Dorset Economy blog 57: One Last Look…

BU's emeritus Professor Nigel Jump writes the last in his series of blogs on the Dorset economy, with one final look...

RGDP = real gross domestic product
CPIH = consumer prices including housing
PMI = purchasing managers’ index- survey of regional activity.
Sources ONS & SPGlobal

The UK economy may be coming out of its doldrums, but only modestly (see table above).  To mid-2024, construction and production were essentially flat whilst services grew.  GDP/head was up just 0.3% in Q2 2024.  The regional PMIs suggest our local economies have been quite positive this summer, against a background of reasonable inflation and unemployment rates. 

Meanwhile, the currency strengthened after July’s General Election.  The BoE eased interest rates (base rate down 0.25% to 5%) but the relationship between base rates and the value of money - a key component, through inflation, of social cohesion - remains fractured.  World financial markets (especially equities) are nervous of a US recession ahead of uncertain November elections.

RGDP = real gross domestic product
CPI = consumer price index 
PSNB = public sector net borrowing
HMT: Forecasts for the UK Economy, August 2024

Private and official forecasters have turned a little more positive about UK macroeconomic prospects (see table above).  Growth expectations, however, remain modest.  RGDP growth needs to double (2.5-3% per annum) for lasting progress in terms of higher real private incomes, lower sustainable public debts and smaller productive deficiencies and trade imbalances.

Policy Background

The Labour government’s first King’s Speech offered a range of proposals to bolster growth. These included an Industrial Strategy Council, Planning Reforms, AI regulation, GB Energy, Nationalising rail services, Employment rights, English devolution et al.  That is a lot of potential state intervention in the regional development process, which carries both hopes of progress and risks of distorted markets.

It would be helpful for government to set out its boundaries for state action as it addresses perceived market failures and unfairness, especially given the Chancellor’s 29 July announcements. These included the scaling back of infrastructure investments whilst allowing inflationary increases in public sector wages (without commitments on productivity).

For example, the downgrade or removal of extant investment plans may affect confidence in the new £7.3bn National Wealth Fund (NWF) which proposes to invest in decarbonising industries such as green steel, hydrogen, gigafactories et al.  Over this parliament, NWF monies are to be disbursed by the existing UK Infrastructure Bank whilst the current British Business Bank will aim at accessing “institutional capital” for low-carbon investments.  Part of the broader “green prosperity plan”, (along with the creation of GB Energy to invest in low-carbon electricity projects and to provide money for insulating millions of homes), the NWF is intended to attract another £20bn of private sector money into low-carbon investment.  It hopes to act as a catalyst for projects with potentially high risk and returns.  

Such ‘new’ institutions always take time to establish and get moving, but the NWF must soon create a coherent strategy for business and investors.  It may use a range of tools, such as equity, debt and guarantees to boost long-term potential above short-term risks.  It will be years before we know whether this policy is successful, but there is a greater chance of good outcomes if it is framed well from the start.

Development Framework

Each new turn of the wheel for regional development (RD) starts with good intentions and high aims.  Let us hope that the new range of names, bodies and activities aimed at boosting growth potential and performance, is founded on sound principles and goals.  This basically means the strategy must improve the productivity drivers: rates and levels for investment, innovation, skills, entrepreneurship and competitiveness.  The new RD structures, finances and policies must be evaluated over time to assess their business effectiveness and efficiency.

The underlying macroeconomic action chain for growth (through the relevant multipliers and accelerators) is:

• higher investment –> more and better supply at lower costs ->
• increased productivity and faster growth –>
• more and better jobs and higher real incomes –>
• sustained demand increases without high inflation -> and back to higher investment.

The danger lies in starting at the wrong part of the sequence – such as boosting nominal incomes before productivity gains are made and feeding inflation before new sustainable and competitive growth capacity exists.

Low average productivity (absolute and relative) has weakened UK wealth creation over a decade and more.  In aggregate, many of us are yet to accept that the country has had a loss of living standards which cannot be assuaged without time and investment.  Until we set and accept a new base of activity and wealth, we cannot renew growth.  If the action chain for growth is pushed the wrong way round, politicians and other leaders will not help consumers and investors to adopt realistic expectations and reset society on a sustained positive path.

Nigel F Jump, Emeritus Professor, Bournemouth University August 2024

This “One Last Look” at the economy is my final “BU Dorset Economy blog”.  Since 2020, I have been trying to explain the core economic impulses of the day and to interpret them in the context of a productivity-based development framework.  Over what has been an extraordinary economic period, I hope readers have found the blogs useful and enjoyable.  Thank you for your time, appreciation and interest.  And now, it’s over…

Celebrate, commiserate, say farewell, break the spell, ... it’s over.  Understand, though it’s not the way we planned.  Wear your scars with a smile, leave the stage in style, ... it’s over. 

And so, to colleagues and to friends, may you get all that you wish for in the end. 

May you prosper, stay well and thrive. May our journeys cross and our stories collide

 ... now that it’s over.  © Oak Apple Music 2012