Chancellor George Osborne has declared that the economy is “turning a corner”. A survey tracking activity in the service sector reached a seven-year high and a composite gauge of construction, manufacturing and services hit a record. Consumer confidence is at a four-year high. The latest Halifax release showed house prices rising at an annual rate of 5.4%. Unemployment edged down to 7.7%. Analysts are now pencilling in growth of 1.5% or more in the third quarter after a solid 0.7% expansion between April and June.
What the commentators said
Osborne has “won the political argument”, said the FT. A “sustained recovery” appears to have begun, with business surveys at multi-year highs and new orders “running at a good clip”, suggesting that the rebound still has some way to go. Those who accused the government of choking off growth and causing years of stagnation have “found themselves snookered”. But we have “once again embarked on the wrong sort of recovery”, said John Plender, also in the FT.
We needed to beef up exports and investment after the credit-fuelled boom and bust in property. But there has been precious little evidence of that. Consumers have been dipping into savings to go shopping – in the first quarter the household savings ratio was at its weakest since early 2009 – and the government is reinflating the housing bubble through its Help to Buy scheme.
Meanwhile, said Allister Heath in City AM, the export revival isn’t all it’s cracked up to be. In the first two quarters, much of net exports’ contribution to growth came from oil, which is in structural decline. The July trade data, meanwhile, undid the progress of the past few months. Investment is still very low, which bodes ill for future productivity. The budget deficit remains huge. “Yes, we’re getting lots of growth again – but nearly all of the old structural problems remain.”
Note, meanwhile, that earnings growth is still below the rate of inflation, which means living standards are still falling, as Andy Bruce pointed out on Reuters.com. Consumers can’t dip into their savings forever and house prices are highly unlikely to repeat their pre-crisis performance from today’s overvalued levels. A flare-up of the euro crisis would undermine export prospects. By early next year, the economy’s “rapid ascent” could “fade to a slow cruise”.
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