The economy is growing again – but beware another bubble

Allister Heath
DON’T BECOME too excited, but far from facing a fresh recessionary dip, the UK economy is growing again. It remains too soon to be sure, but the economy may even have turned a corner, moving from stagnation to a phase of feeble expansion.

Yesterday’s manufacturing figures were better than expected, and the National Institute of Economic and Social Research’s closely-followed macro model suggests that GDP surged by 0.8 per cent in the three months ending in April, after growth of 0.3 per cent in the three months ending in March 2013.

It would be silly to read too much into any of this. The base effect from weak output levels in January has inflated the quarterly rate of growth in the three months to April, the Institute notes, and underlying growth is weaker than the headline figure suggests. We are unlikely to see GDP growth of more than one per cent this year – and in my view, that sort of expansion rate is the new normal.

There have been other signs that parts of the economy are picking up, with car sales soaring, house prices beginning to climb again and lower oil prices helping firms and families. Simon Ward of Henderson has noted that the money supply, if measured correctly, is accelerating again; he has correctly been predicting these latest data. The fact that some parts of the economy – primarily but not exclusively in the services sector – have been doing a little better have been overshadowed by a collapse in North Sea oil and gas and construction output, which have dragged down overall GDP; in fact, non-oil GDP growth has been an annualised 1.3 per cent since 2009, according to Deutsche Bank.

But while it would be pathetic not to rejoice that the overall economy is finally expanding – and we should all remember that despite all of its problems, the labour market has also created a very large number of jobs over the past three years – the last thing we now need is complacency.

It will still take several years before the UK reaches pre-crisis levels of output. Real wages and savings are still falling, with excessively high inflation now entrenched. The Eurozone is continuing to shrink, hitting exporters. The world economy as a whole is slowing again, and there are renewed doubts over the trustworthiness of China’s official statistics. Growth is focused on the capital: well over half of the cranes erected in the UK since March 2010 have been in London, with the rest of the country accounting for just 40 per cent.

Most depressingly of all, the present mini-recovery is at least partly being caused by cheap money and the chancellor’s plot to reinflate the housing bubble with his madcap help to buy and subsidised credit. As these policies bed in, I expect a short-lived, artificial burst of demand and “growth” at some point over the next three years or so, but remain a medium-term bear on the UK economy for supply-side reasons.

The state is too large, taxes too high (even though corporation tax and the top rate of income tax are down), the incentives to work and invest too low, regulations too burdensome and still increasing massively overall (some deregulatory measures, such as making it easier to convert empty offices into homes are good, but barely scratch the surface of the problem), red tape is preventing house-building, our infrastructure is in crisis, our energy policy is suicidal, we suffer from a skills and cultural problem, among many other major problems. We should celebrate any growth we do get – but remain vigilant. A QE-induced recovery caused by a fresh bout of irrational exuberance would not do anybody any good.
Follow me on Twitter: @allisterheath