The UK Economy: will we see a Happy New Year?

By David Bailey on Dec 28, 12 12:32 PM in

The rather gloomy end-of-year message emerging last week from a recent household survey is that many expect 2013 to be a difficult year. The Markit survey found that 43% of households think that their finances will worsen in 2013, compared with 24% who expect their income to improve.

Or as Markit put it, "the underlying situation is that household finances are under severe strain from lower incomes and higher living costs". The squeeze is set to continue, it seems, or at least people expect it to.

More households feared losing their jobs than in the previous month, and most expected wage rises to remain below inflation. And all income bands in the Markit household index were pessimistic about the coming year.

Coming just a few days after official figures showed growth in the economy slower than initially thought in the third quarter at 0.9%, this pessimism on the part of households will bring little comfort for the government, which had been hoping for a boost in consumer spending to kick start economic growth in 2013. And without a boost to consumer demand, it's difficult to see firms investing heavily.

The gloomy prognosis was reinforced by a report from The Jobs Economist which stated that workers can expect longer hours, a continued squeeze on pay and fewer jobs being created in a "hard year of slog" in 2013. Job insecurity will remain high, the report suggests, with workers maintaining a "grin and bear it" attitude. Pay deals will continue to be affected by unemployment, with pay increases lagging behind inflation.

More positively, the number of people in work could reach 30 million before the next general election, a report from the Chartered Institute of Personnel and Development has predicted.

The report said that continued growth in employment was likely in 2013. Yet the report also warned that excess capacity had built up as firms have held on to skilled workers (a point I've been making for some time). This hoarding of staff could mean weak employment growth even if economic growth picks up.

Meanwhile, the insolvency firm Begbies Traynor recently stated that some 140 high street shop chains were vulnerable to going bust in 2013 if a spending upturn didn't materialise. Yet shopping the weekend before Christmas, I was struck how many shops had sales signs up early - a sure sign that the wider the economy is struggling. Fearing being left with stock that they can't shift, shops are cutting prices to attract squeezed consumers.

Of course, it was pretty much the same this time last year. Recovery didn't appear in 2012 and the economy has flat-lined at best. In fact, the UK economy has hardly grown since late 2010. Will 2013 be any different?

In the short-term, the risk is of a triple-dip recession and a credit downgrade. Hopefully this can be avoided. But Chancellor George Osborne faces a difficult year and weak growth will mean that in the budget he will face the choice of whether to embark on further 'fiscal tightening' (cuts and tax rises to you and me) or whether to stretch again the timetable for balancing the structural deficit (that bit of the deficit that doesn't go away after recession).

Of course, he has a third choice, that of relaxing his overly-tight fiscal stance, but having boxed himself into a corner he isn't going to do that.

So where will growth come from? As noted, consumers seem pessimistic as their incomes are being squeezed, so they cannot be expected to kick-start growth. And firms are holding back on investment as confidence is low. Government spending won't provide a boost - quite the opposite in fact as austerity gathers a pace.

In fact the only glimmer of hope could be exports. But that depends on things picking up in the US (if it avoids the fiscal cliff), the Eurozone (if it sorts its crisis out) and emerging economies like China if they continue to grow at sufficient speed to attract the premium goods that UK-based manufacturers do well. That's 3 big 'ifs'.

In short, 'fingers crossed' that exports pick up on the back of growth in overseas markets seems to accurately summarise the government's growth strategy right now.

Professor David Bailey works at Coventry University Business School

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