GROWING PAINS

The UK economy, having enjoyed two consecutive quarters of declining economic activity (or ‘negative growth’ as economists like to call it) is in the throes of a double dip recession.  This unwelcome development sparked Austerity Central into action: “Since we’re in a rapidly deepening hole,” the Government said, “some folk should stop digging and go in search of growth, while the remainder (mostly public sector workers) should continue to dig.” Or words to that effect.

Increasingly politicians the world over now believe that only growth can save us from Armageddon, which I believe is a small town somewhere in the Eurozone.  Call me cynical, but wasn’t the naked pursuit of growth what got us into this mess in the first place?  Growth in bankers’ bonuses, in property values, in second homes and big, flat screen TVs.  But I digress. ‘Hair of the dog’, has been prescribed.  Growth is the new black.

Squeezed by growth, squeezed by a lack of growth.

There are only limited ways that growth can be created.

Real growth happens when people and businesses go out and spend money to buy more things.  Often, the money they’re spending is money they don’t have so they borrow it from a bank or credit card company.  This behaviour was fashionable in the period just before the global economic crash.  Because of this, gratuitous spending is seen as socially unacceptable these days and not an appropriate topic of discussion at dinner parties. Besides, the banks are a tad short anyway, so this is an unlikely route to growth today.

Then there’s market share growth where a business, through better service, smarter sales people, lower prices or better products, sells more of something than its competitors sell.  This is unlikely to have a material impact on the economy since market share growth for one business results in market share decline for another when the market isn’t growing.  A more sophisticated version of market share growth is export growth, a good example of which would be America selling Californian wine to the French. Sometimes referred to as a zero sum game, market share (or export-led growth) in a declining market is an illusory growth strategy.

Then there’s investment growth, where companies invest in the hope that they will get a return on that investment in a reasonable timeframe.  It might be capital-based (like buying new equipment, new facilities or the acquisition of a competitor), or operating investment (such as hiring new people to build a new line of business).  But investment decisions usually require confidence and confidence has gone to the same place as banker’s credibility.

Finally, there’s lazy growth. This is where businesses that sell us stuff we can’t really do without simply jack up the prices.  Energy and telephone companies are seasoned masters of this.  More commonly referred to as ‘inflation’, it has the benefit of being easily passed on by other businesses so every business can benefit.  The downside is that when people pay more for items like petrol, or food which costs more to deliver to the store, they have less money to spend on discretionary items like eating out, holidays or trips to the hairdresser.

The UK population grew by 0.8% in 2009/10, the fastest rate of population growth in over 50 years, but slightly slower that the world’s overall population growth during the same period, at just over one percent.

If economic activity mirrored changes in population, we’d have a natural rate of one percent growth. But one percent is too little to excite people in the City or Government. The higher growth rates required can only really come from increased consumption.  Rises in consumption creates growth in jobs.  Jobs create wealth and wealth creates further consumption, the virtuous circle that makes a businessman smile.  So buying a new car, a bigger TV or a new suit is a good thing, right?  Some will argue that it’s the best way to lift the world’s poorest out of poverty.

But rising per capita consumption is stretching the earth’s resources closer to breaking point.  Building societies based on rising consumption, where having more is being better, is simply not a sustainable model.  And that’s the rub.  Truly sustainable growth is growth that works for everyone, including the environment and, as far as I know, no one’s found the algorithm for that yet.

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