Growth hits four year high - but has it peaked?

UK economic output is growing twice as fast as expected - great news if we can keep it up...

by
Last Updated: 26 Nov 2010

The latest figures from the ONS showed that the economy grew at 1.1% in the second quarter of the year. That's its fastest rate since the heady days of 2006, nearly double the predicted rate of 0.6% and a whopping four times faster than in the first quarter of this year.

The pound rose and sales of bond futures (government debt) took off as a result of the figures. Good news, not least for the nation’s prospects of keeping its all-important AAA+ credit rating and avoiding a debt crisis.

Whoopee, time break out the champagne, declare an end to the dark days of recession and toast a return to the sunlit uplands of recovery, then?

Well, maybe. You would have to be a resolutely glass-half-empty type to think that this emphatic return to growth was anything other than a positive sign, but what of the longer term outlook? Things look a lot less settled for the second half of the year, what with the Eurozone crisis, government spending cuts and more trouble brewing across the pond...

The unexpected magnitude of growth will also add to the pressure on the Monetary Policy Committee to raise interest rates sooner rather than later, especially as inflation remained stubbornly over target so far this year. One MPC member, Andrew Sentance, has already called for a 0.25% rise to 0.75% - these new figures may encourage some of his colleagues to join him at the next meeting in a couple of weeks' time.

Reservations over sustainabilty aren't helped by a closer inspection of the growth figures. A key factor turned out to be a huge 6.6% jump in construction, the biggest since 1963. Of course this was an industry very badly hit by recession so it’s up from a low base. But with substantial cuts in government building programmes on the way this may prove something of a Prague Spring for the sector – especially as the commercial property market is on its back and unlikely to be able to take up the slack.

Talking of cuts, fully 1% of the 1.1% growth comes from the private sector, neatly demonstrating the vital but oft-overlooked point that, despite the prevailing Government noises to the contrary, public and private sectors do not exist in their own hermetically sealed vessels.

Rather, they are intimately linked – that figure suggests that quite a lot of the public money poured into propping up the economy recently has done what it was supposed to, finding its way into the hands and bank accounts of private sector firms and their employees and shareholders.

Cuts in public spending are clearly required to get the deficit under control, but they will also inevitably limit this beneficial effect and thus dampen growth all round.

Which only makes it all the more important that decisions taken about what to cut and how far are driven as much by economic as political sensibilities. If what began as an exercise in balancing the budget finishes as an ideologically motivated dismantling of the state, then we may have seen the last of such healthy quarterly growth figures for quite some time…

In today's bulletin:
Growth hits four year high - but may have peaked
Microsoft pips Apple - and other US bellwethers shine too
UK insurance fraud hits record £840bn
Students (and Scouts) get the entrepreneur bug
Editor's blog: We're balancing on a knife-edge

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today