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News - 30 December 2013

Workers need a pay rise to sustain the recovery.

As even the CBI urges its members to give salary increases to workers the Economic Partnership urges local businesses to give serious consideration to the Living Wage if it wants to avoid the recovery petering out in 2014.

Some of those people that attended the recent Economic Partnership debate on happiness vs economic growth were surprised to learn that the drivers of the UK economy (indeed any economy) number only four; private sector consumption (far and away the largest contributor), public sector spending, net exports and business investment.

So far the UK recovery is driven entirely by consumption – people spending money, despite the fact that they have considerably less of it to spend [about 15%] than they did five years ago thanks to inflation and wage restraint. Almost certainly the recent increase in house prices has made people feel richer and somewhat more confident about the future although, thankfully, they have not returned to the heady days before the banking crisis when 70% of the growth in the economy was based on mortgage equity withdrawal – people increasing their mortgages to buy new cars and holidays etc. This suggests that today’s consumer boom is based on either people spending their savings or increasing their debt.

Although most recoveries start with an increase in consumer spending (inevitable given that this represents nearly two thirds of the economy) this can’t sustain a recovery. The other three factors have to kick in to keep the ball rolling. Notwithstanding the government’s recently announced infrastructure building programme, public sector spending is unlikely to be the catalyst that delivers long term growth. At a local level, Brighton & Hove City Council has to find about £25m of savings from their £700m budget every year for the next five years; a situation repeated all over the country. Public sector spending is going to decline markedly and the other two elements of GDP – exports and investment – are going to have to take up the slack.

In theory, people spending more should increase demand for goods and services and encourage businesses to invest in new products, new machinery, new systems etc to become more productive to supply the increased demand. UK businesses are sitting on a mountain of cash but so far they have been extraordinarily reluctant to spend it because, unlike consumers perhaps, they don’t yet believe that the recovery is solid. The longer they keep on thinking that way the less likely it is to become solid. Investment spending is 24% below its 2007 level.

Of course, the other element of GDP is net exports [the value of exports minus the value of imports] but exports are moving in completely the wrong direction with the most recent figures being among the worst for twenty years. Exports may eventually help but not any time soon; for the moment it is essential that business investment kicks in and quickly, certainly before the end of 2014.

For that to happen people need to continue to spend money to engender confidence in the future but spending their savings or increasing debt is not sustainable. For their own benefit, businesses need to start paying better wages. In Brighton & Hove there really isn’t a better time for them to lead the way and start paying the Living Wage.

Read related items on:
Disposable income
Economic growth
Brighton & Hove Economic Partnership

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