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.