AS SUMMER finally arrived, there has been a change in the economic weather. Although not mirroring the blistering sunshine, the UK economy has moved from cold to warm or from rescue to recovery.
In the second quarter, GDP grew by a faster-than-expected 0.6%, twice as fast as the January-March period. This is the first time in two years that growth has been recorded in successive quarters, and only a tad lower than the Olympic quarter.
It is often claimed that George Osborne is a political chancellor, and if part of his role is to get the economic cycle to move in line with the political, it looks as though it is starting to happen. Having been the subject of criticism early in his term, output is now emerging from the trough and, if progress can be sustained, we should be back to normal late next year or early 2015.
Critics of the chancellor are quick to point out GDP is still 3.3% lower than at the pre-recession peak in 2008. But there seems little point using as a reference an artificial peak, created by an unsustainable credit boom. That was a false position and a correction was inevitable. Far more pertinent is that the level of output is 2.1% higher than when he took office three years ago, a fairer reflection of the effectiveness of his policies.
And the official statistics are supported by data on car registrations, mortgages and house prices. The labour market has pointed to a recovering economy for a number of months. Business surveys show confidence improving. The statisticians have even abandoned the notion that the UK suffered a double-dip recession. This has put the government’s opponents on the back foot. If the economy continues to grow steadily, it may even be a neutral issue come the 2015 election and allow the Conservatives to dictate the agenda on themes on which they are seen to be stronger.
For all the good news, the chancellor has been very low-key in his response. He has welcomed growth but recognised how much further there is to go. The only data available show the breakdown by industry sector, the output calculation. The more revealing expenditure analysis comes later. But the data does highlight a vulnerability.
The star performer has been the services sector while manufacturing has struggled. Construction, not surprisingly, has lagged well behind. There is some confusion about the way the construction numbers are calculated and it is an industry that often exaggerates the business cycle.
What the chancellor will be anxious to avoid will be a re-run of the pattern of 2006-08, when a borrowing boom by consumers underpinned by an overheated housing market was one of the key factors tipping the UK over the edge. Already there are signs that the housing market, aided and abetted by Osborne’s own support schemes, is starting to lift off. While a strong housing market will boost consumer confidence, an increase in the number of houses being built is the key to avoiding the excesses of another housing bubble.
And it is important that trade and investment – essentially manufacturing – make a bigger contribution. Here, the chancellor is at the mercy of international developments. Europe remains bogged down by debt, the US seems to take two steps forward and one back, while some of the key emerging markets are stumbling. But there are signs exporters are making headway in new areas, which could be the key to unblocking the backlog.
Osborne should be satisfied with the progress, but not complacent. It is important to realise that the recent growth is only a step in the right direction. Ensuring the UK continues down this path means more of the same, in terms of low interest rates and loose monetary policy while the chancellor continues his fiscal tightening. Whether the UK can generate the right sort of growth will determine the sustainability of the recovery. But for the moment, after the long cold spell of very poor performance, it is worth making the most of the warm glow of real growth. ?
Dennis Turner is the former chief economist at HSBC
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