The picture of economic growth is now starting to line up a bit better with some of the other data, notably recent figures for employment and unemployment, which have been very positive. If we exclude the impact of oil and gas production, the economy has grown over the past year – albeit by a rather modest 0.2 per cent. On the same basis, non-oil GDP is now less than 1 per cent down on its level in 2007 – the peak year for GDP before the recession hit.
There are, of course, grounds for caution. First, some of this bounce in GDP reflects an unwinding of the dip created by the extra Jubilee Bank Holiday. Second, the Olympics may have provided a temporary boost to economic activity which could unwind over the next couple of quarters. Third, there are still a number of clouds on the economic horizon from the Eurozone and softening growth in Asia and other emerging market economies. And the boost that UK consumers have received recently from lower inflation may be unwound as higher food and energy prices feed through later this year.
So cautious optimism, rather than euphoria, is the right response to these figures. We should look at GDP estimates alongside the other data we have relating to the state of the economy, as we know that they can be revised in the future. Employment numbers and retail sales growth have been relatively strong, but some other indicators – such as the Confederation of British Industry’s latest manufacturing survey and data from construction – are more downbeat.
For me, this reflects the reality that we are living in a “new normal”, where growth in western economies like the UK is likely to be continue to disappoint relative to the pre-2007 period. In the decade before 2007, UK non-oil GDP grew on average by 3.5 per cent. In the current environment, we should regard growth at around half this rate – 1.5 to 2 per cent – as the norm.
The western world is still recovering from the shocks of the financial crisis. Consumers are still having to cope with high and volatile energy prices. And confidence is weak given all the uncertainties surrounding the Eurozone, the global economy and public finances.
The UK, along with other western economies, is in a process of transition. We have left behind a world where growth was supported by easy money, cheap imports and a false belief in the end of boom and bust. But the forces which might create a future wave of sustained growth are not yet apparent. So while the latest GDP figures should give us some encouragement, there are still likely to be challenging times ahead.
Andrew Sentance is senior economic adviser at PwC and a former member of the Bank of England’s Monetary Policy Committee.