There is a new block of flats being built just up the road from where I live. On enquiring about prices, I was told not to bother. The whole lot was being sold to overseas “investors”, mainly off plan. This kind of thing has long been common enough in central London, but not in the wilds of Brent for heaven’s sake.
I cite this story not to criticise foreigners for buying up London property – that’s their affair – but to point out that it is precisely this sort of thing which is underpinning Britain’s economic recovery. It’s fair to say that it is not an entirely healthy state of affairs, never mind growing evidence that London property is being quite extensively used for money laundering purposes.
Second-quarter GDP figures announced on Tuesday confirm that, after a slowdown in the first three months of the year, the UK recovery is back on track and, better than that, it has also reached something of inflection point. It is no longer just overall output which has returned to pre-crisis levels – that milestone was passed a little while back – but GDP per capita, too.
Per head of population, the UK is once again richer than it was back in the summer of 2008, albeit only marginally so. What’s more, having had a much slower recovery than both France and Germany, Britain has now caught up and overtaken them.
International point scoring aside, the bigger question becomes whether the now self-evident momentum in Britain’s economic recovery – this is the 10th successive quarter of growth – can be maintained. With large parts of the rest of the world economy in a state of turmoil, there is good cause for doubt.
Nor are Britain’s apparently more buoyant growth numbers all they are cracked up to be. The UK is far from the reformed, more balanced economy that policymakers hoped would rise phoenix-like from the ashes of the financial crisis. To the contrary, the most striking aspect of the 0.7pc second quarter increase in output is its unbalanced, consumption-dependent nature, or precisely the sort of growth that it might be argued got Britain into difficulties in the first place. Manufacturing actually shrank in the second quarter, with virtually all the growth coming from service industries, in particular retail, hotels, restaurants and related services, which are up 4.5pc on a year ago.
Eddie George, former Governor of the Bank of England, once remarked that even unbalanced growth was better than no growth, “or, as some commentators have put it, a two-speed economy is better than a no-speed economy”. That was back in 2002, which just goes to show how long-standing the concern about the sustainability of the British growth model really is. “Steady” Eddie was surely right that some growth is better than no growth, but it would be a whole lot less worrying if it were more solidly based on investment and exports than household consumption.
This is not to criticise the Bank of England for fuelling another unsustainable “boom”. There is a sense in which the Bank is obliged to run an accommodative monetary policy as long as external demand remains so subdued. Or to put this another way, in order to maintain growth and rising employment, the Bank is bound to support domestic demand so as to counter the lack of it anywhere else. If it did not, there would soon be another recession, with inflation again moving into negative territory.
Admittedly, the eurozone is enjoying a mild cyclical rebound, but so far it falls lamentably short of the levels necessary to counter Britain’s historic weakness for spending more than it earns. A still burgeoning current account deficit, which at the last count had widened to a jaw-dropping 5.9pc of GDP, points unambiguously to problems to come. It was shortfalls of this order of magnitude between overseas income and earnings that prompted the eurozone debt crisis – which in many respects is just a good old-fashioned balance of payments crisis unrelieved by free-floating exchange rates.
By pole-axing internal demand, the crisis has closed these eurozone deficits and made virtually all member states into surplus economies. For countries such as Ireland and Spain, Britain’s refusal to play the same game has proved a God-send, providing a growing source of external demand to offset the absence of it at home. Indeed, Ireland’s economic recovery, such as it is, is almost wholly based on Britain’s – like some kind of parasite, feeding on the pig’s belly.
George Osborne’s determination to close the UK budget deficit by cutting back on government spending is no doubt a wholly necessary endeavour but, again in the absence of any support from external demand, it piles the pressure on households and companies to compensate by increasing their own spending and debts.
In its recent annual report, the Basel-based Bank for International Settlements, proud guardian of the principles of sound money, referred to a sense of deja vu, with exactly the same global imbalances and instabilities that led to the financial crisis once more in the ascendant. Nowhere is this more apparent than in the UK, where ultra-loose money has both sustained Britain’s penchant for consumption and underpinned a renewed “search for yield”.
It is a long time since Britain has had a “balance of payments crisis”, and it could be that for those with free-floating exchange rates, these are indeed largely a thing of the past, at least in their traditional form.
By definition, the “balance of payments” will always balance, with any shortfall in overseas earnings made up for by inflows of foreign capital. Those new flats down the road from where I live are one manifestation of such inflows. Another was last week’s purchase by Nikkei of the Financial Times. The £844m paid will count as inward investment, helping to offset Britain’s import bill.
But there is only so long you can keep selling off the family silver, or otherwise building up overseas liabilities. The UK is living off borrowed time – and money.
Britain’s recovery from the ravages of the financial crisis is a tribute to the measured and innovative way in which economic policy has been managed over the past six years. Yet the risks of repeating the mistakes of the past are all too obvious. Today’s period of respite must now be used wisely to put the economy on a more sustainable footing. Otherwise, another financial crisis eventually becomes inevitable.