Press Story

In his annual New Year message, IPPR's Chief Economist says "there is still plenty of cause for alarm" and that the recovery will be "bittersweet" for millions of UK households. He warns that "a massive build up in household debt before 2008 contributed to the depth of the last recession" and that "the OBR expects debt to start increasing again, not just in nominal terms, but also in relation to incomes." He warns that 2014 will be the beginning of "the next UK debt bubble" that will be back up to 160 per cent of household income by 2018.

IPPR's Chief Economist warns that despite the recent spate of good news on economic growth "serious structural flaws that reach back before the 'Great Recession' still pervade our economy," including high unemployment, low rates of investment and a poor export performance. He warns that if these are not tackled in 2014, the UK's economic recovery may not be sustainable. His assessment of 2013 points to good news, with real GDP increasing at an annual rate of 3 per cent in the middle two quarters of 2013, with forecasters being forced to revise up their estimates for growth in 2013 and 2014.

Despite a recent fall in unemployment, IPPR's Chief Economist points out that youth unemployment continues to rise and remains 277,000 higher than it was before the crash in 2008. Overall, unemployment is 770,000 higher than it was in the first quarter of 2008, just before the recession began. But he points out that employment growth has outstripped even the most optimistic projections. Over the last year, the number of people in employment in the UK has increased by 485,000 as the private sector has proved more than able to create enough new jobs to offset those that are being lost in the public sector. As a result, the unemployment rate has fallen to 7.4 per cent, its lowest level since early 2009.

IPPR wants the Government to adopt an economic strategy that is based on improving the UK's long-term economic performance rather than creating short-term gains through ever-rising household debt.

IPPR Chief Economist, Tony Dolphin, said:

"In his March 2011 Budget, George Osborne promised a 'march of the makers': an economic recovery led by manufacturing industry boosting exports and investment spending. But companies have been reluctant to oblige. Investment spending, which the OBR in its June 2010 forecast said would increase by 22 per cent between 2010 and 2013 is likely to have fallen by 4 per cent over this period. It is still 24 per cent below where it was at the end of 2007. Far from marching forth and leading the economic recovery, the makers have been in retreat.

"The Chancellor risks pumping up a fresh housing bubble with the Help to Buy scheme. House prices are now increasing faster than at any time since July 2010. Across the UK as a whole, they rose by 6.5 per cent over the last year, and in London growth reached double digits. Even with Help to Buy, for many young people finding a set of house keys under the Christmas tree is a far off dream, as concerns about large deposits are replaced with ones about unaffordable monthly repayments and unprecedented levels of debt.

"A massive build up in household debt before 2008 contributed to the depth of the recession in the UK. Now, the OBR expects debt to start increasing again, not just in nominal terms, but also in relation to incomes. Although it is not expected to return to its previous peak within the next five years, by 2018 the debt ratio will be back up to 160 per cent.

"In the global economy we are truly living beyond our means, and have been doing so for three decades. The UK's trade performance has been hindered in recent years by developments in the euro-zone, but poor numbers are nothing new: 2013 will be the 30th straight year in which the UK has recorded a deficit on its current account balance. This is a sign that there is a fundamental flaw in the UK's economic model.

"A relatively low rate of investment is another key structural weakness of the UK, and it is a reflection of the persistent short-termism of business in the UK. The dominance of finance capitalists has led senior managements to focus ever more on quarterly results and on the need to stave off a potential acquisition or merger. For the economy as a whole, this is disastrous. A low rate of investment means a less productive economy, lower living standards and a lack of competitiveness.

"Strong growth in the short-term does not mean that structural weaknesses in the UK economy that became more evident during the 'Great Recession' have been eliminated. Unless we move to adopt a new economic model, the recovery will prove unsustainable and bittersweet for those who do not benefit from it before it is extinguished."

Notes to Editors

IPPR's 2014 economy report will be available here from Saturday 28 December: http://www.ippr.org/publication/55/11689/the-bittersweet-recovery

IPPR's report - 'A job for everyone: What should full employment mean in 21st century Britain?' - is available here: http://bit.ly/IPPR11002

IPPR's report - 'Youth unemployment in Europe: what makes a labour market 'youth friendly'?' - is available here:http://www.ippr.org/articles/56/9419/youth-unemployment-in-europe-what-makes-a-labour-market-youth-friendly

IPPR's report - Jobs for the Future: The path back to full employment in the UK - is available here:http://www.ippr.org/publications/55/7938/jobs-for-the-future-the-path-back-to-full-employment-in-the-uk

IPPR North's Northern Economic Futures Commission final report, Northern prosperity is national prosperity: A strategy for revitalising the UK economy, sets out a new economic agenda for the north of England. It is available to download from: http://www.ippr.org/publication/55/9949/northern-prosperity-is-national-prosperity-a-strategy-for-revitalising-the-uk-economy?siteid=ipprnorth