Economy: Rebalancing Challenge For Osborne

Strange as this may sound, today was a landmark moment in Britain’s seven-year recovery from the crisis of 2008.

For at long last the level of gross domestic product per head has regained its pre-crisis peak.

Now, at first this may sound like rather an esoteric achievement, but it goes to the very heart of why this economic recovery has been so tough, and why the feel-good factor has taken so long to return to the UK.

To understand why, you need to consider what the statistic represents.

GDP is very simply the total amount of income earned in the UK in a given period. As we all know, it collapsed in 2008 and has taken a long time to recover, but last year GDP finally surpassed the level it was before the crisis.

However, during that period, the population has increased, meaning that national income has been shared among a bigger pool of people, and the amount per head has remained considerably lower than before the crisis.

This, more than almost any other statistic, explains why the feel-good factor has been in abeyance. With less money to go around per person, households have seen their salaries fall in relation to inflation. The fact that GDP per capita is recovering just as the squeeze on real incomes comes to an end is no coincidence.

In theory, with people now having more in their pockets than before the crisis (and indeed ever before), families should start to feel the benefit in the coming months and years. Then again, predicting the feel-good factor is no easy task – just as John Major, who willed it to return to the UK economy, found throughout the 1990s.

One issue that has not been addressed is the question of how balanced the recovery is. The Chancellor came into office in 2010 promising to rebalance Britain’s economy, making it less reliant on debt, household spending and services and more dependent on exports and manufacturing.

However, today’s figures show that Britain is once again reliant on the services sector for growth. A full 0.52 percentage points of the 0.7% growth rate was due to services, with the production sector contributing just 0.14 percentage points – and that latter contribution was down to growth in the mining sector rather than manufacturing.

We won’t learn until next month how much of this growth came down to consumer spending, but the UK has tended to be more reliant on this than most other developed economies in recent years.

Finally, there is the question of how evenly spread this growth has been. Here the news is mixed: in many economic senses, Britain is very much skewed towards London, although disposable income levels are surprisingly even across the country. And as our own survey showed this morning , there is a persistent suspicion that when the economy grows, most of the proceeds flow down south.

Whether the Chancellor’s Northern Powerhouse scheme makes any difference to that remains to be seen.