25 Oct 2013

Osborne finally achieves economic momentum

So the chancellor proclaimed that Britain was on “the path to prosperity” this morning as he investigated the charms of weaving and spinning at a factory in Leeds.

His rhetoric is an incremental step up from having “turned the corner” last month. At this rate by 1 November expect we’ll be in the sunlit uplands of full-scale economic nirvana. For now, George Osborne was attempting to rein in the euphoria. But he must be mighty pleased.

Because today’s figure means one thing: momentum. It is not that it is the highest quarterly growth figure under his chancellorship. It is the fact that for the first time under this government – in fact, for the first time since the boom six years ago – we have had consecutive quarters of proper growth (above 0.5 per cent).

George Osborne Visits Hainsworth Factory After GDP Results


This, on the one, hand shines a light on just how shoddy the last few years have been. On the other, it starts to offer the tanatalising possibility that growth, confidence and business investment trigger a virtuous, self-reinforcing spiral. Key to this will be businesses starting to deploy the hoarded cash piles.

The absence of a serious euro crisis is vitally important. But the Carney effect must be mentioned here. Some economists thought today’s number would be very very strong. It had looked as if today’s figure could be a boom time figure of 1+ per cent growth, on the back of important surveys of business confidence.

Actual real economic data have been a little more sober, leading to today’s figure 0.8 per cent, pretty much where it was in q2 and pretty much “par” growth for the UK economy over the past couple of decades (though as Europe Economics‘ Andrew Lilico has pointed out, ex-oil it was 1 per cent growth). This was driven by the services sector, responsible for 0.6 per cent of the 0.8 per cent.

That businesses are more confident than the actual economic reality is good news for Mark Carney, and so Osborne. Carney’s strategy of using forward guidance to excite the animal spirits of business investment since his arrival at the beginning of this quarter appears to be working in the way it was intended: as an exercise in mass applied psychology, even if it is not quite working as intended in the financial markets.

But momentum is the key word. The first proper back-to-back quarterly growth since the crisis. Critics will argue it has been a long time coming. Osborne’s record as chancellor is still one of almost no growth for three years, followed by half a year of par growth. But come it has.

Follow @FaisalIslam on Twitter