27 March 2014 by lydia Casemore
Cast your mind back to early 2010 when the pound was surely near the top of every hedge fund managers list as being prime for attack; contrast that with the current position, where the default insurance on British debt is amongst the lowest in the world. So George Osborne was right in telling us that the UK is a safe haven, an impressive reversal of fortunes. However, to quote David Bloom (head of FX strategy at HSBC) “sterling is the least ugly currency in the world” – feint praise perhaps and perhaps also why people report they simply aren’t feeling the recovery George’s figures suggest we are enjoying?
Scratch beneath the surface and further concerns rear their head in respect of the strength, depth and longevity to the UK recovery. A further quote from David Bloom that takes some of the wind out of George’s sails: “UK growth is surviving on fumes, driven by a consumer credit boom. Britain has an enormous trade deficit.” The UK is top of the class for growth and the star of the industrial world with 2.7pc this year, commentators are having to eat their hats and admit that they did not forecast this growth, George is surely blowing his smokin’ fingers! However, why does David Bloom say we are surviving on the fumes of a consumer credit boom? We believe that is because growth (whilst desperately needed and welcome for the respite it has provided) has to come from the right area. When the UK embarked on our austerity campaign and slashed jobs in the public sector, the gamble was that Government would create conditions where the private sector would replace all those jobs and we would start making things, hopefully with an export upside. The reality is that this hasn’t happened, we are running a current account deficit at more than 5% of GDP, that’s the worst in a quarter of a century and, for the record, the worst by a long way in the G7; looking at the detail we cannot even comfort ourselves that it’s a healthy deficit where we are buying in machinery to increase production and our own exports, rather it is a consumption spree satisfied by imports.
Add to the gloomy picture the fact that the household savings ratio is at 5.4% today, compared to 8% two years ago. We have been told that one of the most chilling facts is that our output per hour is 21% below the G7 average and that measures up to be the widest productivity gap since 1992. On the bright side, a welcome measure to come out of the Budget was the increase in credit available for exporters and the fact that we are ranked no1 for ease of getting credit – amazing! Not quite so uplifting is the sad fact that we are ranked a paltry 28th in the world for ease of starting a business, that simply has to improve.
In summary, perhaps we should have taken a leaf out of Germany’s book and invested in infrastructure projects in the immediate aftermath of the banking crisis, credit was cheap; instead, we pulled capital projects. What we must hope is that the momentum the economy currently has is sustainable and that we are not at the apex of the credit cycle, George recognises that we still have too much debt (to be fair inherited). What we should perhaps be very grateful for as a society is the fact that we have not (like the much of the rest of Europe) suffered massive unemployment on this journey.