What’s the right ‘type’ of growth for the UK economy?

 Most of us are keen to see the economy grow – as measured by GDP – and in the short run, the most likely driver of growth will be aggregate demand (AD). But which component of AD do we want to grow the most?

The Economist newspaper doesn't seem keen on the idea of the government deciding the ‘shape’ of the economy, but argues that there is a big push is to “re-balance” the economy towards manufacturing and away from service industries.

The problem is that this doesn't seem to be happening. The newspaper laments that the economy has loads of spare capacity and needs a huge boost to AD. But in their bid to reduce Britain’s fiscal deficit, the government has chosen to cut investment rather than universal welfare payments.

This means fiscal policy is pulling in the wrong direction. The Economist wants lots more AD, but for the boost to come from Investment and not Government consumption spending.

There’s been plenty of coverage of this problem before (including the graph above). There’s broad agreement that in the boom years, Britain had too much consumer and government driven demand. C and G make up two of the four components of AD.

The other possible sources of AD are I and G; investment and exports. But investment is shockingly low. The biggest slice, investment by firms, is down by a colossal 34% since 2008 in real terms. Spending on machines is 33% lower, on vehicles 38% lower. Even spending on computers has fallen. Ships still carry containers full of air away from Britain. Sterling has dropped by 25% in trade-weighted terms since 2007, making exports cheaper for foreigners to buy. Yet total exports are 1.5% lower and the trade deficit has hardly budged as a share of GDP.

This paints a bit of a depressing picture, and it seems a widely shared view. The Telegraph carries much the same story, arguing that Britain's recovery this year has been stronger than thought, but the economy remains fragile and continues to be weighed down by weak trade and business investment.