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.


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5 reader comments

  1. Paul Begley says:

    With the appalling weather we had in the winter, could some of this just be construction catching up on delayed projects?

  2. Ray Turner says:

    You don’t suppose the improvement in growth might have something to do with me getting back into work (despite Gordons best efforts) and spending more money…?

    Interest rates should have started creeping back up some time ago. Actually, I don’t think they should have been slashed as much as they were. I think the Government and BoE panicked and made matters worse by cutting rates to 0.5%, just as Lloyds merging with HBos was a mistake. The sooner interst rates go back up again now, the better.

  3. Andrew Dundas says:

    Not a surprise!
    Growth was always the answer to the Wall St crash. I told you all so before. Repeatedly.
    Cutting the stimulous measures and imposing cuts in spending is the very worst policy that could be inflicted on either the European or British economies. Obama, Brown, Krugman, Darling and Keynes know the answer to American Banking collapses: keep the spending going and DO NOT to pay down debts whilst the crisis continues.
    For heavens sake don’t cut government spending when confidence has taken such a knock from Wall Street foolishness. ‘Gradual does it’ is the prescription.
    Just as the government lifeboat was carrying us to safety in the 2nd Qtr, Frogspawn & Cama-moan have begun drilling a hole in the hull to ‘let the water out’. Barmy!

  4. Charles Jurcich says:

    The growth figures are pitifull – the only numbers that matter are unemployment and inflation.

    While the private sector are deleveraging, HMG need to do the following (at least):

    Support the economy with more government spending.

    Leave interest rates low to discourage saving – we need spending and investment instead.

    No more QE as it does not increase bank lending at all.

    End the independence of the BoE and make them cash Treasury cheques – so we can finally complete the move from ‘gold standard’ to fiat currency.

    Ban FR Banking – it serves no purpose and is inefficient. Neither Canada nor Australia do FR and they are better off for it.

    Stop issuing government debt, as it’s not necessary to finance government spending. Put interest on excess reserves instead. Only issue government bonds where it is for public purpose.

    Start a properly funded ‘Full Employment Program’ with immediate effect. This will increase our potential GDP as well as acting as an anchor on inflation.

  5. Ray Turner says:

    Had an unexpected and fascinating chat with one of my customers today. Who shall remain nameless…

    He’s got a number of houses that he’s buying via various self-certificated mortgages. It seems that the income declared on the self-certificate basically comprises the rent he expects to receive from letting those houses…

    To cut a long story short, he’s basically “passing bricks” at the moment, over the prospect of interest rates going up again.

    I resisted the temptation to say, during the conversation, that i) as a saver I’m effectively subsidising his little empire at the moment, via poor returns on my investments due to ridiculously low interest rates, and ii) frankly if he’s been greedy, over-ambitious, overstretched himself and left himself exposed, he should have taken the hit in 2008/09 rather than the savers.

    The low interest rates might be helping ordinary families with just the one family home to worry about during a period of unemployment, but they’re also helping the people responsible for the over-inflated housing market and massive personal debt…

    Put rates up again a.s.a.p. please Merv. Let the real culprits take the hit instead of innocent…

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