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This Economic Recovery Is Dangerous

17/04/2014 12:31 BST | Updated 16/06/2014 10:59 BST

How can an economic recovery be dangerous? I fear Britain is about to find out.

I realise that that seems like an especially surprising statement given that the deficit has come down by a third, our balance of trade is improving, there are more people in work than ever before, unemployment and youth unemployment is coming down, and growth rates have surpassed expectations and are predicted - by the IMF amongst others - to continue to do so.

Whilst all this is to be welcomed, I fear that it misses the bigger picture. In 2007 Britain suffered the biggest crash since the twenties. Almost overnight, about 10% of the total value of everything Britain produced disappeared. That meant a great loss of wealth, jobs, wellbeing, and was followed by the longest recession and slowest recovery in over a century and massive cuts to public services.

Everyone can agree that we don't want anything like it to happen again and that as a country we must take steps to make sure it does not. But it is very hard to find any economic or political commentators who can look you in the eye and tell you that the steps that have been taken since then would prevent another crash. And as if that was not shocking enough, you can find a great number who can look you in the eye and tell you that we are heading towards another crash. This lack of serious reform combined with the danger of a crash is why the present economic recovery is dangerous.

The first piece of evidence is the productivity figures. Productivity matters because unless it improves, growth is not sustainable. It has been growing almost constantly since the Second World War. That means that at least to some extent, Britain's economic growth in that time was based on a real improvement in efficiency. Since the crash, it has stopped. As macroeconomist Simon Wren-Lewis has noted, not only is this stop unique in our history, it is also worse here than in almost any other country.

If that was not bad enough, the second piece of evidence is business investment. For a real, lasting economic recovery, you would expect businesses to be investing. But business investment is down 3.5% on last year. I hope that that figure proves to be a one off, but it is not what should be happening in a sustainable recovery.

The third piece of evidence is what it took to achieve these results. In the years following the crash, policymakers piled on the crisis measures to get the economy going again. We had the lowest interest rates since the seventeenth century. The Bank of England started doing something which had so little precedent it was greeted with howls of fear from some financial analysts - buying UK government bonds, artificially holding up the value of the stockmarket up. There were government-backed loans for businesses. All confidently predicted that all these were temporary crisis measures, to be unwound soon. But no: official interest rates are still at 0.5% and the Bank is still holding government bonds. In other words, the UK economy has achieved its growth and added its new jobs thanks to crisis measures which have become the new normal. If that is what it takes, what will policymakers do next time there is a crisis?

The fourth piece of evidence is simple: debt. The recovery has been driven by increased spending and that increased spending has been, metaphorically speaking, on the national credit card. The household debt to income ratio is alarming: the value of what British households owe is equal to everything we earn - and about a third again. And the overall private sector debt to GDP ratio was at 185% in the third quarter of 2013, according to Citigroup. That means households and non-financial firms owe almost twice as much as they're worth. That was one of the problems which led to the crash in the first place.

To this, some will argue that it's not a problem because as the economy recovers, this debt will be paid down.

Unfortunately that's very very unlikely to be true. And this brings us to the fifth and final piece of evidence - the housing market. As the economy recovers, more of us will take on mortgages so the total household debt will go up. And mortgage-payers are going to find it harder to pay that off than previous generations did because whereas in the old days you could expect mortgage payments to get easier in the long run as your pay went up relative to your mortgage, now you can expect them to get harder as interest rate rises put mortgages up relative to your pay.

But the biggest problem of all is that - exactly like before the crash - there are all the signs that house prices are a bubble. Average house prices relative to average earnings are well above average historical rates. Average house price increases in London - not nationally representative, but nonetheless significant for millions of people - were about £15,000 above the average London salary last year. And the government's Help To Buy scheme is pushing prices higher still. Event the IMF and the former governor of the Bank of England have spoken out against it. Boris' economic adviser was right when he said that Britain was never going to build prosperity by selling houses to one another.

And that is why Britain's economic recovery is likely to be problematic to the point of danger. It shows all the signs of repeating the mistakes which got us into our current economic mess and few of the signs of what will get us out of it. The Chancellor often boasts that this government knows that you can't abolish boom and bust. But that doesn't mean they have to embrace it.

Dr Azeem Ibrahim is the Executive Chairman of the Scotland Institute and Lecturer at the University of Chicago