The survey once again shocked many “experts” – the consensus was for a drop in the PMI survey yet the actual figure shot up from 54.9 to 58. The details suggest manufacturing output is surging at a quarterly rate of 1.2 per cent, the best performance in ages. Economists have been guilty of excessive pessimism since the recovery began – just as they were guilty of excessive optimism in the dying days of the bubble.
Even Mervyn King misjudged the rate at which the economy would recover in 2010. The US embassy cable dated 17 February released by WikiLeaks and which created a fuss yesterday as a result of King’s criticism of David Cameron and George Osborne’s inexperience also contained an intriguing passage on the jobs situation. The private sector has created well over 300,000 extra jobs this year, the majority of which were part-time but a large number full-time, yet this was what the US was briefed: “Businesses will cut jobs faster this year and eliminate many part-time positions, as employers realise that the economic recovery will be a long, drawn-out process, said King.” The truth, of course, was much more upbeat; King was also wrong. The “anemic” nature of global growth, has in fact been extremely strong thanks to emerging markets.
What about next year? The Office for Budget Responsibility’s growth forecast of 2.1 per cent is eminently plausible. But it is worth highlighting that its official forecast that growth will average 2.4 per cent per year during 2010-14 is much lower than the 3.4 per cent achieved over 1994-98, according to figures from Henderson, despite fiscal retrenchment on a similar scale. In theory at least, the UK could grow much faster than anybody is expecting. That concerns about credit supply are starting to wane is another plus – many wrongly predicted that weak credit would drag down the previous recovery in the 1990s, following a hit to banks’ capital.
Company finances are in better shape. Households have been insulated by low interest rates, resulting in fewer arrears and repossessions. The opportunities for exporters and international firms are greater than ever.
The trouble is that the private sector is in other ways in a weaker position than it was in the early 1990s, largely because there is now much more regulation and higher taxes. London is less competitive; institutions are relocating elsewhere. Manufacturing is bouncing back but only for cyclical reasons; competition is continuing to intensify as emerging economies become better at producing valued-added goods and services.
The real domestic risk, however, is that interest servicing costs will surge much faster than anybody expects. Each percentage point rise in interest rates and inflation will raise debt interest spending in 2015-16 by £10.7bn, or 0.6 per cent of GDP. Who could cope with mortgages at seven or eight per cent in three years’ time? Strong growth means higher interest rates – and a return to reality guarantees trouble ahead.