23 Jul 2010

Bob the Builder has fixed it, but with a note of caution

An incredible, unexpected economic surprise. And for once, a positive one, as GDP growth in the second quarter obliterates all expectations.

Bob the Builder has fixed it. In fact he and his chums in the construction industry appear to have fixed the entire economy.

The biggest quarterly surge in construction activity since 1963 added a whopping 0.4 percentage points to the overall second quarter GDP figure.

Quarterly growth of 1.1 per cent was last reached over four years ago, and last exceeded in 2001. The economy has had only one faster quarter of economic growth in the past decade, the decade that saw arguably the biggest bubble in banking history.

Firstly, a note of caution. Many in the construction industry would raise their eyebrows at any assessment suggesting some sort of boom. I only note that the construction figures in this GDP data have been based on an entirely new survey.

Secondly, a number like this clearly strengthens the hand of rate hawks such as Andrew Sentance who is already voting for rises in the Bank of England base rate. With inflation stubbornly above target, and a quarterly growth rate that has only been exceeded three times in the entire period of the Bank’s independence to set interest rates, I expect more individual votes to raise rates in the coming months.

If this growth is repeated in the current quarter, then an actual rate rise this year is plausible. Current expectations are of rate rises starting next year. In any event the Bank of England faces a very tough few months.

Thirdly, I would love to know Gordon Brown’s reaction to this figure. Alistair Darling is clear: this figure vindicates the expansionary policies of the Labour government. Yes, only 0.1 per cent of the 1.1 per cent came directly from government output, but much of that construction boom was publicly funded. Former Bank of England economist Danny Gabay attributes half of this number to government support.

Thankfully, the government has already parked the “it’s worse than expected” rhetoric, because obviously numbers like today’s make such assertions a little embarrassing.

However, the more robust the health of the economy (and technically the coalition was in charge for the last half of this quarter, and will no doubt claim credit for the “confidence boost” that arose from its election), the stronger will be the capacity to withstand the Osborne austerity plan.

Today’s number basically sets in stone two competing economic narratives that will endure for the next five years. If austerity, the European malaise, and rate rises lead to a double dip, the public (and Mr Osborne’s own coalition partners) may well remember that the coalition inherited an economy growing as fast as it has done in the past decade.

Yet if the chancellor’s plans deal with the deficit without upending the economy, Mr Osborne will have pulled off a remarkable feat of rebalancing Britain’s lopsided economy.

This Bob the Builder recovery is a superficial construction liable to collapse, underpinned by government-funded scaffolding. Today we learnt the building is much stronger than we thought, but we still don’t know what will happen when the supports are removed.


, ,