x Abu Dhabi, UAESunday 21 January 2018

Britain showing cautious optimism on its economy

Things are looking up for Britain. One forecast even has the country overtaking Germany's economy by 2030. But not all are convinced.

The Bank of England upgraded its UK growth estimate from 1.4 to 1.6 per cent for 2013. Chris Ratcliffe / Bloomberg News
The Bank of England upgraded its UK growth estimate from 1.4 to 1.6 per cent for 2013. Chris Ratcliffe / Bloomberg News

No one in Britain is quite jumping for joy just yet, but across the world, analysts are looking on with lively interest at some rare slices of good news on the United Kingdom’s economy.

The signs were visible before Christmas. Less than four months into his job as governor of the Bank of England (BoE), Mark Carney felt able to present the UK’s most upbeat assessment since the global crisis began in 2008.

“For the first time in a long time you don’t have to be an optimist to see the glass as half full,” he told a press conference at the BoE’s Threadneedle Street headquarters in the City of London. “The recovery has finally taken hold.”

There was a sting in the tail of the message: fears that interest rates and inflation may be driven up. And, as events have proved since that glowing appraisal in November, not everyone is convinced.

Among those who feel optimism may be premature, one of Britain’s top Muslim businessmen, Mo Chaudry, speaking to The National, suggested the governor’s words ignored the “two worlds” reality of the UK economy.

“I don’t feel that positive,” said Mr Chaudry, who runs the Waterworld indoor leisure complex in Stoke-on-Trent, in the English Midlands. “You have London and the south-east, with City of London people telling us things are on the up, and then the provinces where business and the property market are on their knees.”

The news since Mr Carney’s bold announcement has been mixed. In December, Britain’s Centre for Economic and Business Research said the UK would be in a position to overtake Germany as Europe’s largest economy by 2030. Inflation was confirmed this week to be down to the target level of 2 per cent for the first time more than four years.

But both the building and industrial sectors suffered end-of-year setbacks and some retailers, including Marks and Spencer, Tesco and Morrisons, were stung by poor Christmas trading, while others, notably John Lewis and Next, reported strong sales.

George Osborne, Britain’s chancellor of the exchequer, or finance minister, began the new year with a warning that recovery still had “a long way to go”.

It remains to be seen whether 2014 will find Mr Carney in as buoyant a mood as he was in November. Then, adding flesh to the bones of his declaration, he said the central bank had upgraded its UK growth estimate from 1.4 to 1.6 per cent for 2013. The economy was expected to grow a further 2.8 per cent in 2014, he added, rather than the 2.5 per cent the BoE forecast in August, and unemployment was down a fifth of a percentage point to 7.6 per cent. “We have inflation coming down, the economy is creating 60,000 jobs a month,” he said.

“Growth is as strong as its been in six years, since 2008, since before the crisis, so all of that’s to be welcomed.”

The BoE base interest rate is a historic low of 0.5 per cent. In response to concern that the cost of borrowing would have to rise more quickly than anticipated, Mr Carney insisted this would not be considered until unemployment fell to or below 7 per cent. It currently stands at 7.6 per cent with indications of falling to the nominal threshold by mid-2015, a year earlier than previously expected.

Mr Carney admitted the green shoots had not yet spread to the rest of Europe.

He recognised the less encouraging outlook in the European Union, the UK’s major trading partner, where the economy was “no longer shrinking rapidly but [is] still stagnating and probably will for some time”.

There are also question marks about aspects of the British economy and the effect faster growth may have on inflation.

Danny Gabay, one of the former BoE economists behind the London think tank Fathom Consulting, of which he is co-director, has misgivings.

“Amid all the excitement, it is worth pausing to reflect on the following inconvenient truth: productivity – the amount produced per worker or per hour – has fallen over a five-year period,” he wrote in a column for the Daily Mail.

Mr Gabay said this translated as 5 per cent less output than before the crisis, compared with a rise in the United States of 10 per cent.

Pressed by The National, he said the apparently stronger performance by Britain, compared with European partners, was a result of the “help to buy” housing scheme of David Cameron’s government.

This initiative, designed to help people to buy homes with deposits of as little as 5 per cent, has been criticised by Fathom as “a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit”.

In the words of Andrew Brigden, one of Mr Gabay’s colleagues, “had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it”.

Even so, the government has influential support for its cautiously confident outlook.

Stephen Gifford, the director of economics at the Confederation of British Industry (CBI), welcomes the progress. “The absence of significant shocks this year coupled with ongoing improvements in credit conditions and global momentum has fed through to both confidence and activity so that the UK recovery seems more firmly rooted,” he said.

The CBI wants further measures to boost business investment and trade and restore growth to a sustainable level.

And Mr Chaudry’s belief is that those measures need to be a good deal more substantial than even the CBI imagines.

Mr Chaudry, listed among Britain’s top 100 Asian business figures, says Waterworld is profitable and about to be expanded. Two previously failing gym businesses bought by him were also flourishing. His payroll has grown to around 200 thanks to the recruitment of staff for the new businesses. But Mr Chaudry says that had it not been for his own liquidity, enabling him to invest, he would have been forced to make job cuts.

“Businesses find it very difficult to get credit and capital,” he said. “The reality is that you have to work incredibly hard to find a way through the recession.”

The concerns are not falling on deaf ears. “Not everybody across the country is feeling this [the recovery],” the BoE governor told Channel 4 television. A million more people were out of work than before the crisis, he said, and creating more employment and boosting real incomes depended on business being convinced recovery was durable.

It is clear the sceptical voices will not be silenced and that much more must be achieved.

For the government, despite marked differences among key figures, there is a shared approach of stressing the positives without underestimating challenges ahead.

Mr Cameron spoke late last year of growth figures showing “the economy has real momentum, that we are on a path to prosperity”. In his more sober New Year’s message, he added caution when warning of the consequences of any return to left-wing policies.

“Just look at countries currently following that approach,” he said in obvious reference to France. “Our recovery is real, but it’s also fragile, and there are more difficult decisions ahead. A return to that economic madness would devastate this country.”