IT WAS ONLY A SMALL BREAK in the gloom, but enough for the chancellor to claim that the economy was healing. The most recent GDP figure, for the first three months of this year, was a positive number (0.3%), which means talk of a triple-dip recession was pushed to one side as the UK economy returned to growth for only the second of the last six quarters.
Even though the level of GDP remains 2.6% below the pre-recession peak of 2008, there is a feeling that a corner has been turned. It is easy to understand why George Osborne was pleased the pace of activity exceeded City expectations and he could face his IMF interrogators with more confidence than in the past. Now he can claim that even the 0.6% forecast in his March Budget for the year as a whole might be a little low.
Other data support the view that this was not a statistical quirk – particularly the labour market which has shown that trends in employment have been stronger than in output. Figures for government borrowing, although high, are within the chancellor’s forecasts. And the statisticians have admitted that earlier figures for GDP might have to be upgraded, implying that there was no ‘double dip’ after all. After so much bad news (and bad publicity), the chancellor must be delighted with these signs of an upward move in activity.
But in many ways, the euphoria over 0.3% growth is overdone and probably focuses on the wrong issue. A positive number is certainly more welcome than a negative one but it is no surprise that this recovery, which probably began at the end of 2009, has had more downs than ups. Every recovery from every recession since 1945 has had a few bumps in the road and none has been a straight line. This time, however, there have been more bumps in the road and the question has much more to do with recovery than recession.
Given what has been thrown at the economy in terms of the unprecedented monetary and fiscal stimuli, it is worth asking why recovery has taken so long. If all we have to show for our efforts in the fourth year of recovery is 0.3% quarterly growth of GDP after the lowest interest rates for more than 300 years, £375bn of quantitative easing and huge government spending and borrowing, will we ever get back to business as usual – or is this the new normal?
Part of the answer lies in the problems that affected the drivers of growth in the boom years. The household sector, which accounts for 64p of every pound spent, and the public sector (24p of every pound) have been bogged down with debt, which takes time to unwind. It is the government’s stated policy to ‘re-balance’ the economy, to look to exports and investment to fill the hole left by shrinking domestic demand. Unfortunately, recession in Europe, our key market, has blocked off this route and cash-rich companies have shown a marked reluctance to spend.
Economists look for the cloud on the silver lining and so, while positive growth is to be welcomed, it is only part of the story. More needs to be done. But the signs show the economy will start to move upward and get back to ‘business as usual’, annual growth of about 2.5%, probably in 2015. This means the UK will have stagnated for seven years, a high price to pay for the borrowing excesses in lost jobs, profits and public services.
Most people would argue that Mr Osborne has failed, and he probably has, but not because the economy has been so slow to recover. His big mistake was to predict that activity would improve faster than it has, thus raising people’s expectations and then failing to deliver. He inherited the over-borrowing, and he certainly did not create the chaotic situation in Europe, but the collateral damage from both issues have undermined his credibility and made it harder for him to engineer an upturn. Had he been more downbeat (or realistic) in 2010 when he first took over, many commentators would be now be praising his astute handling of his appalling inheritance. But that’s politics. ?
Dennis Turner is the former chief economist at HSBC
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