While it is too early to get carried away, signs of revival in the United Kingdom economy suggest the recovery is beginning.
Glimmer of hope for UK economy finally on the horizon
After an almost balmy summer, the United Kingdom is basking in the mellow warmth of a rapidly improving economy.
From house prices charging to a record high, to high street stores reporting strong sales of clothing, there is, on the surface, plenty of good news.
Unemployment is down, the pound has recently hit a record high and all three sectors of the British economy – services, manufacturing and construction – are showing a turnaround in confidence.
GDP expanded in both the first and second quarters, employment continues to rise and activity surveys suggest that growth is accelerating. While the economy grew by only 0.2 per cent last year, the consensus view is now for growth of m1 per cent thisyear, with the Organisation for Economic Cooperation and Development looking for growth of 1.5 per cent.
Britain is now being classed alongside the fast-growing US economy, rather than the more sluggish EU states.
George Osborne, the chancellor of the exchequer, effectively the finance minister, has claimed victory over his opponents and stated that recent “early signs” of an improvement in the economy are a vindication of the government’s “austerity” policies.
For many, though, whose real incomes have fallen for the past few years, there is little improvement to be felt. And there are real concerns that a two-speed recovery is emerging. London appears to be booming again – almost dangerously so, in respect of house prices – but the regions are still struggling.
Many economists suggest that Mr Osborne’s claims that the country has finally turned a corner may not be the whole picture.
Lee Hopley, an economist at the EEF, the manufacturers’ organisation says: “Turning the corner isn’t the best analogy. The engine has started, but where do we go now?”
Ms Hopley acknowledges that there has been some upbeat data this summer, about all sectors, that points to an improving picture.
“However, if we go back to where we were before the financial crisis, we still have a fair bit of ground we need to make up,” she says.
“Our members from the manufacturing sector are more confident than they have been in the last few years – they are finally seeing orders starting to come through. The US is looking solid and there are even some signs of life in the euro zone,” Ms Hopley says.
But, she adds, there are still concerns. For a start, it is not clear where growth will come from in the next five years. The private sector needs to make a bigger contribution to the economy.
And the recovery still looks fragile. “We were here in 2011 and the euro-zone crisis stopped the upturn very quickly. We have seen good quarters and bad and it really does not take a lot to tip a positive quarter bad,” she says.
Martin Beck, the UK economist at Capital Economics, explains that a combination of factors is behind the improving trend.
“The euro-zone crisis has eased, helping UK exporters,” he says. “Meanwhile, factors which tend to support confidence are on the rise.”
The government has brought in the funding for lending scheme to help push down the borrowing costs companies face and mortgage interest rates remain at record lows. Measures to stimulate the housing market – so-called Help to Buy policies – seem to be pushing up housing transactions and house prices.
“Whether for good or ill, there has historically been a close association in the UK between movements in house prices and broader economic sentiment,” Mr Beck says.
He adds that after a long period of holding back purchases and building up their savings, people are simply tired of going without and have decided to spend.
Although UK households have high levels of debt, they also hold significant assets. Household bank deposits alone amount to about £1 trillion (Dh5.92tn), equivalent to a year’s worth of consumer spending.
Meanwhile, employment is at a record high, and while unemployment is above its pre-crisis level, it has not risen to the extent that many predicted. Greater confidence in employment prospects may also be encouraging people to go out and buy things, or look at moving house.
But, Mr Beck warns, there are reasons why it might be difficult to maintain recent momentum over a long period.
“Real earnings continue to fall, with inflation outstripping growth in cash wages. So consumers have only been able to spend more by saving less. And they can only save less for so long. Meanwhile fiscal policy is taking demand out of the economy as taxes rise and public spending is cut to reduce the budget deficit,” he says.
This mixed picture chimes with what many in business are reporting. Page Group, the recruitment business, is often considered an early indicator of the health of the economy. But Oliver Watson, regional managing director for the UK and the Middle East, says that the recovery is not clear cut.
“We have yet to see any real impact from the improved GDP numbers. We haven’t seen any particular increase in hiring requirements or any more commitment from clients to grow areas of their business,” he says.
“I would say that we are seeing a very, very small uplift in activity,” he adds.
Ryanair, the budget airline, surprised last month with a profits warning that sent its shares plunging 14 per cent. It blamed continuing austerity in the UK, Ireland, Spain and Scandinavia, which meant that people had decided not to book autumn flights.
In contrast, a small ladies’ clothing business, based in Derbyshire, says business has not been so good for 15 years.
“We have hired 36 people since the start of the year and are looking for another 15,” says Christopher Nieper, whose father started the family business 52 years ago.
David Nieper is unusual in the fashion industry in that it both designs and manufactures a range of high-quality women’s clothes here in the UK. It has built up a strong export business, supplying directly to consumers in Germany, France, Switzerland and the Gulf countries.
“We’ve been hiring people in knitwear, people with languages, machinists and cutters,” said Mr Nieper, who employed 230 people at the start of the year. “Our factory output this year is up 18 per cent on last year. I haven’t seen this rate of growth in a long time.”
Mr Nieper has bucked the trend and has grown his business throughout the recession at about 6 per cent a year.
“It’s very difficult to judge the economy. The newsflow is good, but the mood is also better around here. We haven’t been hit so hard by unemployment and people are prepared to pay for what they believe is a quality product,” he says.
Now economists are looking to see if the gains that have been observed across all sectors hold good. But they are also keeping a wary eye on international matters. It was the sudden emergence of the euro-zone’s troubles in 2011 that derailed the beginning of an earlier recovery.
There may be relief in many quarters, not least the government’s, that the economy is starting to come right. But it’s been a long hard slog and UK businesses, as well as British households, would like to see a little bit more autumn sunshine before they declare it an Indian summer.