South: UK economy 'can bounce back'

In the latest issue of the Deloitte Economic Review,  the firm's economic adviser, Roger Bootle, turns his attention to how the UK will fare relative to the other major economies both during the near-term recovery and over the longer-term. His main points are as follows:

• The UK is entering a period of national despair about its economic performance. But after a difficult period over the next couple of years, I see no reason why the UK cannot return to being a relative outperformer.

• The UK has certainly struggled to pull out of recession, even though most other major economies started growing again in the middle of 2009. What’s more, the constraints on the strength of the global recovery over the next couple of years look set to bite particularly hard in the UK.

• The UK’s especially dire fiscal position means that fiscal policy will be a greater drag on growth than elsewhere. With firms having cut relatively few jobs during the recession, the UK’s recovery is likely to be particularly bad at generating jobs by international standards. And unresolved consumer imbalances are likely to be a bigger drag on the UK recovery than elsewhere.

• Admittedly, some of the UK’s disadvantages are not as serious as they may appear, such as the importance of the City. What’s more, it is not as if the UK has nothing in its favour. Most obviously, its net trade sector faces a huge boost from the drop in the pound.

• Nonetheless, I expect real GDP growth in the UK in 2010 of just 1%, compared to growth of 1.5% in the euro-zone, 3% in the US and Japan and 3.5% globally.

• However, once the economy is back to full capacity, the strength of economic growth will depend not on these demand factors, but instead on the supply-side factors driving the economy’s productive potential. And while there are fears that the credit crunch has permanently damaged the UK’s potential output, I am sceptical about how big this effect could be.

In addition, there is no reason why the hole left by lower activity in some sectors cannot be filled by other parts of the economy, where productivity might even be higher. Net trade and business services are obvious areas with significant growth potential. Business services already account for twice as much of GDP as financial services – and about four times as much as City-type wholesale financial services.

• Meanwhile, those who worry about the UK slipping back to the dark days of the 1970s forget just how much structural change the economy has gone through since then.

• In light of all this, why is there so much gloom about the UK’s longer-term prospects? Part of the answer lies with who we are trying to compare ourselves with. It would be futile to benchmark the UK’s performance against fast-growing developing economies that the UK, even with a decent performance by its past standards, is never going to beat over a prolonged period.

• The appropriate bellwethers for the UK are similarly sized and developed Western countries – most obviously France, Italy and Germany. And I see no reason why the UK should lose ground against these economies.

• Much will depend on the policy decisions that are taken. There are a number of ways in which policymakers could mess it up, particularly when it comes to sorting out the public finances. But if things go wrong, it will not be an inevitable result of the financial difficulties of the past few years or because there is something fundamentally wrong with the UK economy.

• Accordingly, there is still everything to play for. The UK bounced back after both the 1980s and 1990s recessions and went on to more than make up for the ground lost during these desperate periods. My money is on the UK staging a third national resurgence.