Britain's economic rebound gathers pace

Britain’s economic data continues to beat expectations, but are we in danger of overheating?

Britain's economic data continues to beat expectations. An index tracking activity in the service sector rose to its highest level since May 1997 last month.

A sub-index tracking employment in the sector is close to a record high, pointing to robust job growth. A survey covering activity in the construction sector reached a five-year high.

House prices are climbing at an annual rate of 6.9%, according to Halifax. Car sales rose for the 20th month in a row and business confidence has reached a ten-year high, according to an index developed by the Institute of Chartered Accountants. Industrial output was 2.2% up year-on-year in September.

What the commentators said

An interesting feature of this rebound, noted Jeremy Warner in The Daily Telegraph, is that there hasn't been much evidence of a sustained bounce-back in manufacturing, despite the plummeting pound. But manufacturing is worth only 10% of GDP, so this is "not ultimately where salvation lies". More encouragingly, there has been rebalancing in the service sector, worth 78% of GDP.

Financial services and public administration, two key areas pre-crash, have shrunk, while health, professional, business and support services have all grown strongly. Our creative, media and digital industries are all thriving. We may not make very much, but "in services, Britain is streets ahead of virtually anywhere else", said Warner.

Unfortunately, Britain's post-war experience shows that we're also streets ahead of other countries when it comes to generating high inflation. There are already some straws in the wind, such as the fastest pace of price rises in the services sector since May 2011, and the fastest growth in a measure of the money supply in almost ten years.

The latter "implies a lot more spending, sooner rather than later", said Allister Heath in City AM. The economy is showing signs of overheating even though it's not even back to its pre-2008 size.

The Bank of England should cool things off by hiking interest rates now. That would help ensure growth proceeds at a reasonable, sustainable rate. Otherwise, we risk a "mini-boomlet and bust, complete with a spike in inflation and another housing crash".

Recommended

Plenty more Brexit arguments to be settled yet
Brexit

Plenty more Brexit arguments to be settled yet

Many important negotiations remain to be sealed in our deal with the EU. “No deal is better than a bad deal” is the way to play it, says Matthew Lynn
10 Jan 2021
Brexit deal: what's changed between Britain and the the EU
UK Economy

Brexit deal: what's changed between Britain and the the EU

After years of wrangling and political scraps, Britain is now outside the EU and has secured a free-trade agreement with the bloc. So what’s changed?
9 Jan 2021
When lockdown ends, be prepared for an inflationary surprise
UK Economy

When lockdown ends, be prepared for an inflationary surprise

The government is pouring more money into the economy to tide businesses over the latest lockdown. Once lockdown ends, says John Stepek,we should see …
5 Jan 2021
Will Britain’s 2020 house-price boom continue in 2021?
House prices

Will Britain’s 2020 house-price boom continue in 2021?

House prices in the UK were hardly cheap going into this year. Yet now, despite the Covid-19 pandemic, they are rising fast. Can it continue into 2021…
2 Jan 2021

Most Popular

Of course bitcoin is a bubble – a bubble you can’t ignore
Bitcoin

Of course bitcoin is a bubble – a bubble you can’t ignore

Bitcoin’s wild ride is being called a bubble by many. And it is, says Dominic Frisby. But that’s not necessarily a bad thing. And it’s a bubble in whi…
13 Jan 2021
A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
I wish I knew what a SPAC was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a SPAC was, but I’m too embarrassed to ask

A financial instrument called a “special purpose acquisition company”, or SPAC for short, is growing increasingly popular in the US stockmarkets. But …
12 Jan 2021