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>>Andrew Kirchner: Welcome to the latest economic update with Professor Joe Nellis. Joe, what
is your assessment of how we are doing? >>Joe Nellis: Well it’s not too good and
it’s not too bad. In Q4 last year the economy shrank by 0.5%; in the first quarter it has
grown by 0.5%. So we are really at a standstill at the moment over a six month period.
We are now into the second quarter and signs are not that good in terms of growth going
forward and for the year as a whole: it seems that most organisations are downgrading the
forecast for the UK economy from about 1.7/1.8% down to as low as 1.3/1.4%. So that tells
me the general view is that we are not coming out of this recession as strong as we would
like, and therefore this year and next year will be difficult for us.
>>Andrew Kirchner: What do you think will happen next year? Will it be weaker than the
2.3/2.2% that has been forecast?
>>Joe Nellis: I think it will be the weaker of those figures of more than 2%, really because
there are a number of factors holding us back. We still have to feel the full force of the
government cutbacks, house prices are not rising very strongly – in some cases they
are still falling – unemployment is rising, although slowly thank goodness.
In general, the UK is not forging ahead as much as we would like in term of historical
events.
>>Andrew Kirchner: You mentioned the squeeze; can the private sector take up the slack that
is affecting the public sector?
>>Joe Nellis: Well there are two points there; can it or will it? Obviously it can, and there
is some evidence in the first quarter of the year that the private sector is beginning
to expand, especially since we look back at the budget – there were some measures there,
a reduction in corporation tax which will reduce year by year; that will help private
sector investment and private sector confidence.
The question is will it grow enough to absorb the fallout from the public sector? I am optimistic,
but it is going to take a couple of years before we really feel the benefit of private
sector growth. So cautiously optimistic is what I would say.
>>Andrew Kirchner: You mention inflation; that is really eating into household incomes;
there is a real squeeze going on?
>>Joe Nellis: Yes, this is a big factor. It is not just inflation which is running at
almost 5%, but there are the tax increases as well.
>>Andrew Kirchner: And we have got commodity prices?
>>Joe Nellis: And commodity prices still rising. If you put all those together, it is absolutely
clear that real household disposable income – in other words, what our income can buy
– that is being squeezed, this year, next year and beyond.
Let’s put on top of that the fact that house prices relative to retail in prices in general,
they are falling on average still – or at least not rising. So I think put those together,
we are seeing in a matter of two or three years perhaps the biggest squeeze on personal
wealth that we have seen for a generation; and I think that is no exaggeration.
>>Andrew Kirchner: So the outlook for the rest of this decade isn’t good at all?
>>Joe Nellis: It’s not.
>>Andrew Kirchner: If we can’t grow beyond our trend growth …
>>Joe Nellis: And growth is what we need to create the tax revenues to create the growing
wealth to create the income growth to make us feel better and to raise our living standards.
The problem is this, a number of countries that have gone through similar transitions
in previous decades, when you have got a decade of growth that is below trend, that is described
as a “lost decade” – a lost decade of income, a lost decade of growth and welfare,
a lost decade of growth and wellbeing. I think the UK is facing the danger of experiencing
a lost decade. And without being too pessimistic, remember Japan suffered a lost two decades
since the 1990s.
So I think we have got to be aware of this and try to get ourselves in a position so
that we don’t expect too much, but at the same time don’t talk ourselves into a depression.
>>Andrew Kirchner: Looking across onto to Continental Europe, Germany seems to be doing
pretty well – 1.5% increase in GDP in quarter 1, so that is three times what we have got.
>>Joe Nellis: Indeed; Germany is a power house. It is still the world’s second biggest exporter,
only second now to China. It is a manufacturing power house and not just volume and low margin,
it is high added value. Germany, of course, didn’t go into this financial crisis with
the same problems that we had in terms of the banking situation; it is much more conservative
in its structure and its behaviour and I think it is really benefitting now from that conservative
philosophy and enjoying the emerging market growth because it is exporting – not only
to Europe, but to those booming markets in the Far East and elsewhere.
>>Andrew Kirchner: So in this coming decade could we see a three tier Europe, with the
top players Germany and France, the UK in kind of the middle ground and Greece, Portugal
in the bottom tier?
>>Joe Nellis: Yes, that is a phrase that I haven’t heard before. We often talk about
a two speed Europe, the peripheral countries and the core and it might well be that countries
like the UK and perhaps Italy will fall into a middle tier now – a middle layer – with
sluggish growth, with inflationary pressures which will distance us more from the core
of Europe – Germany, France and the Benelux countries. That is certainly a possibility,
Andrew.
>>Andrew Kirchner: Joe, thank you very much indeed.