Friday's GDP data took us past a very symbolic landmark. The level of output in the UK is now slightly above its pre-recession peak. However, we should bear in mind that the UK population has risen by more than 4 per cent since early 2008. Average income per person is therefore still some way below its previous peak in real, inflation-adjusted terms.
We expect economic growth to continue at around 3 per cent through this year. All major industry sectors are contributing to this upturn, although only rather erratically in the case of construction, where output fell in the second quarter after a strong first quarter. Growth is also spreading out from London to other regions.
The latest retail sales figures suggest that consumer spending continues to be the main driver of growth, but there have also been encouraging signs that business investment has started to pick up over the past 18 months, albeit from a low base. Employment has continued to grow strongly, with unemployment now down to 6.5 per cent.
All of this is good news, and the UK economy seems to have enough momentum for a decent rate of growth to continue for at least the next six to 12 months. However, we should not be complacent about the longer-term sustainability of the recovery.
First, the UK upturn could be vulnerable to any significant escalation of the current conflicts in Ukraine/Russia and the Middle East. As yet, these do not seem to have had a major impact on either financial markets or global oil prices, but that could easily change. A renewed flaring-up of the Eurozone crisis also remains possible given the fragility of the recovery there.
Second, while jobs growth has been unexpectedly strong in the UK for the past couple of years, this has been weighted to relatively low productivity and low pay sectors, including self-employment. Unless productivity picks up, which requires sustained business investment, companies will not be able to afford real pay increases and consumer spending growth will remain overly dependent on debt. That is not sustainable in the long run, particularly as and when interest rates rise back towards more normal levels.
Finally, the housing market already looks bubbly in London and there are some signs of this rippling out to the rest of the South East and beyond. We know from past experience how destabilising it can be when a property bubble bursts. The Bank of England has begun to put in place some pre-emptive measures to mitigate these risks, but calibrating these policies is difficult. Interest rate rises are also a blunt tool for addressing housing market problems that arise fundamentally from a lack of new housing supply.
This may all prove too gloomy. A virtuous circle of rising business confidence, investment, productivity and real incomes could establish itself over the next 18 months, propelling growth to higher rates for a sustained period. But a prudent business should remain aware of possible downside risks and plan accordingly. There could still be plenty of bumps along the road to recovery.