When it was last this size, Britain’s economy looked very different
ON JULY 25th, more than six years after the great recession began, official data confirmed that Britain’s economy is finally bigger than its previous peak. The recovery has been slow, with Britain bringing up the rear of the G7 (of that group only Italy’s economy is smaller than it was in 2008). And the economy emerges in a quite different shape. During six years in the doldrums, some industries have dwindled while others have burgeoned. Economic heft has shifted from workers to firms.
Between 2008 and 2009 sterling depreciated by 25%, leading economists to predict an export boom. George Osborne, Britain’s chancellor, foresaw a “march of the makers” as manufacturing firms kicked into action. All such predictions were off: exports are flat, while manufacturing and construction output are far below their 2008 levels (see chart 1). The idea that Britain would “rebalance” away from its large services sector, which accounts for 80% of GDP, proved spectacularly wrong. The only marching in Britain has been the sound of workers shuffling to the office.
Employment has shot up, with 912,000 more Britons in work than in 2008. Initial fears that a flood of labour, driven in part by immigration, would lead to mass underemployment were unfounded. The average working week was just under 33 hours in 2008, and has since crept higher. But with many more Britons putting in more hours to produce the same as six years ago, labour productivity has tumbled (see chart 2). That explains why take-home pay has risen just 8% since 2008, compared with overall price inflation of 20%. Workers’ pay packets continue to lighten in real terms.
Yet low pay is not a pain for everyone. Companies are flush: the ratio of firms’ bank deposits to their debts rose to 77% in July, up from 45% in late 2008, according to Michael Saunders of Citigroup, a bank. The corporate liquidation rate was 0.56% in the second quarter of 2014, the lowest level for 30 years. The early-1990s recession sent many firms to the wall. The great recession damaged household finances much more than companies (see chart 3).
That pattern will probably persist. Despite the healthy employment numbers, 2m Britons are still looking for work. With such a big pool it is hard for experienced workers to agitate for better pay. Union activity is muted: the number of working days lost to strikes dropped by 60% between 2007 and 2013. And the jobs that need filling are likely to be relatively poorly paid. In manufacturing, wages average £563 a week but there are just 45,000 vacancies. The services sector has 13 times more posts but pay is lower.
The reshaped economy means the fate of the recovery is in the hands of those running Britain’s newly enriched firms. There are reasons to be hopeful on that score. Business investment is still far below its peak, but has been growing for over a year. Between April and May business lending grew by 1.4%—the largest monthly expansion for more than five years. With cash in hand and available from the bank, bosses may have confidence to invest. Eventually that should justify higher pay too.
This article appeared in the Britain section of the print edition under the headline "Resized and reshaped"
