AS 2014 OPENS, George Osborne is probably feeling quite pleased with himself. After more than three years of disappointment, his policies are starting to bear fruit.
Just a year ago, the regular monthly survey of independent economic forecasters predicted growth of 1% for 2013. As the year progressed, these forecasts were revised upwards. Once the fourth quarter data is available, it will probably show GDP will have increased by more than 1.5%. While this is still below the UK’s traditional long-term average, the projections for 2014 point to even more buoyant activity this year. If it is ‘the economy, stupid’, the chancellor has got his timing spot on. With the UK entering the last full calendar year before the next election, he can claim that the country is enjoying its best growth for seven years and is now the fastest-growing economy in Europe.
The argument that GDP is still below the pre-recession 2008 peak will fall by the wayside in 2014. The gap is closing. Although it is true that income growth lagged both the rise in inflation and GDP, leaving many people to question whether there was any recovery at all, the number of people in jobs (albeit many part-time and relatively low-paid) increased. Total employment rose by almost half a million in 2013 to reach just over 30 million and the unemployment rate fell from 7.8% to 7.4% in 12 months.
For all the good news, however, the chancellor knows he cannot yet claim it is a job done. There are amber lights flashing that will keep him on his toes and events internationally always have the potential to derail his plans. The most obvious worry is the extent to which the upturn is too dependent on the housing market and whether a boom in house prices could turn to another crash.
The idea of a housing bubble looks to be a London and south east phenomenon and there has always been a separate set of rules for housing in this part of the country. But the authorities are more aware of the risks than they were in 2006-08 and are prepared to dampen the market.
The concept of affordability raises the issue of interest rates and when they are likely to change. In spite of the Bank of England governor Mark Carney’s ‘forward guidance’, there is speculation that the first rise will come much earlier than he was implying (2016). If it does, it is likely to be a matter of months rather than years. On the inflation front, the risks of another spike look to have been reduced, partly because of the world economy. Even if the unemployment rate falls below the 7% Carney said was a threshold for raising interest rates, he has other levers to pull first if he believes he needs to slow activity.
Paradoxically, Osborne might not mind a rise in interest rates before the election. We have more people who save than borrow, although we tend to save small and borrow big. And while the low interest rates have been a boon to borrowers, most savers have been big losers. Demographically, the savers tend to be at the older end of the age range where the propensity to vote is highest. Some encouragement and reward for savers before the election may therefore produce political dividends for the government.
But perhaps the chancellor’s biggest worry is not how fast the economy is growing, but how this is achieved. As ever, the consumer is the driving force but this is not sustainable. Rebalancing is key to avoiding an artificial upturn, and this depends on corporate investment and exports. The cash-rich big companies need to start investing. For exporters, a new obstacle has emerged. The problem with doing well is that other people seem to notice – reflected in sterling’s recent rise.
All in all, Osborne would probably have settled for where we are now. Certainly, the opposition seems to have little to offer by way of a coherent alternative. But there are the inevitable bumps in the road and the chancellor will need to be on high alert all year. The headline numbers are encouraging but the devil is in the detail. ?
Dennis Turner is the former chief economist at HSBC
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