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

The new social-care levy: an unfair tax that protects the “assetocracy”
National Insurance

The new social-care levy: an unfair tax that protects the “assetocracy”

The government’s regressive social-care levy will make Britain’s tax system even more complex. Root-and-branch reform is long overdue.
18 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The UK jobs market is booming – what does that mean for investors?
UK Economy

The UK jobs market is booming – what does that mean for investors?

Unemployment in the UK is back to pre-pandemic levels, employers are desperate to hire more staff, and wages are rising. John Stepek looks at what tha…
14 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021