Birmingham City Business School’s Dr Steve McCabe comments on the CBI’s prediction that UK growth will slow in the second half of 2014.

The announcement by the CBI that it expects UK economic growth to slow in the second half of this year is interesting and, of course, somewhat worrying.

Compared to only last year the forecast look so much more positive with growth predicted to rise by 3 per cent this year and 2.7 per cent in 2015.

As the CBI’s Director General John Cridland asserts, the fact that UK quarterly growth has ‘on average’ been greater than other major G7 competitors should suggest that there is much to be optimistic about.

However, what many have been pointing out is that the basis of much of the growth is based on increased consumer spending.

As many commentators point out, stuff in the shops is getting cheaper as demonstrated by recent fall in the cost of living (inflation) due in large part to a 5.7 per cent drop in the price of clothing and footwear by retailers desperate to shift stock.

The headline drop in unemployment whilst being good would also suggest that the worst of the problems caused by the global financial crisis six years are over.  However, whilst there are fewer people out of work it is important to be aware that they are not gaining employment in well-paid full-time jobs. Too many of the new jobs are short-term and based on zero hours contracts.

Added to the fact that wages have, until recently, not risen in line with inflation means that people feel poorer.  Though they may like a bargain they are holding onto their money.

Accordingly growth based on consumer spending is likely to be negatively affected by a sense that things are still very difficult for the average person.

Returning to employment it is also worth noting that even though more people are employed production figures are pretty static.

In order to produce economic growth you need to produce more with fewer people.  And this requires the sort of investment in technology and training in skills that is seen in, for example, Germany.

Crucially you also need to invest in being innovative and making your products better than those made by competitors; something we learnt from the Japanese ‘quality revolution’ in the 1980s.

In the UK the last thirty years has been about reducing productive capability in industry in general. Faced with uncertainty employers will adopt a ‘make do and mend’ approach and will not be inclined to invest in expensive equipment; especially if you can employ people on the cheap.

The likes of Jaguar Land Rover show that massive investment can pay dividends if you produce high-value prestige products that sell well abroad and contribute to export income for the UK.

Unfortunately companies like JLR are not the norm and we still tend to make a lot of things that can be produced more cheaply abroad and as a consequence businesses find it extremely difficult to compete and all-too-often simply disappear and their names consigned to corporate history.

Clothing and footwear are prime examples of goods that are largely produced abroad though there are some British brands – especially in the premier segment – that are making something of a renaissance.

The lesson is that employing people who are less skilled and work with outdated equipment to produce mundane things is not a good long-term economic strategy and simply becomes a vicious circle.

For sure things are certainly better but we need to emulate the economies that have done much better in recent times if we want to achieve long-term sustainable growth.

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Dr Steve McCabe

Dr Steve McCabe

Birmingham City Business School