Economists’ forecasts: Fears over balance of recovery

The size of the current account deficit and the UK’s reliance on household consumption are among the main worries for Britain’s leading economists.

Brexit, regional imbalances, the dominance of the service and financial sectors and elevated levels of household debt were also frequently cited in the FT’s annual survey, now in its 11th year.

Nearly half — 49 of the 104 economic thinkers who answered the specific question* — focused on the dependence on household consumption to drive the economy and the resulting trade and current account deficit.

Other problems raised included income inequality, generational inequality and the decline in savings.

One concern was notable by its absence: just three respondents cited the fiscal deficit as a big worry

Andrew Simms, director of New Weather Economics, said his greatest concern about the balance of the recovery was “it has none”.

“Any talk of recovery now is like saying that a previously paralytic alcoholic had recovered because he’d found the strength to lift a new bottle to his mouth.”

George Magnus, senior economic adviser to UBS, was one of a number to flag the “stubborn large external deficit” and rising private sector indebtedness as a long-term concern. “It’s unlikely to improve much if at all in 2016, and might not even be a major problem until later in the decade. But unaddressed this will be the economy’s undoing before too long,” he said.

Sir Charles Bean, former MPC member and now a professor at London School of Economics, was concerned that we did not understand the true causes of the “substantial deterioration” in the investment income component of the current account.

“While I expect this to prove temporary and largely disappear as the euro area recovers, were it to persist then a much larger rebalancing of production towards the tradable sector would be required.”

Despite Chancellor George Osborne’s championing of the “northern powerhouse”, regional imbalances within the UK topped the list of worries for around 10 per cent of respondents.

Dhaval Joshi, chief strategist at BCA Research, said London had the “feel of a boomtown. But wander 50 miles out of London and you enter a very different, more Spartan economic landscape”.

Mike Wickens, economics professor at Cardiff and York universities, said that in recent years the UK had become a “non-optimal currency area”, with the South East growing much faster and becoming more wealthy than other regions — which he likened to the position of Germany within the eurozone.

“This has hurt the competitiveness of manufacturing and hence the regional economies. I am hoping that the chancellor’s powerhouse policies will start to reverse this.”

But a few voices suggested policymakers could relax. Patrick Minford, professor at Cardiff Business School, said he was “never concerned about ‘imbalances’.

“These are figments of economic planners’ imaginations. Economies are rarely balanced.”

*Full text of answers to the question

What is your greatest concern about the balance of Britain’s recovery? To what extent will that balance improve by the end of 2016?

Anonymous

The UK economy still has several imbalances that will create ongoing vulnerabilities in 2016, most importantly the twin deficits on the government budget and the current account. The Government’s continuing fiscal credibility should help to contain the risks from the former, and the latter is partly driven by some idiosyncratic changes in income flows from overseas investments, so these risks should remain contained in 2016. However, an economic slowdown or external shock could quickly bring them front and centre. House prices continue to rise but the new macroprudential policy framework is very focused on housing risks and I would expect further action from the FPC on housing during 2016.

Anonymous

Regional is an issue — Wales is a worry. We should worry more about skill asymmetry — school results vary, within UK migration matters (London as parasite), and in-migration brings people with oomph to areas of high demand.

The decline of manufacturing is ongoing, but that is to be expected — it has been going on pretty much everywhere (including China) for a while. It is Germany, not UK, that is an outlier.

We should worry about balance of payments a bit more. It can't go on forever.

Anonymous

We view the possibility of the UK voting for Brexit as the single largest negative risk to the UK economic outlook in 2016 and beyond.

In the event of a vote to leave, the UK would have to renegotiate its trading relationship with the EU and also with every other economy in the world (because all of its existing trade agreements are currently arranged via the EU). The ensuing uncertainty is likely — in itself — to be very damaging for growth. Moreover, that uncertainty is likely to last at least 2 years and possibly as long as 10 years as the UK pursues the arduous task of renegotiating all of its trading relationships. "

Anonymous      

Apart from Brexit, my main concern relates to political events, both in the UK and abroad. For some reason, perhaps partly due to the relatively poor economic conditions for much of the working population, the political centre has become weaker and more extreme activists have been gaining ground on both the right and the left in various countries. This could endanger economic recovery generally.  

Apart from that, some asset prices have been pushed up to ridiculous levels, eg government bonds, by monetary policy, which has remained too low for too long. If this bubble should burst suddenly, there could be problems."

Howard Archer, Chief European & UK Economist, IHS Global Insight

On the output side, the recovery currently looks particularly dependent on the services side. Of course, the services sector will always be the major growth driver given its dominant position, but the recent contributions from manufacturing (especially) and construction have been disappointing.

We believe construction can have a reasonable year in 2016 (and we actually suspect it has done better in 2015 than currently portrayed by the hard data). Manufacturing has clearly been particularly hard hit in 2015 by a very strong pound and muted global growth limiting foreign orders. These problems may only slowly ease in 2016.

On the expenditure side, growth is highly dependent on domestic demand, but at least this has been relatively balanced with decent business investment as well as robust consumer spending. We believe exports will look better by the end of 2016 with global growth improving and sterling likely softer. But domestic demand will still be the key."

Melanie Baker, Jacob Nell, Morgan Stanley       

We think the UK recovery is robust and self-sustaining. Our main concern about the recovery is the wide current account deficit, where we see a risk that capital inflows slow sharply on the risk of a UK exit from the EU. However, we expect an ongoing euro area recovery, which we see as key to a smaller current account deficit: Better euro area growth should support a significant improvement in the UK’s net FDI earnings and a pick-up in UK exports. We forecast the current account to shrink to 3.7% GDP in 2016 from 4.8% in 2015.

Kate Barker, former MPC member,

Worries about the 'balance' can be rather vague. Why does balance matter? the key worries are around the current account balance — but that may recover to some extent when financial conditions change as much of the recent deterioration has been driven by investment income. A bigger worry is around whether the household sector's spending is unduly reliant on debt — for the fiscal deficit to improve the household balance would need to deteriorate unless the corporate sector starts to spend. So again firms' investment behaviour is key.  

Ray Barrell, Professor, Brunel University and VA Research

The UK economy remains too dependent on consumer demand and too reliant on foreign finance. The resulting balance of payments deficit involves a potentially declining stock of national wealth in a period where we should be saving for the effects of an ageing population on output. UK exports should strengthen a little this year, but the imbalances we see are structural, and difficult to deal with. An increase in personal taxation matched by an increase in government spending on items such as house building and public sector infrastructure would help redress the imbalances and strengthen growth in the future. Not much will happen in the next year.

Richard Barwell, Senior Economist, BNP Paribas              

Let’s take it as read that it would have been nice if business investment and net trade had made a more substantial contribution to the recovery in demand in the UK. Having said that, it’s difficult to draw strong policy conclusions from the expenditure breakdown of demand at the aggregate level. I just don’t think that’s the right perspective on the problem. From a monetary policy perspective you don’t have the luxury of choosing the mix of demand, and it’s none of your business anyway. From a macroprudential and fiscal perspective, you do care about what lies beneath, but your focus is far more granular than just the share of household consumption or business investment in headline GDP. To be fair, it seems that the Treasury and the Bank are genuinely concerned about these issues — say the imbalance in activity and income across the regions of the United Kingdom or whether spending patterns within pockets of the household sector are sustainable — and they appear willing to act, and at the margin that makes me hopeful that we make some progress on this front. I would have thought that we should be more concerned about supply rather than demand right now, which means that we should probably focus more on the level of spending on R&D rather than (say) the usual fascination with the net trade contribution to demand.

Charles Bean, Professor of Economics, London School of Economics

The recovery has been heavily reliant on domestic demand growth, in large part because of the continued weakness in our main export market, the euro area, and the disappointing impact on net exports of the lower level of sterling since the financial crisis (a good part of which has now unwound). That has been achieved through exceptionally stimulatory monetary policy (including also the FLS) but the counterpart — indeed a key part of the transmission mechanism — has been higher asset prices, including house prices. There is a risk of significant asset price falls when monetary policy normalises, which in turn may cause problems for some households and businesses.   

I am also concerned that we do not understand the true causes of the substantial deterioration (3-4 percentage points of GDP) in the investment income component of the current account over the past three years. While I expect this to prove temporary and largely disappear as the euro area recovers, were it to persist, then a much larger rebalancing of production towards the tradable sector would be required. "

Andrew Benito, Goldman Sachs, Senior European Economist

UK growth has been led by the consumer in 2015 and somewhat unbalanced. We forecast continued, yet sustainable, consumer-led growth.

Symptoms of somewhat unbalanced growth include a historically low saving ratio and a sizeable current account deficit. Yet, our view that growth is sustainable is based on the view that households anticipate rising incomes driven by improving productivity as well as a tighter labour market. This justifies the lower saving ratio, particularly after the elevated saving ratio in 2010-12 when households' sense of caution was linked to concerns about job prospects and access to finance — risks that did not materialise. Instead, the unemployment rate fell and access to finance improved. Alongside a stable household saving ratio, and improving public sector balance, we expect the current account deficit to close steadily.

Following repeated disappointments, this year also brought somewhat better news on hourly labour productivity. The outlook for productivity remains critical to the interpretation of unbalanced growth and its sustainability.

Our outlook requires key downside risks — including a hard landing in China and an EU exit — to be avoided. Were these risks to crystallise, households' and businesses' income prospects would be disrupted through weaker trade flows, tighter credit conditions and elevated uncertainty and weaker consumer spending. In that case, what was unbalanced yet sustainable would then turn unbalanced and unsustainable.   

Nick Bosanquet, Professor, Imperial     

Further decline of large firms — former FTSE champions will face continuing decline— oil, mining, Banks, pharma, supermarkets, high street retailers. Last year saw job losses offset by job gains — 1.7m losses compared to 2.3.m gains. Risk is that rising labour costs — Living Wage, NI and pension payments will hit further job growth from SMEs.

Ryan Bourne, Head of public policy, Institute of Economic Affairs           

My greatest concern is the political obsession with rebalancing, both sectorally and geographically. There is increasingly a Ross Perot-like fetish for manufacturing in our political discourse even though there is clear evidence that the demand for the sorts of services and high-end manufacturing Britain specialises in will increase significantly as the global middle-class expands. And rather than pursuing a broad fiscal decentralisation agenda which devolves spending and tax-raising powers to local authorities to create conditions for growth in their own areas, the government increasingly pushes cronyism City deals and big infrastructure spending to revive areas. There is little economic evidence that devolving more power over spending alone will improve regional growth, whatever the government arrangements. The government should stop working against market trends.

Annika Breidthardt, European Commission

UK growth remains unbalanced with net exports continuing to detract from growth. This dynamic is expected to continue in 2016 but abate in 2017.

Francis Breedon, Professor, QMUL         

The key challenge for 2016 could be the turning point in interest rates here and the US. After such a long period of low rates, the first rate rise could be disruptive. Most disruption would be confined to financial markets, though consumption could be hit most notably through a fall in house prices (since higher interest rates will change the PV of future rental income)

Alan Budd, former MPC member

As above, investment could be hit by the referendum. The balance between domestic demand and net trade and between manufacturing and services is unlikely to change in favour of net trade or manufacturing.

Willem Buiter, Citigroup, Global Chief Economist          

Unbalanced — too domestic demand driven. Britain's exporting and import-competing sectors suffering from the strength of sterling. Real estate has moved from boom to bubble. Debt levels in the public sector and the household sector are far too high — the fact that the household debt burden is well below its 2008 level is little comfort.

The UK's financial sector is too large for a country that no longer has a serious reserve currency. The Bank of England cannot act as lender of

Jagjit Chadha, Professor of Economics, University of Kent

There is a need for a more balanced recovery across the regions, which would be helped by more considered infrastructure development. You do not have to talk with economists for very long before you realise that housing availability and affordability in areas close to jobs continues to be a problem.

Alan Clarke, Economist, Scotiabank

Clearly the UK recovery has been disproportionately skewed towards consumer spending. That said, prospects for the UK’s main trading partner, the Eurozone, are improving somewhat. While the strength of the GBP exchange rate is a dampener for overseas demand, that is typically a secondary consideration. Meanwhile, stronger Eurozone domestic demand tends to be the more important determinant of UK export growth. Accommodative financial conditions in the Eurozone are helping to prop up sentiment indicators. If this translates into stronger activity data, then the UK recovery is likely to benefit from stronger exports. This notwithstanding, the consumer is likely to remain the main driving force behind growth. The fact that consumption is being fuelled by organic, self-sustaining influences (robust real disposable incomes) is encouraging. Admittedly, low inflation is doing much of the heavy lifting in terms of disposable income growth and that support will fade. However, we would anticipate firmer wage inflation to compensate at that point.

David Cobham, Professor of economics, Heriot-Watt University

The lack of rebalancing in terms of output or demand (see above), which is most obviously manifested in the continuing current account deficit. I doubt that will improve significantly by the end of 2016.

Aengus Collins, Country Forecast Director, The Economist Intelligence Unit      

The economy remains over-reliant on household spending being propped up by developments in an increasingly dysfunctional housing market. Even with the greatest political will and policy minds in the world, it would be the work of many years to reverse this situation. It will not have changed one iota by the end of 2016.

Diane Coyle, Professor of economics, University of Manchester

As above. The failure to build enough homes is a massive running sore on the economy. It harms those who can't afford to buy, and it harms those who can, causing them to be heavily indebted. I am very concerned by the failure of the UK to be able to export more. Nobody worries about the current account deficit — until suddenly there is no choice.

Bronwyn Curtis, Chief economic adviser, Official Monetary & Financial Institutions Forum

My greatest concern is that the economy will be more unbalanced, not less, by the end of 2016. The current account deficit is going to grow and the recovery is entirely driven by domestic expenditure.  

The trade deficit might improve a little as more than 60 per cent of exports go to Europe and the US where the economic indicators are more positive than the hard hit emerging markets. But the UK’s earnings on overseas assets will be hurt by the lower oil price. The drop in overseas earnings will swamp any improvement in the trade deficit."

Howard Davies, Chairman, Royal Bank of Scotland and

The trade deficit remains remarkably high. In due course something will have to give, whether the exchange rate, or domestic consumption, or both.

Gavyn Davies, Chairman, Fulcrum Asset Management

The large current account deficit continues to point to an unbalanced recovery that is too dependent on the consumer and the housing sector. There will be little improvement in 2016. In the longer term, there may need to be a substantial fall in the exchange rate, but this does not seem imminent.

Panicos Demetriades, Professor of Financial Economics, Ex-Governor of Central Bank of Cyprus and member of the Governing Council of the ECB, University of Leicester   My greatest concern is the vote on Brexit since this will tell us the extent to which the balance of the recovery is sustainable for two interrelated reasons. Firstly, voters who feel that they are not benefiting from the recovery are more likely to vote yes to Brexit. Secondly, Brexit is indeed likely to derail the recovery.

Wouter Den Haan, professor of economics, London School of Economics

Brexit, the refugee crisis, and the Eurozone sovereign debt crisis. Except possibly the Brexit issue, I suspect that these concerns will stay in place throughout 2016

Michael Devereux, Professor, Oxford university

The state of the economy of our trading partners; especially in Europe. But I'm not sure whether it will improve by the end of 2016.

Peter Dixon, Economist, Commerzbank

I suppose my concern is that for all the pain of the past seven years, we do not seem to have made a lot of economic progress on rebalancing. Hopes of an export-led, investment driven recovery have proven to be pie-in-the-sky, as we suspected back in 2010. The process of household deleveraging has already more or less come to an end and the financial sector remains large relative to the size of the economy. If one objective of policy is to de-risk the economy by reducing leverage, we are nowhere near where we need to be. Admittedly the public finances appear to be moving in the right direction, but a lot more slowly than planned. 2016 will bring more of the same: The economic numbers should look good on the surface but progress on rebalancing will be glacially slow.

Charles Dumas, Director, Lombard Street Research

My greatest concern lies in the undervaluation of the savings-glut economies — see (1) above. That is likely to get worse in 2016.

Martin Ellison, Professor of Economics, University of Oxford

A recovery led by domestic demand can only take an open economy such as the UK so far. Increases in real wages will inevitably pass through into firm costs as spare capacity is used up, at which point the CPI will start to rise. Fortunately that point looks to be beyond 2016 and is likely to be offset by steadily improving export demand from the EU.

Andrew Goodwin, Lead UK Economist, Oxford Economics

The almost total reliance on services to drive growth remains the key concern, particularly given that the UK's performance as an exporter of services has faltered somewhat since the crisis, increasing the reliance on domestic demand.

I am cautiously optimistic that manufacturers — and exporters more broadly — will perform better in 2016, mainly because I do not expect the pound to continue to strengthen. But realistically we are still going to be heavily reliant on services to drive growth in 2016."

Stuart Green, Santander Global Corporate Banking, UK Chief Economist             

We expect household spending to drive the UK economy again in 2016, although we are not overly concerned by the domestic focus of UK growth, particularly with investment expenditure also on the rise. We believe that growth in the Eurozone will continue to improve over the course of 2016; UK exporters should be the natural benefactors of this trend, suggesting a change in the mixture of UK growth towards the end of the year.

Our concerns relate more to the supply-side performance of the economy, and we question whether the UK will see a meaningful improvement in productivity growth during 2016. During the past three years, around 3/4 of the increase in UK output has been facilitated through increased employment, and the remainder via a very modest improvement in productivity. With little slack remaining in the labour market and unfilled vacancies now standing at a record high, we believe that recruitment difficulties could become a more pressing issue for UK companies and GDP growth in general during 2016.

Jonathan Haskel, Professor of Economics, Imperial College Business School

UK TFP growth was disproportionately driven by financial services before 2008, so although financial services are about 10% of value added, it was 25% of the TFP slowdown. I believe that the economy is rebalancing towards the creative/intangible/service sector but that is more badly measured and so obscures the real transition.

John Hawksworth, Chief economist, PwC

The reliance of consumer spending growth on a falling household savings ratio with rising debt to income levels is a source of concern and is likely to be a continuing trend through 2016. This could sow the seeds of the next downturn later in the decade as and when interest rates eventually rise.

Neville Hill, Credit Suisse,         

Although strong real consumer spending growth may give some cause for concern, it’s worth remembering that the relative strength of consumption is manifest only in real terms, not in nominal terms. It is being driven by a positive terms of trade shock, not rapid debt accumulation. For us, a bigger concern is the failure of nominal growth to show much strength. Nominal GDP grew just 3.4% in the year to Q3 2015, compared to an average of 5.3% in the decade before the crisis. Until there’s a meaningful acceleration in nominal GDP, both households and governments will find reducing their high debt ratios extremely challenging. And the case or need for normalising monetary policy will be limited.  

Brian Hilliard, Société Générale, Chief UK economist

That it is all domestically driven. That balance will not change next year.

Lee Hopley, Chief Economist, EEF, the manufacturers' organisation      

Any concerns we have about the balance of growth in 2016 haven't changed significantly since the end of the recession when we moved towards something of a consensus that the UK economy had become seriously unbalanced. Too great a reliance on consumer spending, not enough investment in the productive assets of our economy and another year in which trade fails to contribute positively to growth is still a risk for the UK.

A key component of our forecast for the UK economy is the expectation that the investment recovery chugs along nicely in 2016, which should help the balance of growth — clearly there are some risks to that from global uncertainty, the oil price remaining where it is and firms' reaction to a potential interest rate rise. Net trade's contribution to growth, however, looks like a lost cause."

Steve Hughes, Head of Economic and Social Policy, Policy Exchange

The regional imbalance, with London and the South East still being the engine room of the UK economy. Rebalancing will not improve markedly by the end of 2016, and geographic imbalances will in most cases take significant time to narrow.  

Ethan Ilzetzki, Lecturer in Economics, London School of Economics

See my answer to 1 above.

Richard Jeffrey, Chief Investment Officer, Cazenove Capital Management         

As suggested above, there are two features of the recovery that concern me. The first is that we have yet to achieve sustained productivity growth at a rate that would support a sustainable GDP growth rate above 2%. This may come through as the labour market continues to tighten. However, if capital spending and productivity fail to gain better momentum, the medium-term consequence will be slower growth and the short-term consequence could be higher domestically generated inflation as a result of rising unit labour costs.

The second feature of concern is that trade continues to make a negative contribution to GDP growth. I expect this situation to persist in 2016, and in nominal terms it seems likely that the trade deficit will rise as a percentage of GDP. With an overall current account deficit of around 4.5% of GDP, this leaves the UK economy generally, and sterling specifically, very vulnerable to anything that might disturb the required counterbalancing capital inflows.

On another front, I fear that the MPC believes inflation to be better controlled than actually it is. There is already evidence that domestically generated inflation is increasing, and this could easily emerge as a more serious policy issue as labour markets continue to tighten."

Oliver Jones, Economist, Fathom Consulting

Our greatest concern about the balance of Britain’s recovery is the Chancellor’s de facto mantra of ‘public debt bad, private debt good’. The emphasis on reducing the public sector debt with one hand, while encouraging the private sector to accumulate even more debt on the other, misses a key point in macro-stability. The UK now has a greater than evens chance of a banking crisis within the next five years according to our Financial Vulnerabilities Indicator. If such a banking crisis happens, forcing the government to intervene again to save the banking sector, a few percentage points of government debt reduction will have been a waste of time.

As it stands, the Chancellor is showing few signs of reversing this policy and encouraging households to pay down their debt. Indeed, during his Autumn Statement, the Chancellor unveiled yet another Help-to-Buy scheme. However, there may yet be some reasons to be optimistic, or at least less pessimistic. The FPC remain conscious of the serious risk posed by the UK’s Buy-to-Let sector and have requested powers to curb this. While the Chancellor’s measures for curbing BTL investors are relatively weak to date, at least there are some signs that the steam in the speculative leveraged sector of the housing market might gradually be reduced."

Dhaval Joshi, Chief strategist, BCA Research      

The biggest imbalance in Britain’s recovery is in the dimension of geography. London has the feel of a boomtown. But wander 50 miles out of London and you enter a very different, more Spartan economic landscape.

In 2016, as the financial sector that dominates London comes under pressure, this geographical imbalance should start to correct."

DeAnne Julius, former MPC member, now Chair of UCL

I am worried about the build-up in household debt (relative to income), which creates vulnerability to a house price shock and uncertainty about the impact of interest rate increases, whenever they come.

David Kern, Chief Economist, British Chambers of Commerce

My greatest concern is that our unsustainable external deficit starts undermining international confidence in the UK. Failure to narrow significantly our current account deficit will make the UK vulnerable to speculative attacks in the medium term and our credit rating could be at risk. Gentle falls in the pound may be helpful, but sharp declines in sterling triggered by a loss of confidence could be disruptive and damaging.

Stephen King, HSBC, Senior Economic Adviser

Strong domestic demand and weak world trade growth are hardly the best combination for a healthy balance of payments position. It's been the UK's Achilles heel in the past and it could easily be so again.

Simon Kirby, Head of Macromodelling and Forecasting, NIESR

We’ve been waiting for the economy to rebalance for 5 years or so now. I do not think it will have happened by the end of 2016.

We’ve now had a couple of quarters of reasonable productivity growth. The productivity puzzle still remains though. There have been quite a few papers published that try to explain the puzzle, but the debate has not been resolved yet. I’d be a lot more confident that the very recent productivity performance is going to persist if we the puzzle had been solved.

I do not think the balance of growth will change that much at all. Robust consumer spending will underpin 2016’s growth. Although this may be more subdued, depending on how indebted households respond to rising interest rates.

James Knightley, Senior Economist, ING             

My concern is that the UK recovery in unbalanced in so many ways and there is little prospect of improvement in any of them. You have the public-private split where wage growth is likely to increasingly diverge, which could add to the potential for trade union action. You then have the manufacturing-services split and how the Bank of England will respond and the implications for sterling. Add in the London versus rest of UK split in terms of jobs, house price growth, wealth, economic prospects and there are plenty of things to cause concern. Unfortunately I don't see any of these improving in the next twelve months.

Ashwin Kumar, Director, Liverpool Economics

Mean paid hours are still below their pre-recession level so further recovery may well continue to absorb this slack. This would result in modest productivity and full-time weekly wage growth and many people not feeling much better off, particularly if inflation starts to pick up.

Ruth Lea, Arbuthnot Banking Group, Economic Adviser

External factors, especially ongoing weakness in the Eurozone (note the UK is less exposed to emerging markets than some other countries, eg Germany).

The balance probably won’t have changed much by the end of 2016."

Grant Lewis, Head of Research, Daiwa Capital Markets Europe

The continued heavy reliance on the household sector and a record current account deficit both provide some cause for concern. But neither are likely to derail the UK economy in 2016. That said, the prospects for a rebalancing towards an economy of "builders", other than housebuilders, will probably remain elusive.

John Llewellyn, Partner, Llewellyn Consulting

The external deficit (the largest ever in peacetime), and associated weakness in manufacturing and other exportables, is a large and growing risk. It is unclear that the (notoriously unpredictable) income balance will improve to the extent hoped for by the government, historically, the UK's external deficit has tended to deteriorate through the course of the business cycle. Sterling has been strong and, even if it were to adjust lower, the positive consequences for the external balance would probably take two years to become manifest.

Gerard Lyons, Chief economic adviser to Boris Johnson, the Mayor of London

I have a number of concerns re the balance of the recovery: rising household debt, the persistence of the current account deficit, and the increasing reliance on rising property prices as a sign of economic success. The crisis of 2008 led to much debate about an unbalanced economy, and in turn a focus on reducing the budget deficit. But many other structural issues in the UK, that contributed to previous imbalance have not been fully addressed. Recovery is likely to see rising household debt, a sizeable current account deficit that may at some stage weigh on sterling, and also while inflation stays low, further house price inflation highlights the need to boost housing supply.

George Magnus, Senior economic adviser, UBS                

The spectre haunting the UK is the private sector's rising indebtedness that flows from the tyranny of a stubborn large external deficit and the government's drive to push the fiscal balance into surplus. It's unlikely to improve much if at all in 2016, and might not even be a major problem until later in the decade. But unaddressed this will be the economy's undoing before too long.

Chris Martin, Professor of Economics, University of Bath

3 concerns:

1) real wage growth is very low. domestic demand growth is backed by credit growth; we know the dangers of this

2) investment is still low. This is a structural weakness of the UK compared to competitors.

3) the current account deficit is too large and is growing; the result of concerns 1) and 2)."

Michael McMahon, Associate Professor of Economics, University of Warwick

I have two main concerns. First, the China slowdown and its knock-on effects on the rest of the world and hence the UK. Second, the financial volatility that may follow from normalisation of, particularly US, interest rates. My uncertainty about the latter is probably greater.

I hope that, by the end of 2016, the markets will have adjusted to any higher interest rates in the advanced economies. If the US can lift off without causing too much extra capital outflows, especially in emerging economies, and the rising rates doesn't cause too many shocks to financing of less highly rated debt, then I hope that the main risks from US monetary policy normalisation will have dissipated by the end of 2016.

I am less convinced that concerns about China will have dissipated.

Costas Milas, Professor, University of Liverpool

Again, the main danger comes from a possible Brexit and its impact on investment decisions at home as well as the prospects of our exporters. Currently, EU referendum polls suggest a neck-to-neck race between the “In” and “Out” vote. If the “Out” vote takes a clear lead, markets will probably interpret this as a Brexit outcome in which case, investor uncertainty will kick-in and the cost of borrowing will rise even before the EU referendum. In this hypothetical scenario, it is more likely than not that the MPC will decide to authorise additional QE to prevent the (medium-term) cost of borrowing from rising.

Further, we should not underestimate the destabilising impact of possible/further terrorist attacks on the world economy and the UK economy."

Patrick Minford, Professor of applied economics, Cardiff Business School, Cardiff University

I am never concerned about 'imbalances'. These are figments of economic planners' imaginations. Economies are rarely balanced. Growth periods involve transitions between equilibrium paths most often.

My key worry is over monetary policy which has become stuck in a distorted state with zero rates subsidising the government and large companies, as well as keeping 'zombie' companies going. The Bank is using low inflation due to commodity prices as an excuse for excessive loosening; it says it will deal with 'overheating' that it fears by macroprudential policy. First this will be ineffective as all controls become after a time; second they have shown reluctance to use them; third these controls are distortionary. They should revert to normal monetary policy as the Fed looks now like doing.

Monetary policy does create 'imbalance' of a standard sort: viz credit overheating. This could give us our next crisis headache.

Allan Monks, JPM Research, Economist

Even if the global economy shrugs off some of its greatest challenges next year, it is unlikely that growth among the UK’s trading partners will materially exceed UK domestic demand. If the UK recovery continues, it hence appears likely to again be driven by domestic sources, with limited rebalancing towards trade. A further strengthening in the housing market would probably see household debt ratios start to rise. One source of rebalancing that has already started to occur, however, is the relative strengthening of business investment which is now running 7% above its 2008 peak (note this figure may change after Wednesday’s data).

Kathrin Muehlbronner, Moody's, Senior Vice President — Sovereign Risk Group

Britain’s recovery remains centred on household consumption and the services sector and this is unlikely to change in our view. A rapid rise in household debt would be a concern, but we do not expect it in our baseline scenario. Nor do we expect a material reduction in the UK’s large current account deficit, which is a source of vulnerability.

Rain Newton-Smith, CBI, Director of Economics               

To date, there hasn’t been any material support to growth from the external sector. The UK’s current account deficit is pretty large and while it has proved sustainable so far (and has been narrowing recently), it does represent a vulnerability. Related to this, export growth has been a chink in the armour of the UK’s otherwise solid growth, and has meant that the recovery hasn’t been as balanced as it could have been.

We don’t see this shifting materially in 2016: net trade is set to drag on growth, as firming exports growth is offset by strong imports growth (with domestic demand remaining firm). The current account deficit is set to remain large, as a slight widening in the trade deficit will offset a modest improvement in the income balance.

A key unknown for the UK economy is productivity: should a meaningful recovery not materialise, the sustainability of earnings growth and household spending could be threatened.

Erik Nielsen, Global Chief Economist, UniCredit              

The fiscal deficit and the current account — both record imbalances. We think both will improve during 2016, but history tells you that projecting smooth adjustments in major imbalances is a dangerous game. Abrupt developments are just as likely — if not even more so.

Charles Nolan, Professor, University of Glasgow

The longer term issues we face continue to include infrastructure investment, skills and other measures aimed at boosting our productivity potential.

David Owen, Chief European Economist, Jefferies

Recent years have seen a recovery heavily skewed towards the so-called Flat White Economy, a trend that is likely to continue. In broad terms the sector (which does not include financials services and real estate) represents around 10% of the economy, about the same size as manufacturing but has seen growth rates in some quarters of approaching 10% on year. Many of the people who work in this area would formerly have been employed in financial services or even in years gone by, manufacturing, but are now employed in the various creative industries as well as research and development that make up the sector. Government policy (the Northern Powerhouse) could continue the trend. A more balanced recovery would include manufacturing taking up more of the running, but high value added business services will probably remain key for the UK growing close to potential. Similar trends are being seen in other European economies as well, just that the sector has seen much stronger growth in the UK. A truly single market for services in the EU would give the sector a further boost. Risks more revolve around geopolitics and Brexit.

Joseph Pearlman, Professor of Economics, City University

I am concerned by the potentially increased level of inequality in the UK. Although this appears to have reduced rather than increased since 2010, this is largely because of the drop in very high salaries, which are now on the road to recovery. Too much inequality is likely to lead to dissatisfaction even among the well off, as it will lead to more begging outside supermarkets and on the streets. It will also result in lower social cohesion. So I expect the balance to be worse by the end of 2016.

John Philpott, Director, The Jobs Economist      

Five years ago ‘economic growth and rebalancing’ tripped off the rhetorical tongue like ‘love and marriage’. Rebalancing has since slipped down the agenda despite there being little improvement. Weakness in manufacturing and net exports is likely to refocus attention on the issue in 2016 but I see nothing of substance changing in the real economy. The underlying problem will return to haunt us when interest rates inevitably rise and we need genuine investment and export led growth to offset a slowdown in consumer spending.

Kallum Pickering, Senior UK Economist, Berenberg Bank

Recovery is too reliant on the consumer oriented services industry. The protracted weakness in construction and industrial is a concern. Given the pace of domestic demand growth, construction should be growing faster. But there are significant supply side problems holding this sector back. We see a modest upside risk that construction output begins to grow at a faster rate next year as excess commercial capacity outside of London is absorbed and if some of the supply side issues pertaining to labour and materials ease. Industrial production will remain limited due to weak manufacturing output. Weakness in global demand in conjunction with persistent sterling strength will ensure that any improvements in UK manufacturing are very limited at best.

Christopher Pissarides, Regius Professor of Economics, London School of Economics

Inequality — will the recovery balance low, medium and high incomes so they all benefit from the recovery? The main concern will be middle incomes and routine tasks that belong to that category. There is a risk that we will go in the direction of the US and have a "jobless" recovery in that sector. I doubt whether it will improve by the end of 2016

Ian Plenderleith, former MPC member

Weak overseas demand and UK uncompetitiveness from strongish sterling. Not expect any alleviation in 2016 — it's the world we have to live in — unless major upset from EU referendum (which would be an even bigger cause for concern).

Jonathan Portes, Principal Research Fellow, National Institute of Economic and Social Research

All the major imbalances in the UK economy (the dominance of London/South East; our poor export performance; the dysfunctional nature of the housing market; overreliance on financial services) remain at least as bad as in the pre-crisis period. There is no obvious reason why any of that should change in the next year.

Adam Posen, President, Peterson Institute for International Economics

I have the stereotypical and I believe justified concern about unbalanced growth as articulated by Mervyn King years ago: Too much consumption versus savings, too much house price increase versus productive investment, too much import versus export. I would add, possibly even more strenuously, too much dependence on London and financial services versus other industries and regions, too large financial system balance sheet of foreign liabilities, and too little public investment. Not going to improve much at all.

Vicky Pryce, Chief Economic Adviser, CEBR

The economy has not rebalanced, either structurally or regionally and the gap between London and the South East is widening and will continue to widen on current projections rather than narrow, whatever is being claimed by the Government in relation for example to the 'Northern Powerhouse' and other regional economic development plans and the claims made for the benefits of greater devolution of revenue raising and spending powers. Local authority spending has been cut very severely and the weak manufacturing performance has been affecting overall productivity growth in the economy as a whole. Exports were meant to be the new engine for growth but have disappointed and again this has been affecting productivity- exporting firms are most productive but many companies brave enough to export beyond the Eurozone have seen their markets in the emerging economies collapse over the past year.

Victoria Redwood, Chief UK Economist, Capital Economics

Our main concern is that the recovery is being driven by the consumer and services sectors, with little contribution from manufacturing or net trade. Given the recent strength of the pound and the continued weakness of the eurozone economy, we doubt that net trade will play much of a role in the recovery this year.

Ricardo Reis, Professor of Economics, London School of Economics

My greatest concern is to what extent the recovery is relying too much on the nexus between the financial sector and the housing sector. These are both tightly linked as well as fragile and susceptible to new crises.

David Riley, BlueBay Asset Management, Head of Credit Strategy          

The persistent weakness of productivity growth remains the greatest concern. In the absence of a recovery in productivity growth during the course of 2016, the MPC may be forced to raise interest rates sooner rather than later and the government will probably fail to meet its public finance objectives.

Bridget Rosewell, Senior Adviser, Volterra Partners

My concern about balance is not about sectors but about geography. As I go North I find increasing confidence in taking advantage of opportunities and requests for real investment in infrastructure rather than support for revenue spending.

This combined with attention to supply chains is the real change that is needed to get rebalancing. This is much more important than talking about 'the knowledge economy' without any clear idea about who buys and who sells."

Philip Rush, Nomura, Senior European Economist           

Insufficient domestic savings. This is seen in increased household liabilities and a persistent fiscal deficit, where the former is getting worse and the latter is worryingly slow to close. The result is a large current account deficit that looks unlikely to correct in 2016, so the risk will remain.

Michael Saunders, Citi,

Recovery is likely to remain unbalanced between solid domestic demand and weakness in net exports. But this probably does not pose a threat to the expansion given the subdued pace of private debt growth. The most concerning imbalance is income inequality within the UK, which threatens to erode the political consensus within the UK for globalisation and economic openness.

Andrew Sentance, Former MPC member and senior economic adviser, PwC     

The UK recovery has not been unbalanced in terms of demand components. Investment and exports have been the strongest components of final demand and have grown stronger than consumer spending and government consumption. All components of demand suck in imports, so the net trade balance has not improved massively. But the main factor behind the UK's deteriorating current account balance is not net trade — it is the income balance, and it is not clear how significant this is for the medium-term, or what might be done to influence it.

In terms of manufacturing and services, I always thought it was unrealistic to expect a ""march of the makers"" in terms of traditional manufacturing activities, like steel production. The UK is and remains a successful producer of high value-added manufacturing products. But it is in services that we have our biggest comparative advantage. The UK exports 12pc of GDP in services — significantly more than any other G7 economy. And though financial services are not providing the contribution to our economy they did in the past, other tradable services — business/professional services, media. design, IT, etc have continued to perform strongly.

My main concern is potential regional imbalances — but not a simplistic North-South divide, but a North-North divide and a South-South divide. There are very deprived areas in the south of England, which are only 30-50 miles away from economic hotspots. Clacton has the lowest employment rate of any English travel to-work area, while Bury St Edmunds, 50 miles away, has one of the highest. Similarly in the North of England. Manchester and Leeds are doing well, but secondary cities and towns off the beaten track are struggling. There is much that can be done to improve these more local regional imbalances by improving local transport connectivity and regenerating deprived communities.

Not much of this will change by the end of 2016. But over the period of this Parliament, the government could do much more to improve local transport links and enhance local economic regeneration, and this would deliver much more economic value in the short term than big prestige projects like HS2.

Philip Shaw, Chief Economist, Investec

Consumer spending has become a bigger driving force over the past year, but the more balanced nature of the upswing before 2015 means that its level as a proportion of GDP remains lower than before the crisis. Perhaps the greatest concern should be the UK’s external imbalance, as measured by the current account deficit which, if the figures are accurate, may top 4% of GDP this year. It is not clear how this comes down towards balance and the longer the gap remains high, the more vulnerable the UK becomes to a sudden sell-off in sterling. A possible ray of hope is that a Euro area upturn boosts the demand for UK exports, but in reality the speed of eurozone growth seems unlikely to make a perceptible difference.

Andrew Simms, Director, New Weather Economics

My greatest concern about the balance of Britain’s recovery is that it has none. Britain is not so much recovered as waking from the crippling effects of one binge with just enough energy to head out on another. The asymmetry between finance and the productive ‘useful’ economy remains at the hear of the problem. The Bank of England warned recently of the vulnerability of indebted households and of an ‘uptick’ in reliance on personal loans and unsecured debt. Yet, the Office for National Statistics (ONS) reports a ‘bigger concentration of jobs at the bottom of the pay scale in 2015 than in 1997,’ while the Resolution Foundation estimates that working households on universal credit will lose between £1,000 — £1,300 by 2020.

At the same time the pay of the average FTSE 100 CEO rose to being 183 times that of the average full time UK worker, up sharply from 160 times in 2010. And, while research repeatedly shows that high pay is often neither linked to performance nor improves it, recent finding from the Chartered Institute of Personnel Development shows high pay ratios have a strong demotivating effect on other staff.

At present existing trends seem locked in by the presence of bad policies, such as going ‘light touch’ on the burden of proof and accountability for transgressing bank executives, or the absence of good ones, such as promoting a green economy for hard working families that would create jobs, improve homes and the environment and prepare Britain for the future. Any talk of recovery now is like saying that a previously paralytic alcoholic had recovered because he’d found the strength to lift a new bottle to his mouth."

Andrew Smith, Chief Economic Adviser, Industry Forum

Export- and investment-led growth has been the holy grail of UK policymakers for as long as I can remember. I suspect it will stay out of reach and this recovery, like others in the past, will remain consumer-led. While the floating pound rules out an old-style balance of payments crisis, the huge current account deterioration — albeit not principally due to trade — could ultimately result in an old-fashioned run on the pound. Would this be so bad? Once the dust settled, a lower pound might prove just what is needed to give both inflation and trade a much-needed boost.

Don Smith, deputy chief investment officer, Brown Shipley

The UK's overreliance on domestic demand, reflected in the size of its current account deficit remains a concern, especially running into an event risk as big as the UK's possible departure from the EU. The huge drop in the price of oil since 2014 should help however, both directly though the UK's position as net importer of oil and indirectly through its (possibly very significant) effect in supporting global growth this coming year — not just in developed economies but in the major oil-consuming emerging economies such as China and India.

Andrew Smithers, Retired,

We suffer from under-investment and a large current account deficit. To change these we need to end the current perverse incentives which pay management not to invest. This change in unlikely in 2016. To improve the current account we need to improve the trade balance this requires a lower sterling to improve manufacturing returns on capital. This is probably 50/50.

Peter Spencer, Professor of Economics, University of York

The prospect of low inflation and interest rates delivered the Chancellor a second windfall last month. The second shoe has dropped with a loud thud in the commodity markets, promising a second windfall for consumers, one that will last well into next year. However, these gains clearly reflect the weakness in global markets, which has adverse implications for economic activity in the UK and in particular the balance of the economy. They leave the Chancellor vulnerable to a downturn in the economy or perhaps a loss of confidence in sterling associated with the Euro referendum. And it leaves the MPC short of ammunition to deal with a more serious shock.

James Sproule, Chief Economist, IoD   

The Autumn statement forecasts were too optimistic, and in order to meet deficit reduction criteria, taxes will be raised, this could stall any recovery and lead to a lower rate of sustainable economic growth.

Ian Stewart, Chief Economist, Deloitte

The official data show a marked decline in the UK's net overseas investment income in recent years. Nobody paid much attention, but one result was that in 2014 the UK posted its largest ever postwar deficit on the current account of the balance of payments. We're keeping our fingers crossed that this is statistical quirk, caused by a rerouting of income by multinationals, not a fundamental deterioration in Britain's overseas investment position. The UK has been an extraordinary successful rentier economy in the last century and a half, producing large inflows of income from overseas assets. Losing that status would have major implications for sterling and the sustainability of the UK's trade deficit.  

Gary Styles, Director, GPS Economics

Far too much reliance on consumer spending fuelled by higher borrowing and excessive house price optimism. The much vaunted rebalancing of the economy has been largely absent in recent years. In 2016 we may see slightly higher investment growth but overall the trade position looks set to deteriorate further and consumers will continue to borrow whilst interest rates remain low and they believe house prices can only move upwards.

Phil Thornton, Lead consultant, Clarity Economics

The main concern is the lack of balance of two-speed nature of the recovery. The solid growth seems entirely based on domestic demand which is in turn based on record-low interest rates, low inflation meaning real wage growth, and high house values. The concern is over a sudden change in that mix with either interest rates rising faster than expected triggering a fall in house prices; or a fall in house prices triggered by an outside event that monetary policy is already too close to the zero bound to offset.

David Tinsley, UK and European economist, UBS             

My greatest concern is that so far the UK recovery is not obviously based on a sustained rise in productivity, so that it is debatable whether real income growth will be capable of continuing into the long-run. Without that, rises in houses prices, hopes of fiscal consolidation, and indeed the UK's external position will themselves increasingly look unsustainable.

Samuel Tombs, Pantheon Macroeconomics, Chief UK economist

The recovery is likely to exacerbate existing structural weaknesses — such as inadequate household saving and a bloated current account deficit — but these are slow-building frailties that are unlikely to come home to roost in 2016.

Kitty Ussher, Managing Director, Tooley Street Research

My greatest concern is the widening gap between UK households who have access to the London property market and those that do not: this is set to get worse and has implications for labour mobility and overall economic efficiency and productivity, not to mention fairness both between generations and between geographic areas.

John van Reenen, Director, Centre for Economic Performance

First, productivity remains extremely weak, being about 14% below long-run trends. Low investment is a major contributor, but we also need more of a strategic plan to improve TFP. Second, the housing market is being stoked up by foolish government schemes like Help to Buy. I am doubtful whether housebuilding targets will be met and so ongoing house price inflation continues.

Daniel Vernazza, Lead UK Economist, UniCredit              

Britain’s recovery has been driven by household consumption and services, and increasingly so. Meanwhile manufacturing and exports have been weak. I see no reason to believe that will improve over the next year. Household consumption will continue to be supported by low inflation, employment growth and, soon, firmer wage growth. Business investment will be hit by the EU membership referendum. The public sector consolidation continues. And the weaker outlook for the global economy coupled with the strong pound will keep exports weak.

Keith Wade, Chief economist, Schroders            

The current account deficit at 4.5% of GDP highlights the unbalanced nature of the recovery. It should narrow slightly in 2016 (to 4%) as government borrowing declines, but at the expense of growth.

Sushil Wadhwani

The recovery has already been dangerously dependent on growth in consumer spending. Given fears relating to Brexit, it is unlikely that we will achieve any rebalancing in favour of corporate investment.

Peter Warburton, Chief Economist, Economic Perspectives

The balance of UK growth is unlikely to improve much in 2016; external balance is more concerning than the investment context.

Simon Wells, HSBC, Chief UK economist             

One key risk is the huge current account deficit. Although the deficit narrowed in 2015, it was still around the second widest on record and we think it will widen again in 2016. That reflects little change in the trade balance, but a worsening in net overseas income due to further oil price falls and the UK being heavily invested in overseas oil and gas interests. While the current account has not so far been a problem, the UK needs to borrow almost 5% of national income each year to fund it. This level of dependence on foreign investors is neither desirable in the short term nor sustainable in the long term.

Matt Whittaker, Chief Economist, Resolution Foundation

Despite much talk of rebalancing early in the last parliament, the shape of economic growth in the UK looks largely unaltered relative to the pre-crisis picture. Business investment has picked up, but household spending continues to make by far the biggest contribution to the economy.

Indeed, with fiscal consolidation set to continue to 2019, the OBR's growth projections are underpinned by an increase in debt-to-income ratios within the household sector. While debt servicing ratios remain low, raising household leverage back towards its pre-crisis peak comes with clear risks.  

More generally, we'll need to closely monitor just how the gains from recovery are distributed across society. While income inequality has narrowed over the course of the downturn, there's been a big divergence of experience between younger and older cohorts. The former have been hit by both a disproportional labour market squeeze and a government approach that has targeted an increasing share of the shrinking state on older people. This generational divide looks like being one of the big themes of the parliament."

Mike Wickens, Professor of Economics, Cardiff University and University of York

What does balance mean? Is this regional or sectoral? In recent years the UK has increasingly become a non-optimal currency area with South East and London growing much faster and becoming much more wealthy than the other regions, especially the Midlands and the North, and monetary policy geared to the London. (This is all very like the effect of Germany on the eurozone.) This has hurt the competitiveness of manufacturing and hence the regional economies. I am hoping that the Chancellor's power house policies will start to reverse this.    

Neil Williams, Group Chief Economist, Hermes Investment Management         

Plus ca change . . .! We may be seven years on since the pit of crisis, but the driver of our recovery is still a consumer accounting for two-thirds of GDP.

For this year and next, this is probably just as well, given the need to pull away convincingly from the experience of 2008-09. Beyond that, though, as debt ratios remain high, wages pick-up, and real house prices climb, the BoE's normalisation of rates could begin to hurt.  

Chris Williamson, Chief Economist, Markit

The recovery is being driven too much by domestic consumption and services, resulting in a lack of growth of the manufacturing sector and a worsening trade deficit. We need to earn more income from abroad, though it’s hard to see what will cause the current situation to change any time in the near future.

Richard Woolhouse, Chief Economist, BBA

The issue of long-term “intergenerational equity” is the most concerning and is unlikely to improve in the short term.

This growing gap between baby boomers and younger generations is unsustainable over the long term.

Tony Yates, Professor of Economics, University of Birmingham; Centre for Macroeconomics at the LSE

I think it is somewhat futile to worry too much about the 'balance' of the recovery. Our knowledge of what constitutes balance is not great, and our levers to deal with it are also imperfect. I suppose we would wish that the recovery doesn't involve accumulating the same underpriced misperceived risks that were taken on board in the pre-crisis period, or, if even that is too much to hope for, that the new financial policy tools can help curtail any 'sudden stop'.

Azad Zangana, Schroders, Senior European Economist & Strategist                        

The huge current account deficit is the biggest sign of a huge imbalance. While this had mostly been driven by lower net investment income, the UK’s trade deficit has also worsened of late. We do not see mechanism to correct these imbalances without a significant depreciation in sterling. This is unlikely while investors not paying attention.