The UK economy: the imbalances continue

workersA useful piece by Geoff Tily, senior economist at the UK’s Trades Union Congress, on the persistent imbalances in the economy. In brief, growth remains too reliant on debt-fueled consumer spending, and private investment has been very weak, and even declined overall in 2016. If these trends continue, productivity growth will also continue to be weak, as it is productive investment that drives it.

While the employment performance has been impressive since the end of the recession, wages have largely stagnated. The prospects for a growing economy seem to rest on rising employment, and since the employment rate is already high, this will ultimately require continued substantial net immigration.

For living standards to rise, the economy needs higher investment to fuel rising productivity, which will create the space for higher wages for those in work without squeezing profitability.

I have often written about the need for a rebalancing of the UK economy towards investment and exports, and how this could be helped by the recent sharp devaluation of the pound. The jury is still out on the effects of this, which could well take some time to work through the system. As the cost of imports rises, inflation will increase as a consequence, and this is likely to weaken consumption growth as real household incomes are squeezed.

The saving grace could come from a boost to net exports, but for now, the economy’s weak performance and continued imbalances should be a major concern for policymakers.

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