Britain's economy: back to square one

published 12 June 2014

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.

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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.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.