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I nearly fell off my chair when I read the report. Capital Economics, for so long arch bears on the economy, has only come along and forecast that the UK economy could grow at 4 per cent per year during the second half of this decade. And it has come up with some pretty compelling reasons: and here is brief summary of what they are.


Output gap:
        If the UK had continued to grow at the pace seen before 2008, then its total output would be 15 per cent higher right now. Indeed, within another couple of years this output gap may be as much as 16.5 per cent. This means that in theory the UK has an awful lot of potential to catch up on. Okay there may have been permanent damage done to the UK economy, but analysis by economists of past financial crises suggest that permanent loss of output after a financial crisis has been between 10 and 2 per cent of GDP. Even if we take the worst of these calculations, that still means the UK will enjoy a catch-up period closing a gap with potential worth 5 per cent plus of GDP. Furthermore, a number of factors suggest that permanent damage may have been much lower than the 10 per cent estimate. For example, expenditure on R&D stayed high during the downturn, and unemployment did not rise as high as in the past, which means fewer workers are likely to feel permanently alienated from the workplace. Companies’ cash holdings are currently worth 20 per cent of GDP, a 25 year high, so there is plenty of money to fund the investment required for the UK to enjoy a catch-up period.

Good progress:                                 The much longed for export-led recovery has been held back by economic depression in the region where we have previously done most of our trade. But we are selling more to the BRICs, with the percentage shares of exports of goods to the four BRIC economies rising from 5 per cent in 2007 to 8 per cent last year. Thanks to the cheaper pound, unit labour costs in the UK are now some 15 per cent cheaper than they were five years ago.

Reshoring:          It is already happening in the US and there are signs it is beginning to happen in the UK too. Companies, especially companies in areas where technology forms a vital part of the production process, are re-shoring – that is to say moving their manufacturing back home. A recent study from the EEF found that the proportion of firms repatriating some of their output rose from 15 per cent in 2009 to 40 per cent last year.

Technological progress:                                Capital Economics reckons that the likely impact of technology is being underestimated, and if you are a regular reader, you won’t be surprised to read that I agree. So that’s 3D printing, nanotechnology, biotechnology, the list is long and I have covered it here many times. Even the innovations of the past few decades are not yet being fully felt. Capital Economics said: “James Watt patented his steam engine in 1769 but economic historians estimate that his invention took 60 years to materially boost labour productivity.” Okay, things develop a lot quicker these days, but even so it does not seem unreasonable to suggest the full economic impact of the computer revolution of the last 20 years is yet to be felt.

Demographics:                 Population growth this decade is expected to be at its strongest since the 1900s. Even the impact of the retirement of the baby boomers will be reduced by an increase in the retirement age, and greater participation in the work force by the female population.

Trade:                   The UK is one of the most open economies in the world, and as global trade increases and we see greater efforts to advance free trade, such as recent talks between the US and the EU, the UK may be a significant beneficiary.

Inherent advantages:    The UK does have some core advantages – time zone, English language, strong legal system, political stability – all these benefits will secure the UK an advantage in a growing global economy.

Construction:    We keep hearing about the shortage of homes. It does seem that gradual reforms to planning are beginning to work. A new housing boom may well occur later this decade; indeed demographic changes demand it

Conclusion:        So that is quite a list. The UK still has problems, and I do worry about elevated house prices and household debt at a time when the US begins to tighten monetary policy. I also still worry about the way that the UK prioritises funds, the housing market (and not necessarily house building) over funding entrepreneurs, and indeed business in general. I still say that the UK needs QE to be used to fund business more directly.  But, for all that, it does seem to me that there are reasons to be optimistic.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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