Strong recovery requires a rate hike
27 October 2010 1:48am
So much for the merchants of doom and all of those who, desperate for another fix of cheap money, have been calling for a resumption of quantitative easing. They have all been proved completely wrong. Yesterday’s excellent GDP growth numbers confirm what I have long been arguing: that far from being on the brink of a vicious double-dip recession, the UK economy is doing surprisingly well, despite weak credit growth, a flagging consumer and a declining housing market. Further monetary loosening now would be madness.
Bizarrely, some were still claiming last night that the reduction in the UK’s rate of growth from 1.2 per cent in the second quarter to 0.8 per cent in the third quarter was something to worry about. Given that even annualised growth of 3.2 per cent, as we saw in the most recent three months, is unsustainably strong, it is hard to see how anybody could possibly have expected the UK to have continued to expand at the even more extreme annualised rate of 4.8 per cent seen in the second quarter. Economic literacy is evidently a rare commodity.
The expansion will now slow. It has to. Next year will be tough, as the state starts to retrench in earnest; at some point the UK will revert to its now much lower trend rate of growth of two per cent a year or so. But so far even economic realists have been confounded by the speed of the recovery. GDP has now recovered 40 per cent of its loss between the first quarter of 2008 and the third quarter of 2009, according to analysis from Henderson’s Simon Ward. Even assuming that growth slows to 0.4 per cent in the fourth quarter, GDP will increase by 1.8 per cent in 2010, easily smashing the consensus forecast of 1.3 per cent made by economists at the start of the year.
Of course, the economy remains smaller than it was at the peak of the bubble: third-quarter GDP was 3.9 per cent below its first quarter of 2008 record, compared with a maximum decline of 6.5 per cent in the third quarter of last year. But at the equivalent stage in the early 1980s recovery, ten quarters after output peaked in 1979, GDP was still 4.4 per cent lower. We are doing remarkably well.
Yesterday’s figures reveal that GDP growth hit 2.8 per cent year on year, above the 1998-08 average of 2.6 per cent, according to Citigroup estimates. The figures were substantially stronger than the Bank of England’s monetary policy committee had expected: it had estimated that growth by now would only be around 2.3-2.5 per cent year on year. The Bank has argued that the aim of its ultra-loose monetary policy is to boost nominal GDP growth – actual growth plus inflation – to five per cent a year; we are well above that today, especially with price rises at elevated levels.
One reason why the economy did better than many feared in the third quarter is that most analysts have misunderstood what is happening to the all-important money supply. While the total amount of money in the economy has been growing at a sluggish rate, it has been circulating much more quickly, boosting demand.
The economy will probably grow by 1.8 per cent this year. Next year will be tough but the private sector’s momentum should allow it to cope with public sector cuts; these may even prove expansionary if they reassure companies that the UK is once again a safe place in which to invest. The debate needs to move on: it is time for the Bank to start hiking interest rates.
In other news
London’s cabbies are taking on Uber, and TfL
TAIWANESE insurer Fubon Life is to buy the home of Madame Tussauds wax museum in Marylebone for £348.8m.
British students with ambitions to be the next Paul Krugman should be setting their sights on obtaining a degree [Read more]
June 5 will be the next crunch point in the Greek debt talks. [Read more]
The customer is king when it comes to winning amid an increasingly competitive retail landscape. [Read more]
Top tourist attraction Madame Tussauds Marylebone site has been snapped up by a Taiwanese insurer in a multi-million [Read more]
The Chinese city of Guangzhou may have banned Uber, but that hasn’t stopped its municipal government setting [Read more]
Labour has performed a balletic U-turn this morning, abandoning its opposition to EU membership referendum. [Read more]
Greece’s interior minister has said that the country cannot afford its 5 June payment to the International Monetary [Read more]
Young people aged 16 and 17 years old should be given the chance to vote in a EU referendum, according to the [Read more]
The Bank of England is carrying out a confidential investigation into what would happen if the UK left the European [Read more]
This year's Eurovision Song Contest will feature an addition to the normal line up – for the first time ever, [Read more]
Tonight is the 60th Eurovision Song Contest, and once again we're in for an evening of cheesy music and crazy [Read more]
The Eurovision Song Contest is getting more and more expensive, despite Europe's decline into austerity. [Read more]
There were delays of up to 30 minutes to trains in and out of Kings Cross Station, after the station was re-opened [Read more]
When a 20-year-old footballer publicly declares he wants to leave a club and his agent hurls insults at one of [Read more]
The outbreak of bird flu in the US is leading to an unprecedented situation for companies reliant on eggs – [Read more]
Germany's finance ministry has denied reports it was considering offering Greece its own parallel currency. [Read more]
Chancellor George Osborne was given a boost today, as higher tax receipts helped shrink the deficit by more than [Read more]
Beleaguered spread-betting firm Plus500 today suspended trading in its shares on London's junior market, following [Read more]