We were promised no more boom and bust. We were told the new government elected in 1997 would be kind to manufacturing. It would all be so much better than the Thatcher years.
We know the claim of no more Boom and Bust proved to be ill judged. We lurched from super boom to mega bust. What is less well known is just how bad a decade it has been overall, despite the boom. In the noughties the UK economy grew at only 1.7% per annum on average, well below the post war consensus view of a trend rate of growth of 2.5%, and even further below Mr Brown's estimate that he had raised the trend rate of growth to 2.75%. The UK economy grew more slowly overall during the noughties than it had in either the eighties or the nineties.
Manufacturing fared particularly badly. In the 1980s manufacturing output expanded at 1% per annum on average across the whole decade. In the noughties it contracted at an average rate of 1.2% per annum. In other words manufacturing did better by around one quarter in the 1980s than it did in the noughties. This is the opposite of the conventional view, which believes manufacturing was particularly hard hit by the events of the 1980s. After a sharp contraction at the beginning of that decade manufacturing expanded, producing overall growth for the ten years. In the noughties poor performance at the beginning and a very large decline at the end left manufacturing in retreat for the ten year period.
The present government has also failed to help the north and west relative to London and the south east. I am sure they wanted to balance things up, and get the north and west growing faster to catch up with living standards in London and the south. Instead the gap between London and the rest grew ever wider during the last decade. In the 1990s London grew at 2.9% each year on average, compared to 2.2% for the UK as a whole, so London pulled further ahead. In the noughties London grew at 2.7%, whilst the UK average fell to just 1.7%. In other words, over the last ten years, London has seen an improvement of more than one tenth in its living standards that the rest of the country has not enjoyed, despite starting from a much higher average income level.
The UK faces trouble ahead. The growth figures of the expiring decade, poor as they are, are still flattered by the artificial bubble based on borrowing too much in both the private and public sectors. Everyone, including the government, now accepts that the levels of debt have to be brought down. As the UK deflates demand by repaying borrowings, so we should expect a lower rate of growth. I have been forecasting a fall in the trend rate of growth from the Treasury's 2.75% and the post war average of around 2.5%, to something under 2%, maybe to 1.5%. That now looks optimistic. We will be doing well if in the decade ahead we grow at 1.5%, slightly below the 1.7% achieved in the noughties with the benefit of all that extra borrowing and artificially created money.
The UK economy needs a dose of realism. It needs to curb public borrowing by controlling public spending. It needs to boost the productivity of the public sector substantially, so it does more with less. It needs to offer a more competitive tax and regulation package to business, so it is better made in the UK. We need to work harder and export more as a nation. We need to start earning our way in the world. There is some welcome evidence that after the falls in sterling some manufacturing orders are returning to the UK from overseas. A better balanced economy will need more of this.
This Christmas and New Year may see the end of the fairy tale. It is still possible to go into the shops and buy great products at low prices, made by the ingenuity and hard work of many Asians, especially the Chinese. Much of this buying has been on borrowed money, now largely borrowed through the public sector, and passed on in public sector wages, benefits and direct public sector purchases. If the UK does not get a grip on its financial affairs the markets will take further fright. Despite the money printing, the cost of government borrowing has been rising in recent weeks. If government does not take control and start to sort it out, the markets could drive interest rates higher still, doing damage to any recovery and forcing change upon a reluctant government. The government is wrong to think we need to keep spending and printing to have a recovery. Now the biggest enemy of sustained recovery and well balanced growth is overspending by government itself.
We continue to advise against buying or owning UK gilts. Yields have been rising and prices falling despite the continuation of relatively easy money. There could be more painful adjustment ahead. Meanwhile the last decade has seen no return from buying and holding UK shares. Since entering the market after the crash we have preferred overseas equities in faster growing economies. These have performed better overall as we hoped.