25 Oct 2012

A solid but dangerous return to growth

On the face of it the recession is not just over, the economy has returned to boom time numbers. The fastest growth in half a decade since the peak of the boom years in 2007. The UK joining China in having its quarterly growth measured in digits, not fractions.

Alas, that would be a complete illusion. Stripping out the bounce back from the Jubilee (0.5 per cent) and the Olympic ticket effect alone (0.2 per cent) and you are quickly down to 0.3 per cent. In fact probably the best way to see this figure is over two quarters, where underlying growth is at 0.3 per cent in both. So it’s far from a boom, not particularly good, but could be a lot worse. Solid, considering the chill international winds.

It makes far more sense of the employment numbers and some of the strength in national insurance receipts, for example.

But it is a headline figure that could breed complacency at the Bank of England and the Treasury. I had been pretty certain that at the very least George Osborne would have used the Autumn statement to announce some sort of balanced budget stimulus. Perhaps a boost to capital investment paid for by further welfare cuts. Likewise, there had been expectations of more QE and even a rate cut from the BoE next week. 

The fact is that growth has been basically flat under this government. Its original deficit reduction plan had envisaged 5.7  per cent of growth by now. We have had just 0.6 per cent. On top of that, now it looks like the eurozone is heading for a full on recession. On top of that, regardless of the winner of the US election, the fiscal cliff there could also send the US into recession. On top of that, growth is markedly slowing in the Bric countries. There is every possibility of a triple-dip in the UK economy, and that’s even before the peril of a cold, early winter.

But will 1 per cent growth delude policy makers that all is well?

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