Today’s GDP figures betray mistakes in government policy that must be urgently corrected to unlock growth
We can all be glad that the UK has avoided a triple-dip recession, having achieved economic growth of 0.3% since Q4 2012 according to the ONS’s preliminary figures out this morning. But we should resist the urge to pop the prosecco just yet. Firstly, the figures are still fairly gloomy when you consider the OBR forecasted the economy should have grown by 7.1% since the coalition came to power in May 2010, and it has in fact grown a miserable 1.8% since then. (If that makes you question the independence of the OBR, you wouldn’t be alone.)
Much talk this morning has centred on manufacturing, and the role services have played in powering growth. But I think there are more nuanced findings from today’s statistics that are worth exploring, for they suggest some fundamental tricks to stimulate growth that the government seems to be blithely overlooking.
Failing to properly support the retail, restaurant and leisure industries
There has been much talk of rebalancing the UK economy back towards manufacturing. And it’s true that manufacturing constitutes two thirds of our production output, and is fundamental in rebalancing the trade deficit through UK exports. But total production output constitutes only 15.6% of our economy, versus the 77% made up by services (construction accounts for the remaining 6.8% – the discrepancy in the total is accounted for by rounding of figures).
It’s true that the weighting of these different sectors as constituent parts of the economy has not been updated since 2009 (which is perhaps an issue in itself). But it’s interesting that ‘Distribution, hotels and restaurants’ account for 14% of our GDP, versus manufacturing’s 10.5%. ‘Distribution, hotels and restaurants’ includes wholesale and retail trade, repair of motor vehicles, accommodation and food service activities. The sector has grown by 4.5% since 2009, ahead of manufacturing’s 3.1%, and well ahead of total GDP growth of 3.5% over the same period.
Retail, leisure, restaurants and basic mechanics are all the types of business that offer entry-level jobs for school leavers, and do not require A-levels or a degree to climb the ranks and reach the top. If we want our economy to thrive, we should be doing more to encourage young people into these industries. The government and the Mayor’s backing of apprenticeships is a good start. But more needs to be done to address what we all know is a snobbery among young people about entering into entry-level service jobs, and often retail jobs too, other than those in the most fashionable stores. The new crop of catering schools in London may help, but London still faces a crippling skills shortage in hospitality, to pick just one example from this sector.
The Budget should have laid out clear measures to support these types of businesses to promote further growth. And the government should be selling the sector to the public as a superstar sector (in the same way it does manufacturing) to attract more talent to these types of businesses from all levels of experience and management, and to further fuel growth, support and interest.
London has a particular role to play here, as we are the heart of retail, leisure and restaurant activity in the UK. Measures like Westminster Council’s ridiculous evening parking charges, which are putting customers off visiting the West End, urgently need to be redressed. Easing up visa rules would also allow more tourism to London, enabling a boost to retail sales and bar, restaurant and theatre trade.
Piling more regulation on financial services
Financial and business services are undoubtedly our superstar sector. In the ONS’s GDP sector weightings, this one is easily the biggest, accounting for a colossal 29.1% of GDP (the next biggest is government and other services, at 23.3%). Financial and business services has been our highest-growth sector over the last few years, achieving 5.2% growth since 2009, according to these latest figures.
Yet few would deny that financial services need a serious clean-up. There are still some very unpalatable goings-on in the sector. More regulation will not curtail deviousness, though. The world’s most intelligent and experienced accountants, regulation experts and lawyers – who the top players in financial services of course employ – will inevitably be able to outmanoeuvre the pages of regulation coming out of Whitehall, even if not immediately.
That’s not to say we should give up hope of reforming the darker corners of this industry (although let’s not forget it does a phenomenal amount of absolutely essential good for our country and its businesses). But rather than piling on new rules, it would be wiser for the government to do what it can to support diversity in the financial services sector, and foster greater innovation, to ensure it can continue to diversify and innovate and remain a world-leader. All of which would promote further growth from the sector.
The hundreds or even thousands of pages of regulation that financial institutions have to wade through to be in legitimate operation are an unforgiveable barrier to entry for smaller firms. The more red tape we load onto this sector, the fewer new, disruptive companies we permit to change the way things are done in financial services. If Osborne wants to continue to support our most economically productive industry, he urgently needs to cut red tape, to allow younger upstart companies to refresh it and bring it new revenue streams and innovations that will benefit the sector as a whole.
Delaying aviation capacity improvements
Successive governments have been discussing UK aviation capacity for more than three decades. The UK government has a terrible tendency to deliberate for far too long about transport infrastructure improvements. Crossrail, for example, took 17 years to get an exhausted yes from government. This is completely unacceptable.
Transport might not be the sexiest of sectors, but it is a quiet achiever. ‘Transport, storage and communication’ accounts for 10.6% of our economy, and has been the second-fastest-growing sector since 2009. Of course, tech has been steaming ahead within that, but we can’t afford to overlook transport. A major 2006 report for the government looked at the long-term relationship between transport improvements and long-term economic growth. The Eddington Transport Study concluded that: “There is clear evidence that a comprehensive and high-performing transport system is an important enabler of sustained economic prosperity,” while accepting that “transport cannot of itself create growth: it is an enabler that can improve productivity when other conditions are right.”
It is, then, no surprise that governments are reluctant to commit to major transport projects. Their funds are sapped, while any direct or immediate economic benefits from investment often become too slippery to measure.
But with Heathrow operating at more than 99% capacity, the need for an urgent solution to our aviation capacity shortage has never been more pressing. There might be a government review investigating what can be done now, but the Davies Report won’t even be published until 2015. It must be brought forward. The economic growth of the transport sector in recent years suggests gre
ater government investment now would help fuel that growth further.
This is a time when sectors that have proven themselves to be superstars must superstar sectors be supported. If the government wants growth now, and in the long-term, it needs to act immediately on expanding our aviation capacity.
Securing Britain’s Future: launching on 1 May
There is much more to be done if we are to create economic growth in the short and long-term.
That’s why on 1 May we are launching Securing Britain’s Future, a new publication that distils the insights of more than 30 of London’s most innovative, experienced and established business leaders, including:
Boris Johnson, Martha Lane Fox, Errol Damelin, Doug Richard, Jon Moulton, Carolyn McCall, Julie Meyer, Steve Henry, Luke Johnson, Xavier Rolet and many more.
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