Britain's economy: back to square one

Britain's recovery has now made up ground lost in the recession that began six years ago.

Six years after the recession began, the economy has finally made up the lost ground. According to the National Institute of Economic and Social Research, GDP expanded by 0.9% in the three months to May, taking it 0.2% above the previous peak in January 2008. And the latest survey data point to continued strong growth.

The unemployment rate slid to a five-year low of 6.6%, while UK car sales have risen for 27 months in a row, breaking a record stretching back to the 1980s.

Manufacturing expanded by 4.4% year-on-year in April, the fastest annual pace since 2011. Annual growth in the broader industrial sector (which also includes utilities, mining and waste management) also hit a three-year high.

What the commentators said

As the population has grown, GDP per capita is still 6% below its peak. Real wages are still where they were a decade ago. It's also sobering to consider where our national income would be had growth continued at its pre-crisis pace: 18% higher.

It's encouraging that "the makers really are on the march", said Alistair Osborne in the same paper. The current year-on-year pace of manufacturing growth comfortably outstrips the overall economy's 3.1%. "There is also evidence that companies are starting to invest again in kit to make stuff."

Nevertheless, this isn't evidence of the "elusive rebalancing of the economy long trumpeted by George Osborne". Manufacturing is still 7% below its pre-crisis peak, and in any case only accounts for 10% of the economy, compared to 22% in 1990, so it's hard to rebalance the economy. Services, which are also growing strongly, comprise the majority of the economy.

Britain is "currently in the sweet spot of the economic cycle", said The Daily Telegraph. Growth is strong but inflation low, "buying time for the Bank [of England] to keep interest rates low while the recovery becomes entrenched". Rates are not expected to rise before next year. Yet I can't help suspecting, said Hamish McRae in The Independent, that this rapid growth will start showing up in inflation sooner than anticipated.

Official wage rates "may lag behind what is actually taking place", and there is constant talk about a "huge rise" in construction costs apparently 20% since last autumn but this isn't in the data either. The past few years have taught us to be suspicious of official forecasts. Expect a rate rise inNovember 2014.

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