Why 2014 could mark the end of the UK recovery

As shoppers search for the latest bargains on UK high streets and online, Chancellor George Osborne could be forgiven for believing he really is the artisan of a strong UK recovery.

The year that is about to end was a good one for the UK, judging by some data: low inflation, low interest rates, high employment, rising house prices and a growing gross domestic product – what’s not to like?

But 2014 could turn out to be the year when the recovery ends. Other sets of data reveal the worrying signs of an economy that is running on hopes and dreams, rather than real investment.

Let’s first look at the trade in goods deficit, which was the highest on record in the third quarter of 2013, at £29.4 billion.

The main culprits were finished manufactured goods, where the deficit widened to £15.1 billion and semi-manufactured goods, where the deficit increased to £3.4 billion.

“These were partially offset by a narrowing in the deficit of other fuels by £0.8 billion to £1.8 billion,” according to the ONS.

The trade in services recorded a surplus of £19.4 billion in the third quarter of 2013, £0.9 billion less than in the second quarter.

The overall deficit on the current account – which includes the trade in goods and services account, the income account and current transfers – was £20.7 billion, or 5.1 percent of GDP in the third quarter of 2013.

As a reminder, IMF experts begin to utter the word “unsustainable” whenever a country’s current account gap exceeds 5 percent of GDP.


Business investment figures make only marginally more cheerful reading than the dismal trade deficit.

Gross fixed capital formation (overall investment) rose by £800 million to £53.6 billion in the third quarter from the second, the ONS data released at the end of December showed.

However, year-on-year the figure shows a fall of 0.7 percent.

Business investment increased by 2 percent to £30 billion in the third quarter from the second – but it recorded a 5.3 percent fall from the same quarter in 2012.

If we look at the figures on a year-on-year basis, one component that enjoyed a strong jump – by 8.3 percent to £12.1 billion – was that of private sector dwellings (housing).

It is true that investment in private housing only advanced by 0.7 percent on a quarter-on-quarter basis, but it is clear that money is going into housing much faster than it is going into other types of business.

You cannot export housing but you can import the materials and finished goods that are needed for it, and this, combined with the year-on-year fall in export-generating investment, can partially explain the widening trade gap.

Gross domestic product data show that construction output advanced by 2.6 percent in the third quarter from the second and by a whopping 6.3 percent compared with the third quarter of 2012.

Of course, housing and construction contribute to employment; but their growth should ideally follow that of other sectors of the economy, not precede it, for the UK recovery to be sustained.

There is light at the end of the tunnel, though. The year-on-year investment figures may look bad for the business sector but the quarter-on-quarter ones show growth.

Perhaps the fourth-quarter data will confirm this trend – and maybe a revival in exports, brought on by more investment in the production of goods, will bring the current account deficit under control.