Britain’s economy: back to square one

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

When the recession began, it tore an £110bn (7.2% of GDP) hole in the economy. Now we have finally crawled out of it, said Ed Conway in The Times, but it seems premature to break out the champagne.

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 in November 2014.