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

Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Spare us these desperate measures
UK Economy

Spare us these desperate measures

Struggling firms are trying to reinvent themselves. Some are going to have to get much more radical
21 Sep 2020
Universal Credit comes good
UK Economy

Universal Credit comes good

The government’s benefit reforms have been plagued with disasters since their introduction in 2013. The Covid-19 crisis, however, has revealed a posit…
21 Sep 2020
Bad data is driving fear of a second wave of Covid-19
UK Economy

Bad data is driving fear of a second wave of Covid-19

The recent spike in Covid-19 “cases” is very different to the original outbreak, says James Ferguson of MacroStrategy Partnership. The government need…
18 Sep 2020

Most Popular

Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020