Theoretically, base interest rates should relate closely to the nominal growth of GDP, linking money to the real economy.  In the UK, given an inflation target of 2% per annum and a trend real growth rate of about the same (as estimated by the OBR), ‘normal’ nominal GDP growth would be about 4.0% per annum.  With official interest rates at 0.25%, the Bank is very far from putting interest rates anywhere near this ‘normal’ rate, largely because of excess savings (driven by an ageing population) and a period of persistent slow growth.  The UK’s poor productivity performance since 2008 reflects ongoing low interest rates, because these encourage the survival of inefficient enterprise.

In addition, after Quantitative Easing and other efforts to supply money to the economy, we have huge excess reserves in the banking system.  These could be a major threat to the horse’s stability (high future inflation) if left intact.  Already, they create a ‘brake’ on interest rate increases.  Right now, the monetary fences for the horse to jump are almost imperceptible.  Moreover, in the foreseeable future, there is little expectation that interest rates will rise and reserves will fall, sufficiently to significantly slow or ‘pull up’ the economic horse.  Unless or until inflation accelerates (above target indefinitely), the monetary fence will remain low and, surely, no barrier to growth (completing the race).

Trade Policy: Trade policy sets the conditions of international exchange and regulates access to markets. It is another potential hurdle for the economic horse.  Economics teaches us that barriers to trade are ‘bad’ and free trade ‘better’ for keeping the horse running.  Trade creates more jobs through supporting a sustained faster running pace of/for output growth.

BREXIT and the policies of President Trump raise the spectre of more protectionism – higher barriers, taxes and tariffs on trade.  The key point is that all parties in the global economy are interdependent.  Economic rationality suggests both importers and exporters will not wish to put the trading system at risk.  Many ‘policy jockeys’ get this.  There is clearly, however, some present danger that political actions, couched as popular nationalism, will undermine the global trading system.  There is a risk that this trade fence goes up sharply and, at best, may slow and, at worse, unseat the economic horse in the years ahead. There is a clear downward risk to growth from trade protectionism.  But, this is not a given.  If all the negotiations go well, there could be a big upside – the promised land of the UK as a multi-agreement trading partner with all parts of the world could increase the sustained and sustainable speed of our horse.

Tax Policy: Taxes on business are used to fund public policies that intervene in the economy in order to address market failures and fund socio-environmental priorities.  The political debate about how big the public sector should be relative to the wealth creating private sector is a long-established and hard-to-resolve chasm.  But, note, public funding comes from taxation or borrowing – both require a drag on the payers.  Essentially, high corporate or sales taxes and a complicated tax code are like having a heavy jockey on the back of the business horse.

UK administrations have been reducing some corporate tax rates in recent years.  Indeed, there has been a competitive race to the bottom by some of our competitors (notably Ireland) on corporate taxes.  Furthermore, President Trump vows to join in (cutting the tax burden – rates and rules – on US corporates).  BREXIT raises the possibility of business, sales, or other UK tax rate changes in future.  It may mean UK governments have scope to simplify the system or they could be looking for ‘new’ sources of revenue.  At present, it is unclear how the UK’s competitive position on tax will evolve post-BREXIT but it is not expected to hinder the horse too much in the near future.  The tax jockey is not expected to overburden the business runner – but these could be famous last words.

Spending/Regulation Policy:  New technologies and process innovations are fuelling economic growth.  Excess regulation and non-productive state spending can hurt this growth process by putting a heavier jockey on the horse.  Too much or misdirected state spending or regulation can change a business thoroughbred into a plough horse – cutting its potential speed (of growth) over the medium term.  Alternatively, reducing business regulation could be an important mitigation for any negative BREXIT effects through trade policy.  Rebalancing from government consumption to government investment could be an important part of a new “Modern Industrial Strategy” in the years ahead.

Overall, then, monetary policies seem set to continue to support the economic horse whilst tax and regulations policies could go either way and trade policies risk hurting it.  The net balance of these factors, as the terms of the UK’s new trading relationships emerge, will be key to how the stamina of the economic horse develops in the next five years.  There is a risk that trade protectionism sets higher fences: turning our steed into a plough horse – worst case, recession.  However, there is an opportunity for a thoroughbred to emerge from good training, especially if trade deals can be done and tax/regulation policies can support growth just as monetary policy becomes ‘less loose’ or even makes a welcome return to ‘normal’.

Place your bets …. But, remember, the Grand National is a lottery.  Uncertainty is the main risk right now and the main dictator as to which horse comes first over time.

[1] Based on a similar approach to the US economy by Bryan Wesbury, Chief Economist, First Trust Portfolios, Chicago, USA

Feeling Fine?

God Save America.  2016 will go down as the year of Brexit and Trump.  REM sang, “It’s the end of the world as we know it … and I feel fine.”  At the moment, it feels like the end of the global economy as lead by the anglo-countries.  It’s hard to feel fine because markets and economies hate uncertainty and we now have uncertainty in profusion.

Why are economists worried?  Uncertainty usually puts the brakes on investment.  Simply, weaker investment means lower output, fewer jobs, weaker productivity and worse standards of living compared with what might otherwise have been.

Intervention to mitigate these negative effects might be possible … but it’s hard to do that in economies where the public debt is already too high and interest rates are far too low.  Without adverse implications, it’s difficult to add to the public debt, spend more and tax less when fiscal policy is over-borrowed.  It is very hard to encourage productivity-enhancing private investment when expected returns are so depressed.

President-elect Trump said in his victory statement that his administration would double US growth and hinted that this would be done by recourse to massive infrastructure renewal.  That may work but it would be a hard task in good times.  Starting from here, it looks impossible without a high risk of scary repercussions – higher taxes, higher inflation and much higher interest rates … eventually.

It feels like the end of the world economic order as we’ve known it over the last sixty years.  Maybe, we can look back in ten years time with relief about how well it all went but, right now, it don’t feel fine.  God save us all.

A ‘new’ Industrial Strategy

The UK economy is at a crossroads.  A turning point for growth, inflation and employment is apparent in recent data.  The BREXIT vote might have been the trigger for the change of mood because it adds a new layer of uncertainty but the economy was already going that way.  Moreover, the fundamental imbalances of the UK economy – exhibited by huge trade and fiscal deficits, now ineffective monetary policy and poor comparative productivity – have yet to be addressed – whether we voted in or out of Europe.

The ‘new world’ of external relationships, as evidenced by the 18% drop in sterling since July, implies an adjustment of costs (up) and investment (down) that will probably mean lower growth and higher inflation than would otherwise have occurred over the next few years.  Further out, the UK business sector has the ability and scope to mitigate such negative effects and, indeed, more than offset any adverse changes.  British firms and people are still inventive, innovative, skilled, entrepreneurial and competitive.  With change comes opportunity.  The big question is whether the policy regimes adopted over the next few years facilitate that process of market-led adjustment.

In the UK Autumn Statement, next month, it is expected that the Chancellor of the Exchequer will promote a new Industrial Strategy.  It is tempting to say that there is nothing new in the world of sub-national development.  A re-hash of established intervention strategies is probable, which may be no bad thing.

It is likely that the SW LEPs will be tasked to support major national investments (including power stations, runways and railways) through their activities towards future growth deals, enterprise zones and/or wider business support.  The target, as always, will be more productivity and export-led growth backed by a strong business voice.

We await the government’s ideas with both trepidation and expectation.  We hope the LEPs and their development partners are ready for the task ahead.  We will blog on the ‘new’ strategy after November 23rd, assuming enough details about the new policy approach are forthcoming.

By then, we will have a new US president-in-waiting.  With this and BREXIT dominating the macro world, these are exciting times for analysts of the regional economy and the world of local development.