5 Sep 2014 09:46am

George Magnus: Participating in the recovery

You may have noticed that the UK economy has become almost hyperactive. This year, according to the International Monetary Fund, it is predicted to grow by 3.2%, higher than any other major advanced economy, and in 2015, a further expansion of 2.7% is in prospect. It is scarcely believable that a little over a year ago, pessimism ruled the roost, with the IMF warning the government in the spring of 2013 that its austerity programme was “playing with fire”

This mood evaporated as it became clear the economy had turned the corner. The government’s Help to Buy policy did encourage the housing market, but the bounce-back started much earlier and owes more to high levels of employment and, so far, a remarkable (for the UK) six-quarter sequence of rising investment spending by companies. Fortunately for the government, the economic news is expected to look even better by the end of September.


While record numbers of people are employed, they are not participating in the recovery

The Office for National Statistics is unveiling the results of a huge accounting exercise, designed to better measure the role of information and communications technologies in production processes, the creation of “intangible assets”, such as intellectual property rights and research and development, and the output of various sectors from insurance services to borderline activities, such as drugs and prostitution. This won’t change the UK’s overall growth rate, but it will change our perspective of where we have been.

The 2009 recession wasn’t as deep as thought, we surpassed the 2008 peak in activity early this year, and savings and productivity may have been under-estimated. What could possibly go wrong?

In strictly UK economy terms, while record numbers of people are recorded as employed, they are not participating in the recovery. Average weekly earnings are barely growing in money terms, and stagnant when adjusted for inflation. This shortcoming will make any economic expansion short-circuit. Interest rates may start rising quite soon, productivity growth has disappeared, and the share of investment in GDP is at its lowest level since 1945 (except for 2009).

The UK is also exposed to adverse external developments. A major factor is the weakness of the euro area, to which so many UK business and commercial interests are tied. The recession in the euro area did end in 2013, but growth is poorly distributed and feeble. Moreover, with inflation in the region sliding to just 0.4% in July, there is risk of deflation. Much will be expected of the European Central Bank if these signs intensify.

The sharper factor is Russia. The full weight of sanctions imposed after the annexation of Crimea, and after the MH17 disaster, will push Russia into recession and damage trade. Sanctions have been imposed in the energy, technology and arms sectors, and, crucially, on the foreign financial activities of Russian banks, companies and the state.

The trade issues may be uncomfortable, but they aren’t centre-stage. British companies, such as BP, have a lot at stake, but UK exports to Russia are barely $6bn (£3.6bn). German exports are five times as big, but still a small fraction of that country’s total exports.


Rather the concern is about the financial effects of Russia’s disengagement on itself, global capital markets and the City of London. Russian banks and other entities will be banned from raising capital in foreign markets, and banks will be banned from offering other investment services.

Russia’s $478bn (£284bn) reserves will be of little use if they can’t be sold. Further, the decision by the Court of Arbitration in The Hague to order the Russian Federation to pay over $50bn (£30bn) to shareholders of Yukos, seized a decade ago, could lead to claims to seize Russian assets abroad if the government doesn’t pay up.

The UK should celebrate its recovery, but we have to be vigilant. Unfinished domestic economic business, a feeble eurozone, and the consequences of financial deglobalisaton, generally and in respect of a major emerging market, will stalk the country’s economic prospects and wellbeing.

George Magnus is an independent economist and former senior economic adviser at UBS



Related articles

UK recovery almost complete

The politics of recovery

Skills crisis could threaten recovery