Recovery is vulnerable, warns HSBC economics chief

HSBC’s chief economist in the UK warned the industry that the current economic recovery is built on unstable foundations and needs to be driven by a missing element: private sector corporate investment.

Mark Berrisford-Smith, head of economics for UK Commercial banking, told Talk Construction that the current recovery – underpinned by higher consumer spending and a revived housing market – is inherently unsustainable. “We need to hand over from consumer spend to investment spend,” he said, referring to “kit, infrastructure, systems and new buildings”.

“Businesses’ levels of investment continues to fall, which is hardly the basis for a solid recovery in the construction sector. Will firms concentrate on improving productivity, or hiring more bodies? Will investment drive our economic revival? In six months time we’ll know the answer. The economy might be flying, but it isn’t flying today.”

Berrisford-Smith pointed out that the recession of 2008-2012 had rewritten the economic rule book because employers had found ways to retain staff, such as converting them to part-time contracts, and therefore keep unemployment in check.

At the same time, income growth had failed to keep up with inflation, meaning that any recovery driven only by a modest increase in consumer spending would be too slight – at 1-1.5% annual GDP growth – to give the construction sector much of a boost.

“So how can employers pay their staff more? It’s about productivity, but productivity is 8% down on where we were five years ago. With new technologies arriving you would assume that productivity would increase by 1-2% a year, but companies have taken on people instead of investing in kit and assets: people are cheaper and technology is a risk.

“We have a record number of people in employment, which is not a bad thing, but the price we have paid is a fall in productivity. So in order to pay people more, we need to get more productive.”

He said the UK economy is 2.5% smaller today than in 2008, and 10-12% smaller than it would have been if the growth trajectory up until 2007 had continued. “Current growth of 0.7- 0.8% a quarter could continue, but we may never close that gap with where we should have been,” he said.

Meanwhile, construction is 12.5% smaller than in 2007, after experiencing an “almighty” double dip in 2012, a year he described as a “horror show” and an “absolute shocker” for the sector.