The UK economy grew by as much as 1.4% in 2013, and most forecasters expect this to improve over the next two years. While the government points to this as a success of their economic policy, the opposition insists the recovery is failing to benefit ordinary people – the much talked about ‘cost of living crisis’.
That the economy is on the up is in no doubt. But are Labour right to assert that the link between GDP growth and living standards has been severed?
It’s not just GDP showing signs of recovery. The kind of modest growth we have experienced so far could easily be attributable to the finances sector, which recovered early from the crash.
The construction industry has posted eight months of consecutive growth. UK manufacturing is projected to grow 2.7% in 2014 – stronger than any other European country. Car sales are at their highest in five years. The engines of economy are revving up.
With cheap credit hard to come by, how is demand increasing? Simple: unemployment is falling, and at a higher rate than initially predicted by Bank of England chief Mark Carney. This is probably the most significant sign of recovery – the more people in work, the more money they have to spend, and the better for everyone.
A closer look at unemployment
Although falling unemployment is undoubtedly a Good Thing, the figures warrant closer inspection.
The headline rate – 7.1% in the three months to November 2013, a total of 2.32 million – only counts those classed as ‘economically active’, defined as people out of work but actively looking, and able to start within a fortnight. This leaves out huge swathes of ‘economically inactive’.
The zero-hours contracts controversies that emerged in the latter half of 2013 also highlighted that going by the above definition, people on zero-hours contracts, in part-time work or on dubious ‘self-employment’ contracts are rightly not included as unemployed, but may have no guaranteed income, anything approaching a full-time salary, or the employment rights that come with full-time employment.
Figures on this segment of the working population are harder to come by, so it’s difficult to pin down the scale of the problem. But it’s important to bear in mind. The greater the proportion of the working population on less than full-time, the less money available to go into the economy, and the less well-off people may be individually than implied from the headline figures.
Wage growth… or not?
Adding to the pile of modestly positive economic news at the end of last year, a CBI survey found that “more British firms expect wages to rise in line with inflation [in 2014] than at any time since the 2008-2009 recession”. The survey revealed 42% of firms believing salaries would grow in line with the higher Retail Price Index (RPI) measure of inflation.
Wage freezes have become commonplace since the crash, during a period of high inflation; meaning many people’s salaries were actually decreasing in value every year. So a return to wage growth that keeps pace with inflation is excellent news.
However, individuals may not feel the benefit of this key measure of economic improvement for two reasons. Firstly, it comes after five years of stagnation, meaning they are starting with a devalued salary. Until wage growth outstrips inflation, people who maintained the same salary over this period will still be poorer than they were five years ago.
Secondly, wages outside of the boardroom have been falling in real terms for decades. Taken in a long-term macro-historical context, the link between wages and GDP growth has arguably already been broken – as demonstrated in a 2011 Resolution Foundation report. People are unlikely to see significant earnings increases in line with the recovery.
Taking in interest
A similar story can be told with savings. The low base-rate introduced as part of the stimulus package has kept interest rates low – far below inflation – for the past few years. This means that just as average wages have been losing real value, so have savings pots.
For young workers saving for retirement now, the passage of time should smooth out the dip. But workers coming up to pension age will have suffered significantly.
Even a relatively modest retirement lifestyle – equating to 40% of the average UK salary of £26,500 – requires a pension pot of £633,000. Those coming up to retirement now will find that even if they had amassed such a pot, due to the depreciation in real-term value, the annuity they buy now won’t produce the same level of income as it would have five years ago, or hopefully will in five years time.
As with wages, until interest rates significantly outstrip inflation, savers won’t see the benefits of recovery. Even then it will take a long time for savings to be worth what they were pre-crash.
The bottom line
So will you be better off now the economy is on the mend? Not for a while anyway. Although consumer confidence is on the up, the outlook for real, substantial change on an individual consumer level will be modest at best in the short to medium term.