We’re seeing respectable growth for a New Normal but real risks still remain

Andrew Sentance
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UK ECONOMIC growth is looking up. The 0.7 per cent GDP increase in the fourth quarter of 2013 might not have been as strong as some commentators were expecting, but it means economic activity is up a full 2.8 per cent on a year ago. It’s not as strong as the 3.3 per cent growth rate we saw in the decade before the financial crisis, but it’s a lot better than the average rise of just over 1 per cent per annum from the middle of 2009 until the beginning of last year.

The pick-up is consistent with most of the other data we’ve been receiving recently. The unemployment rate has fallen to 7.1 per cent, and the economy has created 450,000 extra jobs over the past year. Retail sales and car sales have been rising, and the housing market is recovering. Business surveys have generally been very positive.

So the growth being shown by the GDP data is genuine. But how has the economy turned around so quickly? And is the improvement we are seeing solid and sustainable?

The UK economy was recovering quite well in 2010 and early 2011, but was then hit by two significant issues. The first was a rise in inflation, which peaked at over 5 per cent in late 2011 and has only just returned to target. The second was the euro crisis, which appears to have stabilised over the past year.

As these headwinds eased, the underlying strength of the British economy reasserted itself. We have a flexible labour market, which has supported the growth of private sector employment. And even though the economy has not rebalanced significantly towards manufacturing, there has been a lot of rebalancing within the services sector itself. While financial services and the public sector have been squeezed, other services activities have grown strongly. And some of the better performing parts of the services sector – such as business and professional services, technology, communications and tourism – are strongly export-oriented.

Exports of services account for around 12 per cent of UK GDP, compared with about 6 per cent in the major continental European economies and 4 per cent in the US. Our export success in services is a major source of strength for the UK economy and we do well across a range of disciplines, not just in financial services.

There are clearly risks to the recovery. The euro crisis has not gone away totally, and inflation could re-emerge as a problem if stronger global growth pushes up energy, food and commodity prices again. The current climate of low interest rates risks creating financial imbalances, and the Bank of England should be prepared to withdraw some of its monetary support over the next couple of years.

Growth may not accelerate much further and could ease slightly over the next couple of years. But in the current New Normal economic environment, average UK growth of nearly 2 per cent last year and around 2.5 per cent this year would be a respectable performance compared with other western economies. And we should continue to see further falls in unemployment as a result.

Andrew Sentance is senior economic adviser at PwC, a former member of the Bank of England Monetary Policy Committee, and author of Rediscovering growth: After the crisis, published by London Publishing Partnership.

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