TIMING, as they say, is everything. If you are interested in the short-term, and agree with John Maynard Keynes, not my favourite economist, that we are all dead in the long run, now is the time to turn bullish. Growth is returning. There is no doubt that the UK economy is looking up; the short-term outlook has markedly improved. That doesn’t have much of a bearing on what the stock market will do – the FTSE 100 is a global index and is increasingly disconnected from the British economy – but GDP is growing again, to George Osborne’s great relief. The growth remains feeble, and could cease at any time, especially if the turbulence from other parts of the world derails our nascent recovery, but it is real nevertheless.
All three key sectors – manufacturing, construction and services – are signalling growth; yesterday’s services sector survey was especially strong. The Purchasing Managers’ Index (PMI) for the sector hit 54.9, up from 52.9 in April and the highest level since March 2012; any reading above 50 indicates expansion, which there has now been for every month this year.
The UK economy grew by 0.3 per cent in the first quarter; one never knows with macroeconomic statistics but it now looks as if the second quarter will also be positive. Nobody is talking of double-dips, let alone triple-dips, anymore. This is an important moment.
Lots of other surveys confirm the modest recovery. There has been a substantial increase in the demand for housing, with prices going up. Surveys from YouGov show that the gradual rise in confidence on a wide range of metrics – from perceived job security to purchase intentions – is continuing. Confidence troughed in January 2011 but is now much healthier.
If you are interested in the medium term, however, that is an entirely different story. Policy makers have not really learnt anything from the experience of the past couple of decades, and are blowing a third major bubble – after the dot.com and the sub prime/cov light fiascos, we are now facing an equally nasty bonds/cheap money/QE/property bubble that will eventually pop with devastating consequences for the global economy.
Gilt yields will ultimately normalise, as will interest rates. The rise in house prices, which is fuelling some of the renewed confidence, will end in tears. The rush of first time buyers into the market – numbers are up 78.6 per cent year on year in April, according to LSL Property Services – is a sign that irrational exuberance is returning. The chancellor’s inane credit easing policies are adding fuel to the fire.
Massive distortions remain throughout the economy, with zombie firms and households propped up by artificially cheap money. The deficit remains too high, and the national debt is rocketing. Household debt remains too large. The economy is a giant house of cards: at some point, it will come tumbling down, and when that happens today’s modest recovery will soon be forgotten.
In the long-run, however, optimism may once again be in order. Shale gas will transform our energy supplies. New technologies will revolutionise productivity and kick-start growth. These will include driverless cars, 3D printing, wearable tech, robotics, nanotechnology and much cheaper, economically viable solar energy and new digital education providers.
Young people’s values are also changing: they are more likely to be entrepreneurial, to support free markets, to dislike handouts and to value rewards for success. At some stage, and probably no later than 2020, this is likely to translate into a much more radical group of politicians sweeping to power and reforming our crumbling economy and welfare state and loosening our ties to Brussels.
Optimism is warranted in the short and long-term, pessimism in the medium term. For now, though, enjoy the sunshine and our gradual recovery.
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