The State of Britain

The UK outperforms Eurozone rivals, uneven regional growth continues and Trumpian interventions in Oldham

Reading Time: 4 minutes

The fastest manufacturing growth in 30 years, stockpiling, and resilient consumer spending pushed UK GDP Q1 growth up to 0.5% or 1.8% annually. Rising energy prices and air fares added to inflation but computer games and package holidays became cheaper. UK inflation rose to 2.1% in April from 1.9% in March.

Average house prices in the UK increased by 1.4% to £232,000 in the year to March and the number of residential property transactions also increased by 1.4%. The UK’s unemployment rate fell to 3.8%, the lowest since October to December 1974. Excluding bonuses, weekly earnings for employees in Great Britain have increased by 3.3% before inflation, and by 1.5% after inflation, compared with a year earlier.

After a robust quarter, retail sales volumes were flat in April, with growth in clothing sales, non-store retailing and fuel being offset by falls in all other main sectors.

It is unlikely that the UK will continue with this level of growth as stocks unwind and consumer spending eases. A forthcoming economic slowdown is highlighted by the car industry, which reduced production by 44% in April, costing the industry some £2bn.

On the Continent, GDP Q1 growth in the euro area rose by 0.4% which meant annually GDP was up by 1.2%. On an annual basis German GDP was 0.7% and French GDP was 1.1%. The euro area unemployment rate was 7.6% in April 2019, down from 7.7% in March 2019. Eurozone inflation was 1.7% in April, up from 1.4% in March.

Outside Europe, GDP in the United States increased by 0.8% compared with the previous quarter, resulting in GDP growth of 3.2% annually. First quarter figures showed Japan’s economy expanded by 2.1% annually. At 5.8%, India is expanding at its slowest pace for 17 quarters.

The ONS has found that businesses that were older and larger – in terms of employment – were more productive on average in 2017 than smaller businesses. Also foreign-owned businesses were around 18% more productive than equivalent, domestically-owned businesses. UK average annual labour productivity growth between 2008 and 2018 was around 0.6%, which compares with around 1.8% over the decade prior to 2008. The most productive 10% of workers in the UK added value of more than £100,000 per worker per year, median value added per worker per year was around £28,000 in 2017.

The CBI has pointed out that business rates are entrenching regional unfairness. Rate revaluations occur every three years which means they lag behind economic cycles and property prices. The CBI cited areas like Redcar, on Teesside, which saw a significant rise in unemployment alongside a drop in property prices following the closure of its steelworks four years ago. Teesside is likely to become a Special Economic Area where, uniquely, the collection of business rates will be devolved.

Further south, at another steelworks in Scunthorpe, the Government resisted the temptation to put £75m of taxpayers’ money into British Steel’s ailing plant. Whether EU state aid rules would even have permitted a ‘Tony Benn’ style intervention is a moot point. The government lent the firm £120m to pay an EU carbon bill in April and it is not clear whether this can be recovered.

Votes of confidence in the UK. First from Warren Buffett, who wants to invest more in the UK irrespective of the Brexit outcome. The Sage of Omaha is keen on making a large acquisition in the UK. Secondly, the European Bank for Reconstruction and Development – founded in 1991 to help fund the rebuilding of the former Communist bloc and which now focuses on 38 emerging economies in three continents – will move its London headquarters from the City of London to Canary Wharf in 2022.

Despite the above, a survey of 180 financial executives by Duff & Phelps found that London is no longer regarded as the top financial centre. About half of respondents said New York was the world’s top financial centre, up 10% from 2018, while 36% said London was still top (down 17%.) According to Deloitte’s Crane Index, however, new office building in central London is at a three-year high, with 13.2m square feet of space under construction, up 12% on the figure six months ago.

The importance of London to UK plc was highlighted by the ONS this month. In its estimate of regional public spending and regional tax revenues in 2018, it concluded that the only areas of the UK to run surpluses were the South East, the East of England and London, which had the highest surplus of £34.3bn or £3,905 per person. The North West had a deficit of £20.9bn and Northern Ireland had the largest per person deficit at £4,939.

According to estimates from ESCoE, London had by far the highest UK growth rate in Q1 at 2.7%, its nearest rival was the South West at 2.1%, with growth dropping as you head further north. At 0.8% and 1.0% the North East and North West were below the UK average of 1.5%, although Scotland bucked the trend with 2.0% growth.

How can policymakers shift some of this wealth generation up the M1 and M6 – HS2? Huge c£15bn interventions like the RDAs have had mixed results. A PwC study in 2009, jointly commissioned by the Government and the RDAs, found on one metric that the agencies only delivered a return of £1 for every £1 of taxpayers’ money invested.

Time to try something different? Like him or loath him, Donald Trump’s Opportunity Zones appear to be making a difference in the American Rust Belt. Investors defer or reduce capital gains if funds are invested in projects in deprived areas of the US, resulting in the profits on those projects becoming tax free after a decade. Why not pilot it in Oldham, then let the Treasury run its slide rule over the numbers.